This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good day and thank you for standing by. Welcome to the fourth quarter of 2021 Valley National Bank Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Travis Land, Head of Investor Relations. Please go ahead.
spk03: Good morning, and welcome to Valley's fourth quarter 2021 earnings conference call. Presenting on behalf of Valley today are CEO Ira Robbins, President Tom Iadanza, and Chief Financial Officer Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide two of earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bank Corp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on form 8K, 10Q and 10K for complete discussion of forward-looking statements. With that, I'll turn the call over to Ira Robbins.
spk08: Thank you, Travis. And welcome to those of you on the call. As usual, I will provide some big picture thoughts before I turn the call over to Mike to discuss this quarter's results in more detail. In the fourth quarter of 2021, Valley reported net income of $115 million, earnings per share of 27 cents, and a return on average assets of 1.08%. Exclusive of merger charters, our EPS and ROA would have been 28 cents and 1.14% respectively. These adjusted metrics include approximately one cent per share of after-tax provision associated with the non-PCD loans acquired from the Westchester Bank. We generated net income of $474 million and adjusted net income of $488 million in 2021. Adjusted net income was up nearly $86 million, or 22% from 2020. These exceptional financial results reflect the execution of our strategic initiatives surrounding organic growth, credit preservation, and positive operating leverage. We generated organic loan growth, exclusive of PPP and acquisitions, of over 9% during the year. Growth was strong across our markets, reflecting contributions from both legacy value associates and new hires. Loan production was funded by low-cost core deposits, which continued to increase across geographies and business segments. Last quarter, I spoke about our ongoing evolution to a leading regional bank. While I won't rehash those comments, I want to reiterate that today's banking landscape offers tremendous opportunity for a service-oriented bank like Valley. The recent acquisition of the Westchester Bank and the pending acquisition of Bank Leumi will enhance our competitive position and ability to capitalize on this opportunity. These partners will bring us new business capabilities and access to geographies that will enhance our competitive position and support our growth targets. By the end of 2022, Value Boot will be well over $50 billion in assets with a high-quality, core-funded balance sheet and strong capital position. In today's banking landscape, this is a very unique value proposition. With that said, the exceptional progress that we have made as a standalone entity should not be overlooked. Our adjusted 2021 ROA of 1.18% is nearly 40 basis points above our 2017 level. This improvement was not dependent upon reserve releases. Rather, it is the result of net interest margin stability and consistent profitable organic growth. As I think back on 2021, I'm proud of our ability to navigate COVID uncertainty early on. During the year, we recognized a mere $15 million of net charge-offs, equating to just five basis points of average loans. This incredible result is a testament to our lending and credit culture. I'm equally proud of our ability to quickly pivot to an offensive position, which enabled us to generate significant organic loan growth and identify ideal merger partners during the year. Looking ahead, I expect 2022 to be about execution. Execution on the integration of our acquisitions, but perhaps as importantly on the organic growth opportunities that exist for us. As a relationship-focused commercial bank, we strive to be consistently in tune with our clients' financial needs. This has been a key driver of recent originations and will continue to support our organic growth going forward. With significant M&A and technology disruption around us, there is an increasing pool of potential new clients, which will provide an additional growth lever for Valley. We are excited by the team we have in place, and are confident they have the right support and technology to capitalize on these opportunities. With that, and I'll turn the call over to Mike to discuss some of the quarter's financial highlights.
spk02: Thank you, Ira. Turning to slide six, you can see Valley's recent net interest income and margin trends with and without the impacts of PPP. During the quarter, net interest income increased $14 million, or approximately 5%. This was primarily the result of strong organic loan originations throughout the year, $3 million of net interest income from Westchester, and continued interest expense reductions. On a reported basis, net interest margin increased 8 basis points to 3.23%. Exclusive of Triple P, the margin increased 3 basis points to 3.10%. Our margin has performed very well throughout the year despite the overhang of excess cash. We have actively driven down funding costs and are benefiting from strong organic loan growth throughout the year. Slide 7 illustrates the ongoing improvement in our funding base. Over the last few years, we have introduced new deposit niches and accelerated commercial deposit growth. This has reduced our reliance on higher cost CDs and borrowings. This quarter, CDs and borrowings comprised 16% of total funding versus 29% a year ago. Meanwhile, non-interest bearing deposits, including those assumed from Westchester, increased 8% from the third quarter and are up 27% from a year ago. During the quarter, our CD and non-maturity deposit costs declined seven basis points and three basis points, respectively. Our focus on low-cost core deposit generation has led to a significant reduction in funding costs and positions us well for potential rising rates as the year progresses. Slide eight details our loan balances and the key drivers of our strong 2021 growth. Exclusive of over $900 million of commercial loans acquired from Westchester and adjusting for Triple P runoff, organic growth was over 9% for the year. On an annualized basis, our organic growth was over 13% during the fourth quarter with contributions across our geographies and asset classes. On the bottom right, you can see the diversity of our growth by segment. While CRE remains a key driver of our business, CNI growth was strong and consumer channels contributed as well. CNI growth was the result of new relationships and a modest uptick in utilization rates. At December 31st, commercial line utilization was 40%, up from 39% at September 30th, but still below the 41% level at the end of 2020. As you know, we have somewhat de-emphasized the more transactional multifamily space, which did not contribute to our growth during the year. The combination of new hires throughout 2021 and the acquisition of Westchester positions us for another year of strong organic growth in 2022. Our well diversified loan pipeline stands above $3 billion, which is in line with September levels. We anticipate 2022 loan growth to be in the high single digits. As you may expect, commercial asset classes will contribute more than residential and consumer, but growth should remain well diversified across our markets. Moving to slide nine, we generated non-interest income of $38 million for the quarter. The $4 million sequential decline reflected lower swap activity. Revenue from loan sale gains was stable, as were our traditionally less volatile other non-interest lines. Trust and investment services income was strong in the quarter, partially driven by the addition of Deadly Ventures in October. Deposit service charges also normalized throughout the year. While we anticipate SWAP's income to rebound from the fourth quarter level, the rate environment could weigh on mortgage banking revenues in 2022. On slide 10, you can see that our adjusted expenses were over $174 million for the quarter. This number includes approximately $2 million for the operations of Westchester and Dudley, respectively. We remain focused on generating positive operating leverage going forward. Over the last four years, our revenue growth has outpaced expense growth by more than two to one. While we continue to explore incremental expense offsets to absorb ongoing investments, future positive operating leverage is likely to be more dependent on revenue growth. The acquisition of both Westchester and Leumi will enhance our capabilities and reach and contribute to strong revenue growth in 2022 and beyond. Turning to slide 11, you can see our credit trends for the last five quarters. Our allowance for credit losses declined to 1.11% of non-PPP loans at December 31st from 1.12% at September 30th. Despite realizing net recoveries during the quarter, we recognized a $6 million provision primarily to account for our strong loan growth. We also recorded a $6 million provision related to the non-PCD loans and unfunded commitments acquired from Westchester. It shouldn't be overlooked that our strong 2021 results were achieved without the benefit of a reserve release. After a slight uptick in the third quarter, our non-accrual loan balances improved to 70 basis points at December 31st. The improvement was primarily in the Cree segment. Despite entering the year with uncertainty around the potential impacts of COVID-19, We are pleased with our credit performance and expect to preserve our strong track record in 2022. On slide 12, you can see that tangible book value increased over 2% for the quarter and over 9% for the year. We are extremely proud of this result in the context of our healthy dividend payout and the closing of the Westchester and Dudley acquisitions. Our commitment to producing consistent tangible book value growth guides our strategic decision-making process. We remain very comfortable with all of our capital ratios and believe that our strong earnings performance will continue to support organic growth efforts. With our strong capital position, loan pipeline, and enhanced core funding base, we are optimistic heading into 2022. On page 13, you will see that we are reinstituting select guidance for the year. Specifically, we anticipate high single-digit organic loan growth of between 7% and 9%. This should help to absorb a reduction in PPP income and drive mid-single-digit net interest income growth for the year. We expect to preserve an efficiency ratio below 50% in 2022. With that, I'll turn the call back to Ira for some closing remarks.
spk08: Thanks, Mike. I am extremely proud of our 2021 financial results. It was an extremely busy year for our organization, and I am grateful for our team's hard work and commitment. We are really excited about the opportunities ahead of us in 2022 and believe it will be another great year for Valley. With that, I'd like to now turn the call back to the operator to begin Q&A. Thank you.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Michael Perito with KBW. Your line is open.
spk07: Hey, guys. Thanks for taking my questions. Morning, Michael. Morning, Michael. Mike, sorry if I missed this, admittedly doing too much at once over here, but the rate assumptions behind the NII guide, do you mind just expanding on that a little bit for us?
spk02: Sure, appreciate that question. I know this has been a topic on many calls with many of our competitors as well. You know, our guidance in the model is reflective as of 12-31. And it incorporates 25 basis points of Fed hikes occurring in May, September, and December. And as a reminder, we previously have disclosed this in our Qs and Ks, a 100 basis point shock increase would drive NII growth up 4.5% on a static balance sheet. And clearly, we won't have a static balance sheet in 22 with the loan growth that we're guiding to. But that'll help you get a better feel for what we've actually baked in to our assumptions in 22.
spk07: Got it. So you have the three hikes in there. I guess the question is, and you kind of pointed this out, the balance sheet makeup. I mean, when you kind of look to budgeting, I mean, what type of cash carryover do you guys assume? Or, you know, if you can't get that specific, just, I mean, are you guys assuming some normalization of the cash in being deployed? Or do you guys assume that it carries through conservatively for at least the first portion of the year here?
spk02: Yeah, we do have some modest reduction in the cash in the early part of 22. I think the thing that you should keep in mind is that's more than likely the first place we would go if we're in a much more robust economy and we saw some deposit attrition. So the good news is we have that buffer to kind of first take the blow, if in fact we have that, which honestly, given the deposit sources that we've built up over the year, including the amount of growth that we have seen in both business and checking accounts across the company the last two years, mostly related to the way we use PPP to add new customers. I would expect that you would not see as much of a reduction, at least in the early rate increases, as you might otherwise think.
spk01: Okay.
spk07: That's helpful, Mike. Thank you. And then just a couple more on the expense side. So ex-Westchester, you guys were $172 million, give or take, which was a little bit above the range you guys provided last quarter. I mean, it seems like there's generally some industry-wide expense pressures upward. I'm curious if you could – you have a few moving pieces. I know the efficiency guidance is excluding – pending acquisition, but just curious if you could provide a little bit more near-term commentary about how some of those expense pressures could come through, and is it fair for us to assume that the $172 million probably has some upward pressure here as we move forward?
spk02: Yeah, as you said, Mike, everybody in the industry, I think, is observing some upward pressure on overall expenses, not the least of which is related to wages, and so we're not immune from that as well. But as we said in our prepared remarks, and I'll say it again, we're cognizant of those pressures. They're the reality of the marketplace, but we still feel comfortable that we'll be able to manage our efficiency at or below 50%. And probably more importantly, it's worth noting that we are willing to accept some disciplined expense growth, especially if it leads to us being able to strategically capitalize on some of the investments that we're making And they don't always line up, right? The expenses oftentimes can lead some of the revenue growth. So we'll remain focused on that. But I think the guiding principle that you should hear from us today is we're comfortable with our overall efficiency ratio and generating positive operating leverage.
spk07: Got it. And then just lastly, maybe a question for Ira, just, you know, obviously 2021, you know, a couple of bank deals, you guys launched Valley Pay, growth in the cannabis sector, you grew down South, you know, there's, Dudley Ventures, there's quite a bit that you guys kind of brought into the fold. And just as we think, you know, at the onset of 2022 here, you know, you kind of touched on this a little bit in your prepared remarks, but we just love, you know, what you think kind of the two or three maybe most significant growth opportunities are, you know, from a tactical standpoint that you think we should be mindful of as we begin the year here.
spk08: Yeah, thank you. You know, I think we've really established a wonderful foundation for us for 2022 and There's been significant efforts over the last few years to really generate a strong foundation for organic growth and not just organic growth in the geographies that we've historically been in, but organic growth capitalizing what we're seeing down in the South, as well as some of the national platforms that we've been able to build. And I really believe that's going to take off in 2022. You know, additionally, I think the ability for us to execute and layer in the two acquisitions from a traditional bank perspective are going to be additive probably more quicker than what we would have anticipated. But on the periphery, when you look at something like Dudley Ventures as well, really the ability we have to incorporate that and provide a little bit of alternative fee income for us, I think is going to provide benefits as well for 2022. So as I said on my prepared remarks, I couldn't be more excited about what we built here moving forward and just really realizing what that looks like in 2022 should be exciting for all of us.
spk07: Great. Thank you guys for taking my questions. Appreciate it. Thanks, Mike.
spk04: Thank you. And as a reminder, if you would like to ask a question, press the star, then the one key on your text phone telephone. Our next question comes from Stephen Alexopoulos with JP Morgan. Your line is open.
spk06: Hey, good morning, everyone.
spk04: Morning, Stephen.
spk08: Morning.
spk06: I wanted to first follow up on the expense commentary question. Because if we look at the guidance, 50% or lower implies it could go up or down from here. So I'm not sure exactly what you're saying. What would be helpful, can you give us a sense, like expense growth with the inflationary pressure you cited? Is this a 5% year? Is it a 3% year? Can you give us a magnitude more from the expense growth side?
spk02: Well, I won't put a number on it. I will say this. If you look at the fourth quarter numbers, you know, we generated 3% revenue growth against operating expense of approximately 4%. And so as I answered Michael's question earlier around positive operating leverage, you know, on a full year 2022 basis, we are still committed to positive operating leverage and an efficiency ratio that's below those numbers. albeit acknowledging that, you know, we do have noise in the numbers, right? Two acquisitions closing in the fourth quarter combined with the impact of Leumi, which is much larger than those two previously closed or announced acquisitions.
spk03: Okay. Steven, this is Travis, too. I mean, I would just say on that guidance slide, I mean, we do give you kind of a range for NII growth, right? So that'll help kind of drive your revenue growth assumption. And then, you know, you can, I think, utilize the efficiency guidance that we gave you to kind of get a range for expenses.
spk06: Yeah. Well, actually following up on that interest income outlook, the five to 7% is below the loan outlook seven to nine. So you, and you have some rate benefit built in because you just said that. So are you assuming deposits run off? Is that why the NII outlook is below the loan outlook?
spk03: No, actually, even this is Travis again, just to be specific, right? We had 85 million of PPP income in 2021 and, We have about $12 million left of unearned fees in that category. So there's going to be significant decline in PPP income. And then we fill that bucket with a full year of Westchester, the benefits of rising rates, the benefits of our balance sheet growth, the continued benefits of our interest expense saves. So we do not have deposit runoff baked into the model.
spk06: No deposit runoff. Do you think, Travis, you can grow deposits next year? Yeah. Okay. That's helpful. And then finally... Ira, for you, as you said, 2022 is the year you focus on execution, and you've obviously been active on the M&A front. Does this mean you don't plan to look at or pursue M&A transactions for 2022?
spk08: I will tell you, I think we have an incredible ability across our entire organization to really do both, as you saw in, I think, slide four when we talked about the benefits, what we did from 2016 on the organic basis versus on the acquired. So we've established a wonderful foundation here. I think there is tremendous opportunity, as I mentioned before, about what Bank of Wyoming offers us as well as what the Westchester Bank offers us. And we'd be remiss if we didn't focus on executing that and really leveraging that from a growth perspective greater than what we had before. That said, I do think there's going to be tremendous opportunity when we think about what's happening with M&A, and not just from a technology perspective, but also from a consolidation. I don't want to distract anyone here internally, but there may be something on the periphery that makes sense for us that really leverages what we're thinking about from a strategic plan perspective. But there's so much tremendous upside on just executing with the acquisitions we've done. That's definitely going to be the primary focus for us.
spk06: Okay. Okay. Actually, I lied. If I could squeeze one more in. The cannabis business, how much growth did you guys have in the fourth quarter? Where do those deposit balances end the year? Thanks.
spk08: I mean, it's well over, you know, in the hundreds of millions of dollars as to where the cannabis business is today. You know, I think the biggest opportunity there really is expanding some of the multi-state operators. I think we're in 17 states right now with an ability to go up to 27, I think, is what we already have approved today. We have over 40% of the current portfolio just in the pipeline as well. So it's an area of continued opportunity and growth for us. We did begin to tip our toe into the lending business a bit at the end of the year, and I think there'll be opportunities for growth in that space as well. And even with the Valley Pay, I think, as you mentioned, it's a closed-loop payment platform that really enables us to to look at growth from a multitude of different perspectives, whether it be internally or even white labeling, there's a lot of opportunity for us. And it's that agility that we're trying to create throughout the entire organization for many of the initiatives that we're putting forth and, once again, something to be very excited about. Okay.
spk05: Terrific. Thanks for taking my questions. Thanks, Stephen.
spk04: Thank you, and I'm showing no further questions in the queue. I'd like to turn the call back to Aura Robbins for closing remarks.
spk08: I just want to thank those of you that participated in our call today, and we're looking forward to 2022 and connecting with you again. Thank you.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect. Amen. Thank you. Thank you. Good day, and thank you for standing by. Welcome to the fourth quarter of 2021 Valley National Bank Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Travis Land, Head of Investor Relations. Please go ahead.
spk03: Good morning, and welcome to Valley's fourth quarter 2021 earnings conference call. Presenting on behalf of Valley today are CEO Ira Robbins, President Tom Iadanza, and Chief Financial Officer Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide two of earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bank Corp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on form 8K, 10Q and 10K for complete discussion of forward-looking statements. With that, I'll turn the call over to Ira Robbins.
spk08: Thank you, Travis. And welcome to those of you on the call. As usual, I will provide some big picture thoughts before I turn the call over to Mike to discuss this quarter's results in more detail. In the fourth quarter of 2021, Valley reported net income of $115 million, earnings per share of $0.27, and a return on average assets of 1.08%. Exclusive of merger charters, our EPS and ROA would have been $0.28 and 1.14% respectively. These adjusted metrics include approximately one cent per share of after-tax provision associated with the non-PCD loans acquired from the Westchester Bank. We generated net income of $474 million and adjusted net income of $488 million in 2021. Adjusted net income was up nearly $86 million, or 22% from 2020. These exceptional financial results reflect the execution of our strategic initiatives surrounding organic growth, credit preservation, and positive operating leverage. We generated organic loan growth, exclusive of PPP and acquisitions, of over 9% during the year. Growth was strong across our markets, reflecting contributions from both legacy value associates and new hires. Loan production was funded by low-cost core deposits, which continued to increase across geographies and business segments. Last quarter, I spoke about our ongoing evolution to a leading regional bank. While I won't rehash those comments, I want to reiterate that today's banking landscape offers tremendous opportunity for a service-oriented bank like Valley. The recent acquisition of the Westchester Bank and the pending acquisition of Bank Lummi will enhance our competitive position and ability to capitalize on this opportunity. These partners will bring us new business capabilities and access to geographies that will enhance our competitive position and support our growth targets. By the end of 2022, Value Boot will be well over $50 billion in assets with a high-quality, core-funded balance sheet and strong capital position. In today's banking landscape, this is a very unique value proposition. With that said, the exceptional progress that we have made as a standalone entity should not be overlooked. Our adjusted 2021 ROA of 1.18% is nearly 40 basis points above our 2017 level. This improvement was not dependent upon reserve releases. Rather, it is the result of net interest margin stability and consistent profitable organic growth. As I think back on 2021, I'm proud of our ability to navigate COVID uncertainty early on. During the year, we recognized a mere $15 million of net charge-offs, equating to just five basis points of average loans. This incredible result is a testament to our lending and credit culture. I'm equally proud of our ability to quickly pivot to an offensive position, which enabled us to generate significant organic loan growth and identify ideal merger partners during the year. Looking ahead, I expect 2022 to be about execution. Execution on the integration of our acquisitions, but perhaps as importantly on the organic growth opportunities that exist for us. As a relationship-focused commercial bank, we strive to be consistently in tune with our clients' financial needs. This has been a key driver of recent originations and will continue to support our organic growth going forward. With significant M&A and technology disruption around us, there is an increasing pool of potential new clients, which will provide an additional growth lever for Valley. We are excited by the team we have in place, and are confident they have the right support and technology to capitalize on these opportunities. With that, and I'll turn the call over to Mike to discuss some of the quarter's financial highlights.
spk02: Thank you, Ira. Turning to slide six, you can see Valley's recent net interest income and margin trends with and without the impacts of PPP. During the quarter, net interest income increased $14 million, or approximately 5%. This was primarily the result of strong organic loan originations throughout the year, $3 million of net interest income from Westchester, and continued interest expense reductions. On a reported basis, net interest margin increased 8 basis points to 3.23%. Exclusive of Triple P, the margin increased 3 basis points to 3.10%. Our margin has performed very well throughout the year despite the overhang of excess cash. We have actively driven down funding costs and are benefiting from strong organic loan growth throughout the year. Slide 7 illustrates the ongoing improvement in our funding base. Over the last few years, we have introduced new deposit niches and accelerated commercial deposit growth. This has reduced our reliance on higher cost CDs and borrowings. This quarter, CDs and borrowings comprised 16% of total funding versus 29% a year ago. Meanwhile, non-interest bearing deposits, including those assumed from Westchester, increased 8% from the third quarter and are up 27% from a year ago. During the quarter, our CD and non-maturity deposit costs declined seven basis points and three basis points, respectively. Our focus on low-cost core deposit generation has led to a significant reduction in funding costs and positions us well for potential rising rates as the year progresses. Slide 8 details our loan balances and the key drivers of our strong 2021 growth. Exclusive of over $900 million of commercial loans acquired from Westchester and adjusting for Triple P runoff, organic growth was over 9% for the year. On an annualized basis, our organic growth was over 13% during the fourth quarter with contributions across our geographies and asset classes. On the bottom right, you can see the diversity of our growth by segment. While CRE remains a key driver of our business, CNI growth was strong and consumer channels contributed as well. CNI growth was the result of new relationships and a modest uptick in utilization rates. At December 31st, commercial line utilization was 40%, up from 39% at September 30th, but still below the 41% level at the end of 2020. As you know, we have somewhat de-emphasized the more transactional multifamily space, which did not contribute to our growth during the year. The combination of new hires throughout 2021 and the acquisition of Westchester positions us for another year of strong organic growth in 2022. Our well diversified loan pipeline stands above $3 billion, which is in line with September levels. We anticipate 2022 loan growth to be in the high single digits. As you may expect, commercial asset classes will contribute more than residential and consumer, but growth should remain well diversified across our markets. Moving to slide nine, we generated non-interest income of $38 million for the quarter. The $4 million sequential decline reflected lower swap activity. Revenue from loan sale gains was stable, as were our traditionally less volatile other non-interest lines. Trust and investment services income was strong in the quarter, partially driven by the addition of Deadly Ventures in October. Deposit service charges also normalized throughout the year. While we anticipate SWAP's income to rebound from the fourth quarter level, the rate environment could weigh on mortgage banking revenues in 2022. On slide 10, you can see that our adjusted expenses were over $174 million for the quarter. This number includes approximately $2 million for the operations of Westchester and Dudley, respectively. We remain focused on generating positive operating leverage going forward. Over the last four years, our revenue growth has outpaced expense growth by more than two to one. While we continue to explore incremental expense offsets to absorb ongoing investments, future positive operating leverage is likely to be more dependent on revenue growth. The acquisition of both Westchester and Leumi will enhance our capabilities and reach and contribute to strong revenue growth in 2022 and beyond. Turning to slide 11, you can see our credit trends for the last five quarters. Our allowance for credit losses declined to 1.11% of non-PPP loans at December 31st from 1.12% at September 30th. Despite realizing net recoveries during the quarter, we recognized a $6 million provision primarily to account for our strong loan growth. We also recorded a $6 million provision related to the non-PCD loans and unfunded commitments acquired from Westchester. It shouldn't be overlooked that our strong 2021 results were achieved without the benefit of a reserve release. After a slight uptick in the third quarter, our non-accrual loan balances improved to 70 basis points at December 31st. The improvement was primarily in the Cree segment. Despite entering the year with uncertainty around the potential impacts of COVID-19, We are pleased with our credit performance and expect to preserve our strong track record in 2022. On slide 12, you can see that tangible book value increased over 2% for the quarter and over 9% for the year. We are extremely proud of this result in the context of our healthy dividend payout and the closing of the Westchester and Dudley acquisitions. Our commitment to producing consistent tangible book value growth guides our strategic decision-making process. We remain very comfortable with all of our capital ratios and believe that our strong earnings performance will continue to support organic growth efforts. With our strong capital position, loan pipeline, and enhanced core funding base, we are optimistic heading into 2022. On page 13, you will see that we are reinstituting select guidance for the year. Specifically, we anticipate high single-digit organic loan growth of between 7% and 9%. This should help to absorb a reduction in PPP income and drive mid-single-digit net interest income growth for the year. We expect to preserve an efficiency ratio below 50% in 2022. With that, I'll turn the call back to Ira for some closing remarks.
spk08: Thanks, Mike. I am extremely proud of our 2021 financial results. It was an extremely busy year for our organization, and I am grateful for our team's hard work and commitment. We are really excited about the opportunities ahead of us in 2022 and believe it will be another great year for Valley. With that, I'd like to now turn the call back to the operator to begin Q&A. Thank you.
spk04: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Michael Perito with KBW. Your line is open.
spk07: Hey, guys. Thanks for taking my questions. Morning, Michael. Morning, Michael. Mike, sorry if I missed this, admittedly doing too much at once over here, but the rate assumptions behind the NII guide, do you mind just expanding on that a little bit for us?
spk02: Sure, appreciate that question. I know this has been a topic on many calls with many of our competitors as well. You know, our guidance in the model is reflective as of 12-31. And it incorporates 25 basis points of Fed hikes occurring in May, September, and December. And as a reminder, we previously have disclosed this in our Qs and Ks, a 100 basis point shock increase would drive NII growth up 4.5% on a static balance sheet. And clearly, we won't have a static balance sheet in 22 with the loan growth that we're guiding to. But that'll help you get a better feel for what we've actually baked in to our assumptions in 22.
spk07: Got it. So you have the three hikes in there. I guess the question is, and you kind of pointed this out, the balance sheet makeup. I mean, when you kind of look to budgeting, I mean, what type of cash carryover do you guys assume? Or, you know, if you can't get that specific, just, I mean, are you guys assuming some normalization of the cash in being deployed? Or do you guys assume that it carries through conservatively for at least the first portion of the year here?
spk02: Yeah, we do have some modest reduction in the cash in the early part of 22. I think the thing that you should keep in mind is that's more than likely the first place we would go if we're in a much more robust economy and we saw some deposit attrition. So the good news is we have that buffer to kind of first take the blow, if in fact we have that, which honestly, given the deposit sources that we've built up over the year, including the amount of growth that we have seen in both business and checking accounts across the company the last two years, mostly related to the way we use PPP to add new customers. I would expect that you would not see as much of a reduction, at least in the early rate increases, as you might otherwise think.
spk01: Okay.
spk07: That's helpful, Mike. Thank you. And then just a couple more on the expense side. So ex-Westchester, you guys were $172 million, give or take, which was a little bit above the range you guys provided last quarter. I mean, it seems like there's generally some industry-wide expense pressures upward. I'm curious if you could – you have a few moving pieces. I know the efficiency guidance is excluding – pending acquisition, but just curious if you could provide a little bit more near-term commentary about, you know, how some of those expense pressures could come through, and is it fair for us to assume that the, you know, the $172 million probably has some upward pressure here as we move forward?
spk02: Yeah, as you said, Mike, you know, everybody in the industry, I think, is observing some upward pressure on overall expenses, you know, not the least of which is related to wages, and so we're not immune from that as well. But as we said in our prepared remarks, and I'll say it again, we're cognizant of those pressures. They're the reality of the marketplace, but we still feel comfortable that we'll be able to manage our efficiency at or below 50%. And probably more importantly, it's worth noting that we are willing to accept some disciplined expense growth, especially if it leads to us being able to strategically capitalize on some of the investments that we're making And they don't always line up, right? The expenses oftentimes can lead some of the revenue growth. So we'll remain focused on that. But I think the guiding principle that you should hear from us today is we're comfortable with our overall efficiency ratio and generating positive operating leverage.
spk07: Got it. And then just lastly, maybe a question for Ira, just, you know, obviously 2021, you know, a couple of bank deals, you guys launched Valley pay growth in the cannabis sector. You grew down South, you know, there's, Dudley Ventures, there's quite a bit that you guys kind of brought into the fold. And just as we think, you know, at the onset of 2022 here, you know, you kind of touched on this a little bit in your prepared marks, but we just love, you know, what you think kind of the two or three maybe most significant growth opportunities are, you know, from a tactical standpoint that you think we should be mindful of as we begin the year here.
spk08: Yeah, thank you. You know, I think we've really established a wonderful foundation for us for 2022. There's been significant efforts over the last few years to really generate a strong foundation for organic growth, and not just organic growth and the geographies that we've historically been in, but organic growth capitalizing what we're seeing down in the South, as well as some of the national platforms that we've been able to build. And I really believe that's going to take off in 2022. Additionally, I think the ability for us to execute and layer in the two acquisitions from a traditional bank perspective are going to be additive, probably more quicker than what we would have anticipated. But on the periphery, when you look at something like Dudley Ventures as well, really the ability we have to incorporate that and provide a little bit of alternative fee income for us, I think is going to pervade benefits as well for 2022. So as I said on my prepared remarks, I couldn't be more excited about what we built here moving forward and just really realizing what that looks like in 2022 should be exciting for all of us.
spk07: Great. Thank you guys for taking my questions. Appreciate it. Thanks, Mike.
spk04: Thank you. And as a reminder, if you would like to ask a question, press the star, then the one key on your text phone, telephone. Our next question comes from Stephen Alexopoulos With J.P. Morgan, your line is open.
spk06: Hey, good morning, everyone.
spk08: Morning, Stephen. Morning.
spk06: I wanted to first follow up on the expense commentary. Because if we look at the guidance, 50% or lower implies it could go up or down from here. So I'm not sure exactly what you're saying. What would be helpful, can you give us a sense, like expense growth with the inflationary pressure you cited? Is this a 5% year? Is it a 3% year? Can you give us some magnitude here? more from the expense growth side?
spk02: Well, I won't put a number on it. I will say this. If you look at the fourth quarter numbers, you know, we generated 3% revenue growth against operating expense of approximately 4%. And so as I answered Michael's question earlier around positive operating leverage, you know, on a full year 2022 basis, we are still committed to positive operating leverage and an efficiency ratio that's below those numbers, albeit acknowledging that, you know, we do have noise in the numbers, right? Two acquisitions closing in the fourth quarter combined with the impact of Leumi, which is much larger than those two previously closed or announced acquisitions.
spk03: Okay. Steven, this is Travis, too. I mean, I would just say on that guidance slide, I mean, we do give you kind of a range for NII growth, right? So that'll help kind of drive your revenue growth assumption. And then, you know, you can, I think, utilize the efficiency guidance that we gave you to kind of get a range for expenses.
spk06: Yeah. Well, actually, following up on that interest income outlook, the 5% to 7% is below the loan outlook, and you have some rate benefit built in because you just said that. So are you assuming deposits run off? Is that why the NII outlook is below the loan outlook?
spk03: No, actually, Stephen, this is Travis again. Just to be specific, right, we had $85 million of PPP income in 2021. We have about $12 million left of unearned fees in that category. So there's going to be significant decline in PPP income. And then we fill that bucket with a full year of Westchester, the benefits of rising rates, the benefits of our balance sheet growth, the continued benefits of our interest expense saves. So we do not have deposit runoff baked into the model.
spk06: No deposit runoff. Do you think, Travis, you can grow deposits next year? Yeah. Yeah. That's helpful. And then finally, IRFU, as you said, 2022 is the year you focus on execution and you've obviously been active on the M&A front. Does this mean you don't plan to look at or pursue M&A transactions for 2022?
spk08: I will tell you, I think we have an incredible ability across our entire organization to really do both, as you saw in, I think, slide four when we talked about the benefits, what we did from 2016 on the organic basis versus on the acquired. So we've established a wonderful foundation here. I think there is tremendous opportunity, as I mentioned before, about what Bank of Wyoming offers us as well as what the Westchester Bank offers us. And we'd be remiss if we didn't focus on executing that and really leveraging that from a growth perspective greater than what we had before. That said, I do think there's going to be tremendous opportunity when we think about what's happening with M&A, and not just from a technology perspective, but also from a consolidation. I don't want to distract anyone here internally, but there may be something on the periphery that makes sense for us that really leverages what we're thinking about from a strategic plan perspective. But there's so much tremendous upside on just executing with the acquisitions we've done. That's definitely going to be the primary focus for us.
spk06: Okay. Okay. Actually, I lied. If I could squeeze one more in. The cannabis business, how much growth did you guys have in the fourth quarter? Where do those deposit balances end the year? Thanks.
spk08: I mean, it's well over, you know, in the hundreds of millions of dollars as to where the cannabis business is today. You know, I think the biggest opportunity there really is expanding some of the multi-state operators. I think we're in 17 states right now with an ability to go up to 27, I think, is what we already have approved today. We have over 40% of the current portfolio just in the pipeline as well. So it's an area of continued opportunity and growth for us. We did begin to tip our toe into the lending business a bit at the end of the year, and I think there'll be opportunities for growth in that space as well. And even with the Valley Pay, I think, as you mentioned, it's a closed-loop payment platform that really enables us to to look at growth from a multitude of different perspectives, whether it be internally or even white labeling, there's a lot of opportunity for us. And it's that agility that we're trying to create throughout the entire organization for many of the initiatives that we're putting forth and, once again, something to be very excited about. Okay.
spk05: Terrific. Thanks for taking my questions. Thanks, Stephen.
spk04: Thank you, and I'm showing no further questions in the queue. I'd like to turn the call back to Aura Robbins for closing remarks.
spk08: I just want to thank those of you that participated in our call today, and we're looking forward to 2022 and connecting with you again. Thank you.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer