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Valley National Bancorp (NASDAQ:VLY)
Q1 2021 Earnings Call
Apr 29, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Valley National Bancorp First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker today, Travis Lan, Investor Relations. Please go ahead.

Travis Lan -- Head of Investor Relations

Thank you. Good morning, and welcome to Valley's first quarter 2021 earnings conference call. Presenting on behalf of Valley today are President and CEO, Ira Robbins; Chief Financial Officer, Mike Hagedorn; and Chief Banking Officer, Tom Iadanza.

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 2 of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.

With that, I'll turn the call over to Ira Robbins.

Ira Robbins -- President and Chief Executive Officer

Thank you, Travis. And welcome to all the participants on the call.

This morning, I will provide detailed thoughts on the unique growth opportunities available to us at Valley and update you on our corporate social responsibility efforts. Mike will then provide additional details on the financial results before opening the call to your questions.

In the first quarter of 2021, we reported net income of $116 million and earnings per share of $0.28. For the third consecutive quarter, this represents the highest level of quarterly earnings in Valley's entire history. Return on average assets was 1.14%, reflecting net interest margin expansion, stable expenses and a lower provision for loan losses. Looking forward, we expect fee income to rebound, continue net interest margin strength and strong loan growth. This should drive further positive operating leverage, strong financial performance and shareholder value over time.

On last quarter's call, I mentioned our expectation for mid-single digit non-PPP loan growth in 2021. In the first quarter, we generated 3.4% annualized growth in non-PPP loans. This growth was well diversified from an asset class and geographic perspective.

On the commercial side, non-multifamily CRE and C&I were strong contributors, and auto loans increased nicely in the consumer portfolio. However, the net growth numbers don't tell the whole story. In the first quarter of 2021, Valley originated over $1.6 billion of non-PPP loans. This represents the single highest quarter for loan originations in our history. Our commercial loan pipeline now stands above $3 billion, which is also the highest level in our history. These statistics represent what we can control. We can build commercial and retail relationships and drive meaningful activity by providing premier service. We have less control over the pace of pay-offs, which remain elevated and have weighed on our net loan growth. Still, we feel very well positioned to achieve our loan growth goals through the course of the year.

We mentioned in the fourth quarter call that we're increasing our C&I lending staff in Florida by 25% or approximately 15 individuals. 12 of those 15 lenders are now on board with half focused on middle market and the other half on business banking. We have also added 8 new C&I lenders in the Northeast, spread across our middle market, business banking and healthcare segments. We will continue to selectively augment our lending team to ensure we are positioned to capitalize on growth opportunities throughout all of our markets. Our talent is supported by the technology tools that enable nimble responsiveness and premier service.

From a balance sheet perspective, we have the capital and deposit funding to support the loan growth that we expect to achieve as the economy continues to rebound. Geographically, we saw more than 50% of our commercial loan growth come out of Florida during the quarter. Activity has been particularly strong in Palm Beach, Broward County, Jacksonville and Orlando, where previous hires attracted from larger competitors are paying dividends. There is a real momentum here that will continue to be supplemented by the additional hires I referenced earlier.

We have strategically build a loan portfolio and lending team that is well diversified across asset classes and geographies. Our significant market presence and stable Northeast markets is supplemented by a robust commercial lending operation in more growth-oriented Florida markets. Future growth is expected to remain well balanced between these markets. We believe this differentiated approach sets us apart from many of our regional peers and will ensure a consistent pool of growth opportunities remains available to us.

With that said, I also want to mention some important strides we have made as corporate citizens. During 2020, we continued to promote social and economic justice. We emphasized inclusion among our associates and communities by expanding our diversity, equity and inclusion initiatives, and partnering with local justice-focused organizations. Our communities remain at the heart of what we do. In 2020, our employees volunteered almost 7,000 hours of their time, and as an organization, we gave nearly $4 million to local charities. We've also developed a new community lending group that will focus on serving the unique needs of under-represented firms across all of our markets. We are proud to have received an Outstanding Community Reinvestment Act rating from the OCC.

In 2020, we also established an ESG Council to further our approach to environmental, social and governance issues. Our ESG Council will guide our efforts to practice sound ESG stewardship with respect to our employees, shareholders, customers and overall society. We will also use ESG best practices to mitigate the risks presented by these issues as we pursue our long-term strategic initiatives. For more details on these efforts and our recent successes, I welcome you to view our 2020 Corporate Social Responsibility Report on our website. We understand the importance of these issues, and we'll continue to devote time and resources to ensuring we fulfill our potential as a well-respected and leading corporate citizen.

As you can tell, there is plenty going on at Valley. We are constantly evolving to meet the changing needs of our markets and our diverse constituents. We continue to generate strong net interest margin performance and diverse loan growth opportunities. We are very excited for the rest of the year, and confident we will continue to drive strong financial performance and shareholder value.

With that I'd like to turn the call over to Mike Hagedorn for some additional financial highlights.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Thank you, Ira.

Turning to Slide 4, you can see that Valley's reported net interest margin increased to 3.14% from 3.06% in the fourth quarter of 2020. The majority of this increase was related to accelerated PPP loan forgiveness. However, net interest margin would have still increased 1 basis point sequentially, absent the effects of PPP. This stability reflects continued earning asset mix shift as average cash balances declined and average loans increased modestly. Importantly, much of the quarter's loan growth occurred in March. The impact on average balances and earnings will begin to emerge in the second quarter.

We continue to actively manage the funding side of the balance sheet and drove another 9 basis point reduction in our interest-bearing liability costs during the quarter. This reflects lower deposit rates and a full quarter's benefit from the FHLB borrowings prepayment that we executed in the fourth quarter. As is typical, the first quarter's day count also had a modest negative impact on the reported margin.

During the quarter, we utilized excess liquidity to fund the run-off of higher cost brokered deposits. This trend continued into April and our average cash balance continues to decline. With strong loan originations and select liability repricing opportunities, our net interest income should grow as the year progresses, absent the impact of PPP forgiveness volatility.

You can see more detail regarding the impacts of PPP income on Slide 5. We estimate that PPP contributed 8 basis points to the margin versus 1 basis point in the fourth quarter. As you can see in the bottom left, we have an additional $600 million forgiveness request pending approval by the SBA. All in, approximately 57% of our round one and two originations have now received or requested forgiveness.

Through March, 31, 2021, we have recognized approximately $49 million of PPP loan fee income since the inception of the program. I will speak to the results of our round three PPP origination shortly. From an income perspective, however, as of March 31st, an additional $57 million of PPP loan fees will be recognized as outstanding loans are forgiven or repaid.

Slide 6 outlines our interest rate positioning and the remaining opportunity to reprice liabilities over the next four quarters. We have over $3 billion of retail CDs set to mature in the next two quarters at an average rate of around 57 basis points. We expect the majority of these funds will be retained in lower cost CDs or transaction accounts at rates closer to 25 basis points. We also have additional opportunities on the borrowing side, including the pending maturity of $500 million of higher cost borrowings early in the third quarter of 2021.

As a result of active balance sheet management and significant deposit growth, our net interest margin has been extremely resilient over the last few years. We remain modestly asset sensitive and expect to continue to outperform peers from a net interest margin perspective going forward.

Slide 7 illustrates the ongoing improvement in our funding profile. Total deposits increased another 2% during the quarter, fueled by a 9% increase in non-interest bearing balances and a 7% increase in other transaction balances. Continuing our recent experience, CD balances declined 19% during the quarter. A portion of this run off was in brokered balances. These dynamics contributed to the sequential 5 basis point reduction in deposit costs.

From a total deposit growth perspective, we have benefited from successful cross sell of deposit products into our commercial customer base. Our exceptional deposit growth positions us to fund the future loan originations that will result from our strong pipeline. We continue to build out deposit products and services to further diversify our growth channels. To this end, we recently revamped our online account opening process and expect to add new digital deposit products in the coming months.

Page 8 provides an overview of the recent acceleration of online and mobile banking adoption among our customer base. We continue to assess the performance of our physical delivery channels and look for opportunities to further enhance efficiency in our physical delivery. As a reminder, in 2020, we rolled out a pilot program to provide banking services to businesses and multi-state operators in the cannabis space. We took a differentiated approach of combining industry-leading risk management with a value enhancing offering for our commercial customers. As we exit our pilot phase, we are positioned to capitalize on growth in the cannabis space as legislative support continues to build momentum. We will update you on our progress as this business becomes material.

Slide 9 details our loan portfolio and origination trends over the last few quarters. Average loan yields were effectively flat during the quarter, benefiting from elevated income from PPP forgiveness. As Ira mentioned, we originated a record $1.6 billion of non-PPP loans during the quarter. While origination activity has been robust in recent months, elevated pay-offs continue to weigh on net loan growth. The pace of future loan payoffs is uncertain, so we remain encouraged by our strong and diverse lending pipeline.

The right side of Page 10 lays out the details around our round three PPP activity. We originated over $850 million of new PPP loans over the last few months. The average loan size in round three is lower than our previous experience. This contributed to a higher average processing fee of 4%. In round three, we continued to focus on minority and women-owned businesses. In total, the PPP experience has been extremely rewarding for Valley. We filled the need in our local communities and executed at a very high level. Our NPS scores related to PPP have been extremely high and the level of differentiated service that we were able to provide has increased demand for our other products and services.

Moving to Slide 11, we generated non-interest income of $31 million for the quarter. The reduction was driven by lower swap and residential mortgage gain on sale income. We expect swap income to rebound to high-single digits in the second quarter of 2021 with steady improvement from those levels for the remainder of the year. Gain on sale income should also improve to a high-single digit level, but could decline from that point, given the expectation slowing refinance activity as the year progresses.

As we said on our previous call, we do recognize that certain fee lines will ebb and flow with market conditions. However, enhancing fee income remains a strategic focus of our Company. We continue to explore less cyclical opportunities to develop business lines that will contribute to greater consistency and revenue diversity.

On Slide 12, you can see that our adjusted expenses were stable in the first quarter at $157 million. The quarter included over $700,000 of expenses associated with seasonal snow removal. Our adjusted efficiency ratio ticked up to 48.6% from 47% in the fourth quarter with the increase reflecting the reduction in fee income during the quarter. We remain focused on relative expense control and positive operating leverage.

Since the first quarter of 2020, our revenue has grown at nearly two times the pace of expenses. This trend is consistent over a longer horizon as well. Over the last five years, our quarterly revenue has increased at an annual rate of 14%, which is more than two times the pace of annual expense growth in the same period. Looking forward, we continue to explore opportunities to generate positive operating leverage and are building the talent and infrastructure to leverage our strong balance sheet with a focus on organic loan growth. As this growth is realized, we will continue to drive toward industry-leading efficiency levels.

Turning to Slide 13, you can see our credit trends for the past five quarters. During the quarter, we maintained our allowance for credit losses at 1.17% of non-PPP loans. We recognized that renewed economic optimism has driven negative provision and reserve releases across the industry. While we share this optimism, our first quarter CECL model remain partially weighted to recessionary scenarios. We revisit our model each quarter, and given the economic tailwinds beginning to emerge as well as the successful pace of vaccine rollout, it is this possible that we increase the Moody's baseline weighting going forward. All else equal, this could lower our future reserve levels.

Our non-accrual loan balances continue to hover around 60 basis points of loans, give or take. Accruing past dues declined to $53 million from $99 million in the prior quarter. This represents the lowest absolute level of accruing past dues since the second quarter of 2018. While we remain conservative by nature, our borrowers have been extraordinarily resilient throughout the pandemic. During the quarter, our active deferrals declined to $284 million or 0.9% of total loans versus 1.1% in the fourth quarter. Additional detail on deferrals can be found in the appendix.

As we have reiterated throughout the crisis, Valley's historical credit strength remains a distinguishing characteristic of our organization. As a result, we expect to outperform the industry on credit loss experience in any economic environment.

Slide 14 illustrates the consistent growth in our tangible book value and the continued improvement in our capital ratios. Tangible book value has increased 8% in the last 12 months, driven by our increased earnings power. Our tangible common equity ratio increased to 7.55% from 7.47% in the fourth quarter. Adjusting for our $2.4 billion of PPP loans, tangible common equity would have been above 8%.

On a year-over-year basis, we have also seen a significant improvement in our regulatory capital ratios, which gave us the flexibility to redeem $60 million of subordinated debt on April 1st. This tranche has been acquired from USAB and carried a 6.25% cost. All else equal, this would lower our total risk-based capital ratio by approximately 20 basis points. We expect to offset the majority of this impact with retained earnings during the second quarter.

With that, I'll turn the call back over to Ira for some closing commentary.

Ira Robbins -- President and Chief Executive Officer

Thanks, Mike. This quarter was highlighted by the continuation of our strong performance trends. Our net interest margin has been extremely resilient, reflecting our active balance sheet management and loan and deposit tailwinds. We continue to control expenses and drive positive operating leverage. Our capital levels are robust and we are positioned to drive significant organic growth on both sides of the balance sheet across our entire franchise. This strong and consistent performance is the results of the performance-oriented culture that we have developed over the last few years. There is a real momentum here at Valley. While we continue to evolve and refine our approach, we are committed to remaining a high-performing institution for the benefit of all of our stakeholders.

With that, I'd now like to turn the call back over to the operator to begin Q&A. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question coming from the line of Steven Alexopoulos with J.P. Morgan. Your line is open.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everybody.

Ira Robbins -- President and Chief Executive Officer

Good morning, Steven.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Good morning.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Ira, I wanted to start on online competition, because we've been told for years that with customers now being able to move money more easily, they could go online, check rates that banks like yourself would have to pay closer to market rates for deposits, and you're telling us that you're 57 basis points CDs are going to be retained somewhere in the 25 basis point range, which is well below what online players such as Chime are paying. So, my question is, are you -- as you move those rates down, are you seeing customers move balances out of the banks to Chime and other players that are just paying more, or are customers staying with you?

Ira Robbins -- President and Chief Executive Officer

We're definitely seeing a customer retention, Steve. We're actually seeing customer growth. When we look at unit of accounts, I know there's been a surge in deposits across the entire industry, we're focused on growth in households, growth on what our customer experience looks like. But on individual units, we're up 7.5% linked quarter on an annualized basis in unit of personal accounts. We're up 8.5% on an annualized basis in business accounts, and year-over-year were up 8% as well. So we've seen a real positive trend continue across both business and consumer accounts.

Our NPS Scores within the online banking channel is actually better than what we get within the branches. I think it's a combination of having a terrific online banking experience, as well as that relationship focus within the branches, we tend to see a lot of our customers want the ability to bank online, but want to safety and security to know that there is somebody that they have the ability to connect with. So I think it's a combination of a comprehensive strategy not in individual one, and we're seeing real core growth in our organization, and it's a focus I think on that customer experience.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Got you. Okay. That's helpful. And, Ira, on customer sentiment, you guys are in a very unique position, because you have exposure to the Northeast, and Florida, right? We know Florida is much more open than New York and New Jersey today. Can you contrast for us business sentiment among your customers in the Northeast versus Florida? And maybe talk about what difference you're seeing in terms of them building own pipelines here?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

Sure. Hey, Steven, it's Tom Iadanza. I think, as Ira pointed out early in the presentation, about 40% of our production on the commercial side is coming out of Florida, and about 50% of our growth is coming out of Florida. We still exhibit very stable growth in production in the Northeast. Again, across all orders [Phonetic] of our business. We're more suburban than we are Manhattan based here. We are seeing higher C&I growth today in the Northeast, because that's been our focus for the last four years here, and we're starting to see that C&I growth in the South in the Florida or Alabama markets as we add staff down their.

Pipelines are now -- for the most part, I would say, it's 40% of the pipeline is Florida based on the commercial side, 60% is still New York, New Jersey. More importantly or equally important is on the consumer. We are now 50-50 refinance to purchase, but we have seen about a 30% increase in the purchase portion down in Florida over the last quarter. So we're starting to take advantage of that migration down on both a business and consumer side.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. But, Tom, I'm trying to understand, are you seeing a big difference in customer behaviors in Florida today versus the Northeast?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

From the standpoint of customers building inventory, customers building whether it's a real estate project, very similar, you're seeing a bit more activity in Florida in different product categories. It's still retail. You're still doing office down there. You still doing a lot of multifamily. It is lower up here on that build than it is in Florida and it's lower up here on C&I inventory build than it is in Florida. So there is more activity in Florida.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Got you. Okay. And then final question for you, Ira. It's clear M&A in the Northeast is certainly percolated. Do you think that you can be competitive in your markets with roughly $40 billion of assets, or do you think you need to join many of these other banks that are jumping up to that $60 billion, $70 billion, $80 billion asset threshold? Thanks.

Ira Robbins -- President and Chief Executive Officer

Thanks for the question. Look, I think there is varying reasons as to why each organization looks at M&A. We have real strong organic growth that's taking place in our organization. We're focused on relationship banking model, leveraged by technology, not the other way around. And as a result, I think being focus from a strategic perspective, we do have the ability with where we are today to continue to deliver outsized performance on an organic perspective. That said, I think there is always opportunities when we look at M&A and other institutions, both bank and non-bank, that potentially would be accretive and help us accelerate some of the individual strategic objectives that we've outlined. So, to answer your question directly, I think, we are of an opportunistic size definitely to continue to grow the organization. But that said, I think if there is an opportunity to continue to grow the layering in some M&A, it's something that we would be up into as well.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Terrific. Thanks for taking my questions.

Ira Robbins -- President and Chief Executive Officer

Thanks, Steven.

Operator

Our next question coming from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning. Just on the -- Ira, I think you reiterated mid-single digit loan growth, but I just wanted to make sure that was the messaging, and then, any bias one way or the other in terms of that growth rate for the full year, just given how strong originations are even at start of the year?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

Yeah. Hey, Frank, it's Tom again. I think the single-digit growth given where our pipeline is today and that $3 billion range, which is probably 25% above the pre-pandemic levels, gives us confidence that we'll meet that level. The only caution is the pull-through will be lower, there's much more competition, much more loosening of terms. One of the important components of us hitting our growth number is not to compromise our credit standards and our underwriting standards, which we did not. We're still a very diverse, growing in all regions, all product type, C&I, real estate, still very granular. Average real estate loan is still in that $4 million range. Average C&I loan is still at $1 million range. We're going to maintain those standards.

The impact of every bank being very hungry for loans might prevent us from hitting -- pulling through that full $3 billion that we're talking about. Additionally, we have taken advantage of the aggressiveness that's [Phonetic] in the market. We exited about $150 million of New York City multifamily loans that we acquired through the Oritani acquisition, non-relationship lower yielding and moved out of that and still replaced and grew that 3.4%.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. Thanks. And then just lastly from me. On your -- it seems like you can handle as much deposits in the door as you want, how do we think about -- I know it's a small piece of the overall franchise, but if I think about the Alabama portion of the footprint, how could that change over time? Do you retain that? How does the strategy there -- first of all, what is the strategy now and how could that change over the near term?

Ira Robbins -- President and Chief Executive Officer

Let me just maybe address the question first. So, maybe I would disagree a bit. I don't think it's easy to get the type of deposits that we want today. I think anyone can grow deposits based on sort of surge deposits and based on not real relationships, those are transaction-type deposits. Our growth in households, our growth in relationships is something that we focused on. I think when we looked at even from a PPP perspective, we could have absolutely done more PPP. We could have absolutely been on every single leader board when it came to PPP, but it would have been inconsistent with our focus from a strategic perspective and making sure that we were relationship first and how we looked at growing the overall franchise.

So from our perspective, it's the individual liability side of the balance sheet, the growth in households, the growth in profitability, those individual relationships that drives franchise value. Putting up unbelievable deposit numbers when their transaction really -- don't really drive franchise value from our perspective. I think as that layers into the Alabama, I think we look at it from a more holistic perspective, are they additive to the organization when we think by stable funding base? Is there franchise value that comes out of that? And today, the answer is yes. And we continuously reassess every single geography, every single product we have within the organization to sit and say, is this the best use of our capital? Is this the best use of our resources? And is it providing the best franchise value to the overall organization?

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. All right. Thank you.

Ira Robbins -- President and Chief Executive Officer

Thanks, Frank.

Operator

Our next speak -- our next question coming from the line of Zach Westerlind with Stephens. Your line is now open.

Zachary Westerlind -- Stephens, Inc. -- Analyst

Good morning. It's Zach Westerlind covering for Matt Breese. How are you guys doing?

Ira Robbins -- President and Chief Executive Officer

Hey, Zach.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Good morning, Zach.

Zachary Westerlind -- Stephens, Inc. -- Analyst

I just have two quick kind of model questions. The first on the NIM, do you guys -- for the trajectory for the rest of the year, do you guys see the NIM having room to run higher?

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

This is Mike. I'll take a stab at that one. When you look at the sequential change from fourth quarter to first quarter, 8 basis points, the two largest increases that drove that were the impact of PPP and the impact of our interest-bearing liability, cost reduction, both of which we think are going to be robust going into the second quarter. And I would say that the latter, the interest bearing liabilities will continue into the third and fourth quarter, and you can see that in our IP. The other thing is the number of days was a negative drag on that sequential comparison, and that's obviously going to improve in the second quarter.

So what I'm telling you is I think margin could actually -- as stated, margin could actually be better than 3.14% in the second quarter. And then once all of the majority -- not all, but the majority of those PPP fees that are enhancing margin are taken through the income statement, you'll see a reduction in margin for that reason alone. But we still have these other movers that we're working on, not the least of which is our interest bearing deposit costs, which we still have more room.

Zachary Westerlind -- Stephens, Inc. -- Analyst

Great. Thank you. And then, on expenses, is $157 million a good quarterly run rate?

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Yeah, we feel pretty good that the adjusted expenses that we've put out $157 million is fairly decent ongoing run rate.

Zachary Westerlind -- Stephens, Inc. -- Analyst

Great. Thanks for taking my questions.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Yeah.

Ira Robbins -- President and Chief Executive Officer

Thanks, Zach.

Operator

Our next question coming from the line of Ken Zerbe with Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

I was hoping just in terms of the ACL ratio, in the press release you guys mentioned that it looks like you boosted reserves related to certain commercial real estate loans. Can you just talk a little bit about that specifically, like how meaningful was that?

Ira Robbins -- President and Chief Executive Officer

Yeah. It was a single loan, I think, you were referring to that we moved into our non-accrual category. It's pretty small relative to the size of the portfolio.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

The biggest mover on our CECL reserve was clearly to weightings that we put on the Moody's estimate. So, just to be real clear about the 60% on the baseline, which had previously been 30%, 30% on S3, which is a recessionary scenario, which had been previously 50%, and 10% on S4, which is the prolonged slump. Within those components in the Moody's estimates, because of the way it works, it's less focused on the GDP number, honestly, but more focused on the U3 number because of the difference in U3 unemployment, each one of those scenarios.

And so what our comments were meant to say is we really felt that was prudent going into the quarter, thinking about the pace of the vaccine rollout, there is a ton of uncertainty about it, side effects, was the economic rebound actually driven by fundamentals or was it being driven by a lot of government money that's just sloshing around in the economy. So taking everything into its totality, we thought that was the best approach. And that resulted in us taking some measure of provision $9 million in the first quarter. So in our comments we said, all things being equal, we would expect that number to being somewhat reduced. I'm not saying that will actually go to negative, but absent loan growth, it's higher than what we're projecting, which would also drive a higher level of provisioning. I think the bias will be toward a lower number.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Okay. That now makes sense. And then just, Tom, in terms of mortgage banking, obviously is [Indecipherable] looks like you expect to rebound in that next quarter, can you just explain exactly what did happen with mortgage banking this quarter to drive the lower revenues?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

So, our estimates were -- think of it this way, we're basically a fair value shop. So, our entire balance sheet is done using the fair value conventions. And when you look at the way that works from an accounting perspective, at the end of the quarter, you recording a number of those fair value of what you think the next quarter production is going to be, and that's a function of interest rates. So, because the level of production has been somewhat challenged by the length of days that it's taking to close mortgages and get them to the GSEs, which typically were around 60, 61, 62 days, stretched out to 90 based upon FTE counts and just the sheer level of refinance activity, plus a reduction in rates from the fourth quarter to the first quarter resulted in that fair value adjustment going down. That production is still there and it's going to be delivered, and that's what's going to drive the second number -- the second quarter number back up. So in totality, if you look over the entire period of time, all the revenue will be the same, it's just a matter of which quarter it's recognized in. I know this is a tricky thing. I appreciate the question, but hopefully that explains it.

Ken Zerbe -- Morgan Stanley -- Analyst

It does, it helps. All right. Thank you very much.

Ira Robbins -- President and Chief Executive Officer

Thank you, Ken.

Operator

Our next question coming from the line of David Chiaverini with Wedbush Securities. Your line is now open.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. Couple of questions. A follow-up on the fee income similar to your discussion around the gain on sale and the dynamics around that. On swap income, you also guided to a rebound in the second quarter and then kind of stabilizing. I was just curious what drives the variability in swap income from quarter-to-quarter? Is it a certain type of loan that you originate? Or is it based on the level of interest rate and interest rate movements that drives customers to hedge that movement?

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

It's essentially both. I think we produced more C&I in the first quarter and that tends to be shorter-term floating. We did the same appropriate amount of fixed rate, but the fixed rate has shortened in term to -- closer to five-year than longer-term horizon. So typically five year and under, we're not swapping. Customers have an exit strategy on the asset. So, it's really depends on the mix of the asset. Looking at what's in our pipeline is why we believe it will come back to traditional slightly higher levels in the upcoming quarter.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. That's helpful. And then shifting gears, you spoke a little bit about the cannabis business. Can you frame the opportunity? How big it is? And discuss how much of it is on the lending side versus the deposit side?

Ira Robbins -- President and Chief Executive Officer

Look, I think if anyone would test right now, the opportunity is tremendous. It really depends on how quickly the government goes ahead and puts through different legislation. For us, it was really more of a risk management focus and how we want to be proactive in addressing it as opposed to reactive. We spent well over a year putting together risk management practices in place that made us comfortable that we'll be able to manage this risk appropriately as well as growing. We've been very selective as to companies that we've targeted to do business with. So right now it's really on the deposit side. We're just beginning to target a little bit on some of the lending side. But we think overall that the industry is something that would drive performance at Valley well above peers and we think we're going to be first in from any size perspective.

David Chiaverini -- Wedbush Securities -- Analyst

Great. And geographically, is that more in the Florida market?

Ira Robbins -- President and Chief Executive Officer

No. Right now, it's largely in our New Jersey footprint. We are looking obviously to grow it into the other geographies that we currently have physical locations.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks very much.

Ira Robbins -- President and Chief Executive Officer

Thank you.

Operator

Our next question coming from the line of Michael Perito with KBW. Your line is open.

Michael Perito -- KBW -- Analyst

Hey, guys, thanks for taking my questions. Appreciate it.

Ira Robbins -- President and Chief Executive Officer

Yes, Mike.

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

Obviously, a lot has been asked and answered at this point. I wanted to expand maybe on Slide 8 for a minute here. The revamp or the relaunch of the deposit account online opening process, I was wondering if you could maybe give us a little bit more color in terms of how much of your deposit accounts or incremental deposit accounts are being opened online today and where you think that could trend with kind of this new platform or hoping it could trend, maybe just expand a little on kind of the economic impact of that, right, in terms of kind of the efficiencies that could be gained if more of your account opening moves online versus in-store presumably?

Ira Robbins -- President and Chief Executive Officer

We'll give you -- I think we owe it to this sheet [Phonetic] a little more of a clarity and an update and we'll put together a more detailed slides next quarter on some of that. But we're seeing monumental growth within the -- via digital channel today on a linked quarter basis versus where we were before, both in volume as well as in unit of accounts. That said, Tom really spearheaded with a gentleman by the name Stuart Cook, who works for us on new online account opening platform that I would rival against anyone within the industry. I think it's three minutes, Tom?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

Yeah, it's three minutes, which includes all of the compliance, checks to apply online, open and fund within two days it'll appear there. It's -- we're using it now for a single online account, but it will expand into several accounts and ultimately be the account opening process used across our footprint. It also -- with the drive in more mobile users online users and less transactions being done at the branch, it'll allow our branches to be more focused on guidance and consulting type services, especially with regards to a lot of the activity we're seeing in our mortgage, our residential mortgage product.

Travis Lan -- Head of Investor Relations

And Mike, it's Travis. When we said in the prepared remarks that it was recently revamped, we mean that very honestly like it's over the last couple of weeks, which is why we don't -- we didn't put any real statistics in the deck. But as you go forward, as Ira said, we'll put more clarity around that in terms of numbers.

Michael Perito -- KBW -- Analyst

That's great. No, that's -- I understood. And it's -- is it fair to assume that that's just on consumer account online opening side at this point with -- I guess to Tom's point looking to expand, that's other things like business in the future or is it both consumer and business online at this point?

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

At this point, it's consumer. It will be fully activated on a consumer accounts probably over the next two quarters, and then by the end of the year, it will be both consumer and commercial.

Ira Robbins -- President and Chief Executive Officer

Mike, I think the one important thing here is the way that we've structured this enables us to really lever this as a platform from growth across all different product types throughout the entire organization. So, it's not dependent upon a third party to make changes. We have the ability in-house to do -- really begin to drive a lot of this, and we think this is a growth platform for us. And once again, I think it's consistent with the technology strategy that we put forth to make sure we own the ability to drive that customer experience as opposed to a third party owning that ability to drive the customer experience. It's a very differentiated model from what many of our peers are doing, where they're just layering in with the third-party, whoever that may be to sit there and let them control what that experience looks like. So, we think it will be differentiated. We think it will contribute to the growth we have within the entire organization. And as Tom mentioned, it's going to help us from an efficiency perspective as we think about what the physical experience should look like for many of our customers.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

And Mike, I'll just -- I'll finish this up by saying that from Q1 of '20 to Q1 of '21, business checking accounts increased 8.2% and our personal checking accounts increased 4.1%, but that includes both online and in-person openings. We'll figure out a way in the future to break that out for you, I think that's what you're asking. But it goes back to what Ira said earlier that a lot of banks are just trying to fight to keep that even and they're probably losing ground. And what's happening here is we're actually net positive, very nicely net positive account growth.

Ira Robbins -- President and Chief Executive Officer

I mean, on a unit basis on online, we were 56% linked quarter 4Q versus where we were first quarter. So pretty big numbers. And I think we'll do a pretty decent job next quarter giving you a little bit more details. I think it is something that's a big driver here for us.

Michael Perito -- KBW -- Analyst

Yeah. No, that would be great. Because obviously the big guys are disclosing like over 50% of accounts are online, that's not exactly clear what's in that number, but obviously, it's a good proxy for the consumer marketplace at least, right? So, I mean, I think it's pretty relevant to have this platform. And so I appreciate you expanded color there.

And then just lastly, and I apologize if I missed this earlier, but I was wondering if you could just -- I know you talked about credit a little bit, but just expand a little on the provision expense specifically, right? I mean it seems like record pipeline, loan growth going to accelerate as the year progresses here, but hopefully the credit conditions continue to improve. I mean, any thoughts on that dynamic and how that could balance out in your provision line going forward?

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

As you pointed out, the question was asked and I hope it was answered earlier, but I'll try to do it again just real quickly...

Michael Perito -- KBW -- Analyst

Yeah, I'm sorry about that. I was kind of jumping back and forth here. So...

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

No trouble. The biggest movement is the choice of the Moody's models for us. So, 60% baseline, 30% S3 and 10% S4, mostly driven by our decision in the first quarter around -- uncertainty around the pace of the vaccine rollouts combined with as a real fundamental economic rebound or is it more about government money. And so because of that, we stuck to a little more -- I would say, tilted toward a little more recessionary forecast. And so my comments earlier were all else being equal, and keeping pace with loan growth, so obviously the way CECL works is when you add new loans, you're going to have to keep pace with whatever category they're in. But assuming that that's not the largest driver, I would expect to bias would be for us to take less in provision moving forward, all other things being equal.

Michael Perito -- KBW -- Analyst

Got it. So, I mean, I know obviously it's way more complicated than this, but kind of growing into the ACL as conditions improve, but you're loan balances hopefully expand.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Yeah, that's a tricky thing, because I've seen that in a couple of people's write ups. That's not actually how CECL works. You don't really...

Michael Perito -- KBW -- Analyst

Yeah, I know.

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Yeah, you get it.

Michael Perito -- KBW -- Analyst

Probably an oversimplification, but I guess maybe said in another way, not targeting at this point with the way you're balancing the Moody's forecast, any dramatic economic-related reserve release at this particular point in time?

Ira Robbins -- President and Chief Executive Officer

Yeah. I think as I said earlier, it's going to be driven by the Moody's scenarios that we pick, and as Moody's changes the numbers for both GDP and U3 unemployment in their models as well.

Michael Perito -- KBW -- Analyst

Yeah. Okay. Thank you, guys. I really appreciate all the color on the call today. Thanks.

Ira Robbins -- President and Chief Executive Officer

Thank you.

Operator

I'm showing no further questions at this time. I would like to turn the call back over to Ira Robbins for closing remarks.

Ira Robbins -- President and Chief Executive Officer

I just want to thank everyone for taking the time to think about Valley today, and we look forward to delivering another quarter of outstanding performance in the second quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Travis Lan -- Head of Investor Relations

Ira Robbins -- President and Chief Executive Officer

Michael D. Hagedorn -- Senior Executive Vice President and Chief Financial Officer

Tom Iadanza -- Senior Executive Vice President and Chief Banking Officer

Steven Alexopoulos -- J.P. Morgan -- Analyst

Frank Schiraldi -- Piper Sandler -- Analyst

Zachary Westerlind -- Stephens, Inc. -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Michael Perito -- KBW -- Analyst

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