Valley National Bancorp (VLY) 2002 Q4 法說會逐字稿

Ladies and gentlemen.

Thank you for standing by and welcome to the Valley National Bancorp fourth quarter earnings conference call.

At this time, all participants are in the listen only mode and later on we will conduct a question and answer session;

Instructions will be given at that time.

If you should require any assistance during the call today, please press zero then star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Gerald Lipkin, Chairman and Chief Executive Officer.

Gerald Lipkin, please go ahead sir.

Thank you..Good morning and welcome everybody to the Valley National 2002 fourth quarter earnings conference call.

I will like to advise everybody that this teleconference is being webcasted for the first time and I would like to welcome those of you who are attending our webcast along with those of you who dialed into our toll free number.

We do have to go to our forward-looking statement first.

I’ll call on Alan Eskow, our Chief Financial Officer.

Thank you, Gerry.

Today’s presentation may contain forward-looking statements regarding the financial conditions, results of operation and business at Valley.

Those statements are not historical facts, and may include expressions about Valley strategies, management’s expectations about earnings, affective utilization of strategies, new and existing programs and products, relationships, opportunities, technology, the economy and market conditions.

These forward-looking statements involve certain risks in them and uncertainties.

Actual results may differ materially from the results the forward-looking statements contemplate, written information concerning factors that could cause results to differ materially, from the results the forward-looking statements contemplate, can be found in Valley’s press release for today’s conference call.

Valley’s 10k for the year ended of December 31, 2001, Valleys 10q for the quarter ended September 30, 2002, as well as Valley’s other recent SEC filings.

Valley assumes no obligations for updating its forward-looking statements.

Thank you, Alan.

For those of you who have had a chance to look at our news release, you already know that we had a good fourth quarter and an excellent year for 2002.

Our diluted earnings per share for the quarter were 41 cents versus 37 cents in the fourth quarter 2001.

That’s an 8.5% increase.

For the year, we went from $1.39 to $1.65, representing a 19.09% increase.

On a net income basis, our earnings went from 36 million 077, to 37 million, 164 for the quarter, a 3% increase.

For the year, it went from $135m to $154m, a 14.36% increase.

The reason that the per share diluted earnings per share went up as a percentage more than the net income is because of the stock repurchase plan, which I will go over a little later.

At the present time, we have outstanding diluted shares in fourth quarter of 91 million, 480 thousand, compared to the year ago fourth quarter of $99,340,000.

And for the entire year, we had average outstanding shares of 93 million, 673 versus 97 million, 548.

Our return on average assets for the year were 1.79%, compared to 1.68% for the comparable quarter a year ago 2001.

Return on average equity was 23.59% for the year, compares to 19.70% last year.

Our efficiency ratio for the year was 47.31% compared to 44.39% last year.

I caution if you netted out the trust preferred interest and the financial service organizations that we recently acquired, our number would be 43.28%.

So, we really have not had deterioration in our efficiency, it is more the fact we added trust preferred securities and how that affects the ratio.

The net interest margin on fully taxable equivalent basis for the quarter was 4.39 % versus 4.53% the third quarter of this year.

For the year as whole, we had net interest margin of 4.51% compared to 4.45% for 2001.

The last 50 basis point drop in November was significant and took us little bit longer to adjust to make the appropriate adjustments to it, causing the fourth quarter to deteriorate as much as it did.

The credit quality in the bank remains very good.

Our non-accrual loans at December 31, 2002, were $21 million, 524 .

As of 9-30 they were 19.64 7.

Last year, 18 million, 483.

You can see there has been a relatively leveling off of our non-accrual situations.

The other real estate owned by the bank is virtually nonexistent for a bank our size at $43,000.

Our nonperforming assets to loans in Oreo are 0.37%, compared to last year-end at 0.28% for the year as a whole.

We ended up at 0.36%.

There has been very little movement in our nonperforming assets.

Loans past due 90 days and still accruing year-end were down slightly at $4 million, 931, compared to September 30th when they were $10 million, 456.

The fourth quarter of the last year they were more in line with the current number at 5 million, 146.

Delinquency to the bank, and we report total delinquencies 30 days and over, were 1.2%.

That compared to the third quarter when they were year-end last year when they were 1.3%.

So, there has been a slight improvement, although the dollar number remains relatively constant.

In so far as our loan growth was concerned, we had a very good year as a whole.

Our loans increased 8.08%.

That represents an increase of $431m.

The commercial loans showed a 3.23% growth.

The commercial mortgages showed a 10.97% growth.

Our residential mortgages grew by 7.84% for the year.

That was after we sold $217m in residential loans during 2002.

That number is relatively constant, although slightly higher than last year, 2001, we sold $303m of our originations.

Home equity program at Valley National Bank, which is a very high performing portfolio, showed 13.42% growth.

Our auto lending for the year was up 7.49%.

So, we are very pleased with the way our loans have grown, particularly in light of economy around the country.

The only area in our loan portfolio that has shown any decrease, and that is relatively small, was in the construction lending.

That went from year-end 2001 of 206.8 million, down to this year 200.8 million.

There wasn't much of a decrease at 2.85%.

The deposits likewise showed a good growth for the year.

We show our total deposits of 5.97%.

The non-interest bearing, which is our most desirable deposits, grew by 8.75%.

Our savings pass book accounts grew by 20.19%.

Year-end totaled 2.942 billion dollars.

So, we were very pleased with that growth.

At the same time, the only area in our deposit structure that has gone down is certificate of deposits, which showed 10% decrease.

That is largely by design because we have always found we raise the rate and generate more funds.

The consumer has a strong preference to staying short and liquid in today's environment.

As a result, we emphasized our savings pass books as opposed to the certificates of deposit.

We did have a total of 7million, 092, in security gains this year, but that came largely from the sale of Disus stock when they were acquired.

Mortgage servicing rights we added additional impairment, added to impairment reserve in the quarter of another million dollars, for a total of $4.4m for the entire year.

As I mentioned earlier, our share repurchase program continued throughout the year, adjusted for 5-4 stock split, the board authorized 10 million dollar share repurchase in the third quarter of 2001.

Most of that repurchase has taken place during 2002, when we bought back 5.6 million shares for a total purchase price of $149.6m, in the fourth quarter we purchased 1.53 million shares at total price of $40.4m.

Our branching efforts continue quietly, but successfully.

We have opened three Boyer branches during 2002.

I am quite pleased to say one opened in March, one in June and one in October.

Those three branches alone have garnered over $73m in deposited.

We have on tap seven more branches slated to be open during 2003.

Two of which will be in Manhattan.

Our aviation and leasing company also prospered during the quarter, as well as throughout the entire year.

During the quarter it grew by 5%.

It showed significant, almost a 58% growth for the year.

The aviation loans during the quarter grew by 1.56%.

These are predominantly smaller personal aircraft loans, not the jumbo jets we read about in the newspaper where some institutions have gotten into some trouble.

The personal, the small business leasing area which is really a bright spot in the bank, has grown from 16.9 million to 20.22 million.

So, we are quite pleased with that.

As those of you have been following, our new products, Kid First savings account continue to grow every week.

At the present time, we have almost 31,000 accounts with balances exceeding $53.6m.

Our Kid First accounts have average balance at the present time of approximately $1736 per account.

So, very, very successful program in the bank.

They have brought in many, many corollary accounts as the children come in to open accounts.

We are pleased with that product.

During the year, we made several purchases of subsidiary financial companies.

On August 1, we acquired Masters Coverage Corp.

That acquisition has been completed.

It was a cash acquisition.

That company has annual revenues that is we expect will be in the 6 to 7 million dollar range.

For 2002, they approved our decision correct, because they were accretive to earnings.

We purchased during the fourth quarter, we closed on November 1st, NIA lawyers title Agency, LLC.

This is a title company with three offices operating in New Jersey and revenues for that agency are approximately $5 million.

At year-end, we purchased Glen Raush Securities.

Glen Raush is SEC registered security dealer and investor on Wall Street, specializing in municipal Securities.

Glen Raush will continue as subsidiary of Valley National Bank.

Assets and customer accounts total $1 billion and annual revenues last year exceeded $5 million.

Tax free municipal bond sales accounted for approximately 75% of the company's business.

With that, if anybody has questions, I would be happy to entertain them.

Ladies and gentlemen, if you would like to ask a question, please press the 1 on your touchtone phone.

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If you have a question, press 1 at this time.

We have a question from the line of Gerard Cassidy with RBC Capital Markets.

How are you?

Good morning to you, too.

Couple questions, more maybe industry-type questions than rather Valley specific.

The first is you are one of the few keys fortunately to have good loan growth in the quarter on year-over-year basis.

We noticed from many banks that is not always the case.

It seems like everybody is using leverage to offset margin pressure and they are available for sale security portfolio.

I noticed yours is flat year-over-year.

Do you have any thoughts on employing similar strategy if loan demand slows down or how would you counteract slower loan demand in the upcoming year should that happen?

Well, it depends.

To some degree, we always look at our security portfolio as an opportunity to increase earnings.

But, our primary goal has always been for loans.

We constantly remind our lending staff through all of the department heads that quality is number one.

We have turned down a large number of loans and I think our loan growth could have been a lot stronger than it was if we were willing to dent great our credit standards.

We work hard to maintain our standards and our delinquency levels have shown that we haven't deteriorated in our lending decisions.

The economy of Northern New Jersey, Manhattan, where the vast majority of our loan business takes place has remained a lot stronger than we see taking place around other parts of the country.

I think we may be blessed by the fact our population is as affluent as it is, that the number of people living in this area has not decreased.

In fact, if anything, we have seen population growth in northern New Jersey, which has helped us.

The diversification of industry in the area certainly has been a benefit.

So, I think our economy has helped us put on some of this growth without having to denigrate credit quality.

Got you.

Your credit, no one -- you are one of the best, if not the best on the credit side.

Moving over to the branch expansion, I was distracted, how many new branches are you opening in Manhattan?

We have two right now.

We are looking at a couple other locations.

I said all along. it isn't our goal to see how many offices we can open it’s our goal to open up key locations that are going to help build the franchise.

We have done very well with the three offices in New Jersey that opened this year.

I have high expectations for the seven on tap for next year.

What have you seen recently in your offices you just opened up in terms of reaching break-even, what type of time period?

We usually strike the break-even somewhere between the first and second year of operation.

It could take anywhere from 18 to 30 months.

That has been our long-term experience.

One last question on the branches.

I know Manhattan is very big in terms of deposit market.

It seems like the hot market to go to, Manhattan and Chicago, are two high areas for new branches.

Do you ever worry or at what point do you start to worry that maybe there are too many new players coming into the market or even the bigger guys start to open up branches?

Our approach to Manhattan has really been that, you know, we are not going to turn it on fire.

We are not going to open up 30 or 60 branches in Manhattan.

We are not shifting our business focus to only that in Manhattan.

It's just a huge market.

We feel that we, as a middle market player, if we go at it modestly, can do very well for the balance sheet by opening up another -- if over the next five years we doubled the number of offices we have in Manhattan right now we have seven.

If we ended up over the next five years in addition to the two we have on tap opening up another four or five, I think everybody in our organization would be pretty happy and we would continue to prosper coming in under the radar scope of the big banks.

We are not in a position to go toe to toe with them and we are not trying to.

Great.

Thank you very much..

))OPERATOR: Thank you.

Next question is from the line of Robert Lacoursiere with Lehman Brothers.

Good morning.

I wonder if you could give us more color and background on explaining the sequential quarter changes in other expenses and other income?

Other expenses and other income…for the quarter?

Yes, quarter on quarter basis.

A lot of the change we have seen on the other income side, which is up about $3m.

The majority comes from financial services companies we put on.

Most of that is being put into that category, the other income at this point.

The other expenses really is pretty much the same thing.

Both of those categories are taking into account expenses of each operations and income of the operations.

Great.

If I could ask a separate question, going back to the deposits.

When we look at the on an average balances basis quarter-on-linked-quarter basis, we have seen a second quarter of decelerating growth, the highest point was in the second quarter and it has been slowing since then.

How do you see deposit evolution going forward from here?

I think we will continue to see growth in deposit sector.

We are looking forward next year to continued growth in that area.

We have experienced, you know, the opening part of this year nice growth.

I guess that is the genesis of my question.

Beginning of the year you were running at about 9 or 10% annualized pay for the first half of the year.

Since then, this quarter by my calculation is less than 3%, up 2 and-a-half percent.

Just -- it's hard on quarter-by-quarter basis to judge it, although I do think that our plans for the first quarter this year and going into next year should be significant.

Thank you.

Our next question is from the line Adam Barkstrom with Legg Mason.

Please go ahead.

Good morning.

Jerry, Alan, could you give insight into your margin, what you think the December margin number was on monthly basis, if you have that?

Then, looking into the crystal ball going out next year, what you think we ought to see as far as margin creep?

You know, assuming flat rate environment there will be rebound in the margin?

Then, a couple follow-ups after that.

We are projecting in second half of the year increase in margins, decrease in the first half of the year from where we ended the year.

Hopefully our loans will continue to show strong growth and we can make up in volume what we lose in the margin.

You know, it's difficult maintaining a 4 and-a-half percent spread when prime rate itself is at 4 and a quarter percent.

We have to pay depositors their interest.

You run into a compression there.

Of course, we are fortunate we do a large consumer volume, and those rates tend to be north of the prime rate.

We do a lot of small business, middle market lending, which also commands a higher interest rate.

So, I think that the large banks are going to face a tougher margin compression over the course of the year than we will.

Again, if the Federal Reserve next month decides they will drop interest rates another half a point, that will have a major negative impact margin.

Right.

I apologize if you talked about this already, the net charge-off for the fourth quarter, higher than the normal run rate, is this more of a fourth quarter clean-up or anything in particular?

A combination…from the size of the bank depends on what the charge-offs are.

Small fluctuations make it actually look big.

When you look at a 6 billion dollar loan portfolio and you talking about charge-offs of 4.7 million, whatever, it is very small.

Anything in particular driving up that number or kind of a fourth quarter clean-up?

It is – less than we charged off fourth quarter of last year.

Last year we charged off 8 million 9, this year we charged off 4 million 7.

You know it is just –

Right.

Last year –

I think you have to look at the entire year, you really have to look year to year, for the year last year we did 13 million 9 and this year 13 million 3 on charge-offs on a 6 billion dollar portfolio.

Right.

Fair enough.

Two more real quick ones.

Jerry, you mentioned that you guys took a million dollar reserve against your mortgage servicing rights.

Was curious next year, obviously we were as it hopefully at the top, if you will.

Going into next year, do you envision recapturing that reserve or could at one point you recapture some of that reserve and factor into --

It is hard to predict.

If things move the right way, we can recapture some of it.

That is really very, very difficult to predict.

Right.

On the share repurchase plan, 10 million approved you pretty much almost filled that out and envision another slug of that going to improve?

I don’t know what our board is going to do.

That is their decision, not mine.

Got you.

Thank you.

Next question from the line of Samuel Loczar us of Technical Services Group.

Good morning.

My question is rather than opening branches, will Valley become more aggressive in the acquisition other Northern New Jersey banks of a smaller size.

For example, Interchange just purchased the Bridgeview Bank.

We are always in the market for acquisitions.

The number of opportunities out there have really become very limited.

I mean, if the right situation came across, we are always receptive.

So, rather than worrying about exploring or getting more aggressive in that area, you will continue to open branches?

Correct.

Thank you.

Thank you.

Our next question is from the line of John Klinewith Sandler O'Neil.

Please go ahead.

Morning, guys.

You did a good job talking about the demographics in the marketplace as it pertains to lending.

Just curious what you are seeing or hearing from your lenders in the various segments as far as the loan pipeline or whether demand is starting to pick up or not?

Well, I would say -- I have Robert Meyer here.

He will tell you.

Commercial really estate in the Northern New Jersey market and some of the New York suburban markets continues to be reasonably strong for us.

Construction lending, while as Jerry indicated, is down, we do continue to receive a fair number of requests to look at.

New York City and commercial lending has been on the soft side as we compete against obviously a very large competitive market.

We are beginning to see business development there.

And the New Jersey commercial lending side for quite a few years has been a take from somebody else market.

We benefit from the continued consolidation in the marketplace.

One area that has been a bright spot, not only with Valley and most mortgage lenders has been our residential mortgage opportunities.

We had a very, very strong year, as you see, this year in residential mortgages.

It looks like it is carrying over into January.

The brightest part of it is we do a lot more of refinancing of other people's product than we do of our own.

We have a opportunity for growth there.

We are not just spinning our own wheels.

I think that's an area that we are looking at for at least the first quarter of this year and it is kind of hard to predict.

I hope it would last all year and should run through the first quarter of this year as a vibrant area.

Our automobile business has shown good growth in the last year.

That has taken place mainly because we expanded our footprint of the dealers from whom we buy paper.

We used to buy only almost exclusively in Northern New Jersey and with State Farm, as you are aware.

State Farm left the scene and we went off on our own.

Now, we cover all of New Jersey in buying paper.

We buy paper through heavily in eastern Pennsylvania and we buy paper now in lower New York State and Manhattan, long Island.

So, by expanding the footprint, we have been able to generate sufficient sources to make up what we lost with State Farm.

That being said, fourth quarter of this year, the manufacturers and their desire to sell more product, offered a lot of zero financing.

There is no way a bank can compete with zero financing if they want to stay in business.

But, we are poised, as those zero financing programs are reduced or changed, to move forward.

I believe in this first quarter, as well as all year, providing the automobile industry stays vibrant.

Great.

Thank you.

Thank you.

Our next question comes from the line of Mr. Green of Financial Securities.

One follow-up question on the indirect.

Is that something that the competitive pressure is obvious.

But, how are competitive pressures from other regionals like yourself?

They are out there.

We seem to do a very good job.

We have a sales force on the road calling on dealers on a regular basis.

One of Valley's strength is our consistency.

We do not come in and out of the indirect market.

We have been in indirect automobile purchaser of automobile paper, a paper only, at least we like to think it is.

We have been in that market now for close to 50 years.

We have never been out of the market, even when the prime rate went up into the low 20s, we stayed in the market.

That gives us a foot-up on a lot of our competition, who the thing to me in this week, so they are in it.

Next month they decide they are out of it.

Our consistency has really helped us and we do it competitively.

The efficiency with which we run our back office and the low charge off has enabled us to be competitive on interest rate basis.

Great.

On the CNI side your existing core commercial customers you would extend money to, are they looking to borrow more money to expand or are they still kind of kept the horn stuck?

All over the place.

Some people have tucked in their horns.

Some people feel this is a opportunity to grow their business.

So, I can't say I can see a consistent pattern across the board.

Would your feel be that your existing customers are borrowing little bit more or hard to tell?

They are not borrowing more in the sense of excess use on lines of credit.

We have seen almost no change in the past five years in the amount of percentage usage of lines.

There have been some advantageous acquisitions of real estate for future expansion with the ones that have not been adversely impacted by past couple of years.

But, the growth continues -- much of the growth in the area continues to be modest amounts across the board as opposed to larger amounts through individual clients.

Alan what was deKlinein yield on mortgage backed securities linked quarter?

Eric, do you know offhand?

Linked quarter, that is from September to December of last year.

About 15 -- we are guesstimating about 15 basis points.

Okay.

Is there a larger roll-off in the first quarter, do you think or is that going to be…?

No.

We think it will flatten out and stabilize.

Okay.

Thank you.

Thank you.

Our next question comes from Brian Harvey with Fox-Pitt Kelton.

Please go ahead.

Thank you.

Good morning.

Can you guys just share with us what the linked quarter loan growth is by product and maybe if you have it by geography?

Geography is all the same.

Our footprint is essentially a 40 mile circle.

I thought that was pointing toward Manhattan versus Northern New Jersey?

Commercial really estate we have gotten a lot out of New York.

I don't have a breakdown specifically of which loans came from where.

On a linked quarter, the commercial loan relatively flat.

Construction, as I mentioned, was down 4.8%.

Residential mortgage was up 7.25%.

Commercial mortgage was up 4.25%.

Home equity was up about 1.46%.

Our credit card, which is really nominal, only $11 million portfolio, is up 2.94%.

Our automobile portfolio is off 3.5%.

The other consumer was up 23.26%.

The other consumer gain was approximately equal to what the automobile percentage was, you know, in absolute dollars.

The two were relatively flat when combined.

Okay.

Those are flat percentage change, it’s not annualized.

Okay.

My last question is on the capital ratios.

They are drifting closer to 650 on tangible basis.

We don't include the trust preferred in that.We have 200 million in trust preferred.

Okay.

Where does the capital ratio drift for you when you get more, or do you have a target ratio for that?

We don't think it will drift down that much.

It drifted down because of the buyback.

As the buyback comes to any kind of conclusion, the earnings in the bank will drive it up again.

Since we started the buyback 16 months ago, our retained earnings equal about 45% of the buyback.

So, in other words, we have been able to retain and we also pay out half income in dividends at this bank.

So, that makes it more spectacular.

We knew when we went in this, that was exactly what was going to happen on trust preferred on regulatory basis would bring us in line.

As we continue to earn and stop the buyback, that will bring the tangible number right back up again.

Okay.

Thank you.

Thank you.

Again, ladies and gentlemen, if there are additional questions, please press 1 at this time.

We do have a question from the line of David Foster, Bobby Brown Asset Management.

Please go ahead.

Good morning, gentlemen.

I had a couple questions.

Your loan loss reserve has fallen the past several quarters to about 1.11% currently.

Do you expect to build this back over the next year or are you comfortable with the current level?

We are comfortable with the current level.

We have in the last 10 years or so provided actual loan losses.

Whatever the actual loan losses are, is what we added to loan loss reserve.

Loan loss reserve is built on a formula based upon the mix of loans, different percentages against different types of loans.

And we find our present level we are adequate.

Okay.

Second, you mentioned in your press release that tax rates will go up next year.

Do you plan to accrue 34% rate beginning in the first quarter or –

At this point time, barring any changes, that will probably be the rate.

That's all I have thank you.

We have a question from the line of Al Savastano with Ryan Beck.

Good morning.

Just wanted to ask how is your staffing level with your commercial lenders and has there been significant turnover or any kind of turnover in the past quarter or so?

Haven't had any turnover last quarter.

Staffing lenders are adequate.

You know any good qualified commercial lenders looking for a job....

Will always take more.

We have no additional questions at this time.

Please continue.

That's it.

Thank you all for coming, listening.

See you at the end of next quarter.

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