Valley National Bancorp (VLY) 2003 Q2 法說會逐字稿

Welcome to the Valley National Bancorp second quarter earnings conference call. (CALLER INSTRUCTIONS).

I would now like to turn the conference over to your host, Mr. Gerald Lipkin, CEO of Valley National Bancorp.

Please go-ahead, sir.

Thank you and welcome everybody.

Before we begin though, I want to call on Diane Grins (ph), our Director of Public and Shareholder Relations at the bank, to cover our forward-looking statement.

Good morning.

Today's presentation may contain forward-looking statements regarding the financial condition, results of operations and business of Valley.

Those statements that are not historical facts may include expressions about Valley's contents and strategy, management's expectations about earnings, expected utilization of tax strategies and expected tax rates, new and existing programs and products in relation to opportunities, technology, the economy and market conditions.

These forward looking statements involve certain risks and uncertainties.

Actual results may differ materially from the results the forward-looking statements contemplate.

For any information concerning factors that could cause results to differ materially from the results of forward-looking statements can be found in Valley's press release for today's conference call, Valley's Form 10-K for the year ended December 31, 2002 as well as in Valley's other recent SEC filings.

Valley assumes no obligation for updating it's forward-looking statement.

Thank you very much Diane.

Again, welcome everybody.

Well, despite an economy that remains soft, Valley continues to post strong earnings, good loan growth and our asset quality remains excellent.

We are very pleased to report that we turned in earnings for the quarter of 40 cents per share, ahead of your general consensus estimate by one cent.

The percent increase over the previous quarter was flat however, and -- but I do think we should point out that while our year-to-date earnings came in at 87 per share compared to 79 cents or 1.27 percent, that was during a period when our effective tax rate went from 29 percent to 34 percent and that did have a material effect in that regard.

Also, during the same period we did complete a stock repurchase program and expended a little over $119 million over the last 12 months.

So that did affect the gross earnings but ended up having a beneficial effect on our per share earnings.

The gross earnings on a year-to-year basis went from 78 million to 75 million and again, I would point out it resulted in an increase on a per-share income of 79 to 80 cents.

The return on average assets remains very strong at 1.65 percent for year to date.

Our return on average equity for the year was 24.16 percent, increased during the quarter to 24.27 percent.

The efficiency ratio while comes in at 50.32 (ph) percent does include our trust preferred issue, which if it were excluded as have been in prior years, it would have come in at 44 percent, indicating that our efficiency remains at a very strong level.

The net interest margin on a fully tax equivalent basis came in for the quarter at 4.34 percent.

Year-to-date, it's at 4.04 percent, indicating the continuing net interest margin squeeze that I think all banks are facing as rates continue to come down.

However, we are still well within our historical range of four to 4.65 percent, so we are still comfortable with what we are seeing.

As so far as our credit quality is concerned, it remains as we consider outstanding.

The nonaccrual loans are down slightly from 26.7 -- 26.8 million at the end of the first quarter to 23.8 -- 23.9 million at the present level.

Total nonperforming assets including OREO of $172,000 brought us in at 24,066,000 (ph) versus 27,247,000 (ph) at the end of the quarter last quarter.

Again, I think for the size of the bank, these numbers are really down.

We're dancing on the head of a pin.

They are very low.

I've been asked almost how much lower I think they could go.

It's almost impossible based on the size of the bank for them to move much lower than they are today.

Nonperforming assets to loans and OREO came in at 0.39 percent of loans past due 90 days and still accruing were at 3,023,000 (ph).

Delinquencies 30 days past due and over, this I emphasize, 30 days, is at 0.75 percent and that's pretty much consistent throughout the bank, whether we look at our commercial real estate, commercial credits or consumer loans, they are all at very low levels.

The charge offs, net charge offs year-to-date totaled $1,620,000 versus 7,183,000 last year.

Last year I thought that that number was for the size of the bank was very low (inaudible) the credit quality has continued to remain very strong.

Our loan growth has remained very comfortable as far as I am concerned.

We are seeing nice strong loan growth in virtually every category.

Our commercial loans closed at the end of the quarter at 1,163,000,000, up 1.97 percent for the quarter or $22.4 million.

Our construction loans were up $16 million and closed the quarter at 203 million.

The residential mortgage loans which is probably one of the strongest areas in the bank closed the quarter at 1,648,000,000, up 66 million for the quarter but I have to point out that for year to date, we have sold $144 million in residential mortgage loan originations.

And again, this has been a very bright shining area within the bank.

The volume continues to remain very strong and I'm very thankful.

I really thank all members of the staff for this because we had contributions of labor from other areas in the bank to help maintain the production levels in the residential mortgage area.

The commercial mortgages closed the quarter at 1,564,000,000, down from the prior quarter of $4.9 million but I think that was more of an aberration.

If you look at year-to-date, they are still up 49 million or 3.23 percent, so I think again, as I said, we have seen continued strong growth in our commercial mortgage area.

The home equity area continues to show nice strong growth of 3.87 percent in the quarter or $17 million to $467 million.

Automobile loans continue to show strong despite the zero percent being offered by many of the captives.

We have expanded our network of dealers from which we are buying paper and as the head of the department likes to say, we are fishing broader, not deeper.

We are looking for a bigger pond and we seem to have found it.

Our automobile loans ended the quarter at $958 million versus 928 million at the end of the last quarter or up 30 million or 3.32 percent for the quarter.

Again as I said, considering the zero percent that we are faced with with some of our captives, I think that has been an outstanding performing area within the bank.

Our other consumer loans are up $15 million or at $117 million and are made up of a variety of different categories of personal loans, overdraft checking and things of that nature.

The aviation loan and leasing company area continues to show nice growth in the quarter, growing 7 million or 7.36 percent to $105.9 million.

Again, that's up 41.2 percent from the same period last year.

A large portion of that growth -- the lion's portion is coming from the small ticket leasing area which we have found a strong demand coming out of our (inaudible) for that.

Our deposits continue to grow nicely during the quarter, our non-interest-bearing deposits grew 4.49 percent during the quarter.

Our savings deposits grew 3.28 percent during the quarter.

Our time deposits grew 5.46 percent during the quarter and an overall 4.25 percent growth in our deposits, well in line with our budgets.

The six month total cost of deposits is approximately 1.1 percent and that is actually trending downward as we move into the third quarter and hopefully, we will see that at a lower level during that quarter.

While I speak about funding, I want to mention briefly as we mentioned in our press release, that during the quarter, we began repositioning some of our borrowings, particularly longer-term borrowings that we use to carry our loans.

Total borrowings are at $1.4 billion and we are looking at this point to start to lock in some of the lower rates as rates are starting to trend northward.

We feel this is the appropriate time to tie in those rates to offset some of the fixed-rate loans that we put on during the past year or so at lower interest rates.

This should protect our margin going forward.

We have among our borrowings, about a quarter of the borrowings are under 3.15 percent at the present time and we are actually in the most recent borrowings we locked in the four, five, six year range have been below that level.

The total borrowing costs in the bank is about four percent so we are really not faced with a major problem as rates go up.

Also we are quick to point out that we have about 23 percent of our loan portfolio of pure floating-rate loans.

So we are in a good position should rates begin to head upward, as the street seems to be indicating in the last several days.

Our mortgage servicing rights, I would like to touch on that a little bit today.

We amortized 3.1 million during the second quarter and that is on top of the 2.3 million we reported during the first quarter or 5.4 million year to date.

If we exclude some purchases that we put on during the second -- late in the second quarter, the remaining cost of the portfolio to be amortized is approximately $15.4 million at this point.

So that's not a major significant number, certainly not for a bank of our size and as rates go upward, as mortgage rates have indicated in the last week may be heading, we will be seeing even a slowdown -- we should be seeing a slowdown in the amortization of the portfolio.

Our share repurchase program, I mentioned earlier what we had done year-to-date.

During the past quarter, we repurchased 670,000 shares for a total cost of 16.6 million or an average cost per share of 24.82 cents (ph).

For the entire year we have to date, we repurchased 1,438,000 shares at a cost of $35.3 million for an average cost of $24.50.

I again remind everybody in May while we have completed our initial repurchase program, the Board did authorize the repurchase of an additional 2.5 million shares and from time to time, there's not a specific target date with which we would be repurchasing that.

We did at the end of the quarter open another office in Manhattan on Sixth Avenue between 26th and 27th Street.

This now gives us eight offices in Manhattan.

The only office we have opened one year was our Cedar Grove office and I know people ask about it and there seems to be a lot of talk about how people are doing with those offices.

After one year, we have approximately $46 million of deposits at that location, so we are quite pleased with it.

Again one of our pet projects around here it is our Kids First Savings account which is now just two years in existence and we are really proud to report that we have over 39,000 of those accounts on the books at the present time with balances exceeding $66 million.

Our Student Rewards Checking account is a new product that we just introduced in the last 60 days and hopefully, this will mirror the student -- or the Kids First Savings account.

It's mainly designed for young people heading off to college giving them their first checking account.

The other thing that we've accomplished during the last quarter, which I'm sure some of you have already heard the results are, is that we did bring our advertising agency in-house.

We are not only saving significant dollars but we I think are getting a better product and a much faster execution of our product.

They are the ones who are doing the present radio commercials that are on A (ph) wavelengths in the New York, NJ area.

If you have heard any of those, not only did they write them and create them, but the voices on there are employees of the bank so I am really impressed with what we have been able to accomplish there.

That pretty much sums up my part of the presentation.

I will go to any questions if anybody has any at this point.

(CALLER INSTRUCTIONS).

Adam Barkstrom of Legg Mason.

Hey Gerry.

Good morning.

Good morning Adam.

How you doing?

Real well.

Good.

Good quarter.

Thank you.

A couple of questions.

First of all I want to see if you could give us a little more guidance on what you think margins will do the third quarter and I am curious if you guys in your securities portfolio, one of the concerns out there obviously is extension risk going forward and I guess that concern has been certainly exacerbated over the last week.

We have seen the 10 year treasury rocket up.

We've seen some companies try to deleverage to reduce this risk.

I'm curious if this is on your radar screen, if you have looked at that, if this extension risk in the MBS (ph) portfolio is a concern to you at all?

On another front, I am curious to hear what you're seeing, it looks like your loan growth numbers were again, pretty strong this quarter.

We heard some of the same things from one of your local competitors, North Fork.

I'm curious about more detailed sectors and where you're seeing some of the strength, etc.?

Thanks.

All right, well, net interest margin is under continued pressure.

It's obvious that interest rates as far as what we are paying for our funds are going to be coming down much further than they are right now.

It is always a little bit of flexibility but not a heck of a lot, obviously.

One of the things that does help us though is we do have and we still continue to have a large portfolio of certificates of deposit, which as they continue to mature, come in at lower rates.

We do have a large portion of our deposits also in passbooks, which have a small amount that they can come down but pretty much I do not think that the prime rate is going to come down much more than where we are right now.

If all that holds true, then while we may have some slight compression in our net interest margin I do not think it's going to be dramatic.

As far as the expansion risk in our investment portfolio, that is always there.

I mean, it's there in everything we do around the bank, I did try to point out the fact that how much we have in loans that are at floating interest rates and they do offset that considerably.

We do model our portfolio on a monthly basis if not more frequently if necessary as to what the impacts will be.

I think as rates go up, I think the bank should do very well.

One of our concerns of course was the fact that we had to write-down a lot of the interest rates on our mortgage portfolio, commercial mortgage portfolio in particular, as well as we are seeing a downward trend in our investment portfolio but we've always laddered our bank.

We ladder it going down, we ladder it going up so I really don't think it's going to have a traumatic negative effect on the bank as rates head back up as I mentioned and I did try to cover it this time, we have begun to protect ourselves to some degree by locking in some lower rate investments.

The bank has out of the investment portfolio, enormous cash flow even despite interest rates no matter how high they may go, people relocate, they sell their homes.

That causes a turn over and a cash flow to be generated in the mortgage portfolio and in the investment portfolio.

It's not a static portfolio for that reason as well as well is there is a huge amortization.

One of the good positives that people seem to miss on mortgage-backed securities is that amortization that comes in every month; the normal amortization creates enormous cash flow, which enables us to ladder going up.

About loan growth, the portfolio as I pointed out, continues to grow.

We see nice growth coming in all areas.

We've had -- the strongest growth area has been obviously in the residential mortgage area but we control that growth, not putting it all on the books.

We sell a large portion of what we originate in the mortgage portfolio.

In fact, for the most part the loans that we look to hold onto are our 15-year mortgages.

We do not hold onto the 30s.

Generally we sell those although we do have a portfolio of 30s.

The duration certainly is not 30 years and the concentration as I point out on what we held is in the 15 year, which has an enormous amortization rate to it.

We've seen nice growth coming in the automobile area.

We've expanded our network of dealer reps that we have on the road, keeping our name in front of the dealers and its worked very well.

A lot of people felt when we lost State Farm, that would be the end of our automobile business.

Well today, our portfolio and generations are greater internally than when we had State Farm.

We're seeing very nice growth coming out of New York.

The first year that we owned the bank, we were a little tight fisted with them, making sure we really knew who their clients were.

There were some credits that we just weren't comfortable at Valley level.

I am not saying they were not good credits, they were just not our type of credits and we had some turn over in their portfolio because our own decisions so we did not have massive growth in the portfolio during the first year.

But the second year, we owned the bank, it seemed to turn around and we have had very good growth coming out of the New York operations today and we're very happy and very pleased with that loan growth.

Adam, I hope I answered your question.

Absolutely, thanks Gerry.

Tommy Davis, Ryan Beck.

Yes, good quarter.

Thank you.

Just a couple of things Gerry.

You've got debt of about 11 percent of assets right now and I guess I would like a little more color on where you see debt going relative to the total base and kind of what your timeframe is to have this restructuring completed?

Well, again the -- first of all, the level of debt is something that is kind of hard to measure.

I'm certainly comfortable at our present level and I would probably be comfortable if it was twice that high but I would be more comfortable if we generated deposits to cover our loan growth and that's where we put our first emphasis always is on our deposit growth.

But if the loan growth starts to come in faster than our deposits are growing and right now it is very hard to entice people to put money away into the bank, particularly long-term into CDs when you are offering one or two percent for their money, you really have to become more dependent on borrowings.

What we have done is we've been focusing on restructuring that borrowing.

We have a sizable portion of the borrowings.

I believe it's approximately 30 percent or so of the borrowings that will be coming due within the next 12 months, which will be -- we should be able to price down significantly as they continued to come due.

Where we've done some restructuring, that will be restructured too.

At the bank, if we feel that rates will be moving up very dramatically, we might look to pre-fund some of those to take advantage of locking in some of the lower rates.

Pretty much when we lock them in we look to lock them in for an average of five years.

That's pretty much how we offset the loans in the bank.

We do a lot of 5 year fixed-rate lending in the commercial mortgage area.

That's how we offset it.

One other thing, I noticed your reserve keeps falling down to about 1.1 percent (indiscernible) and probably versus 120 or so a year ago.

Yes, that's a good and bad problem.

FASB says you are not allowed to have more in that reserve accounts than your historical loan losses dictate.

This bank's credit quality is so high, we all end up in an argument with the regulators and SEC that we want to have more in the reserve and they say no you cannot because your loan loss history is too low.

Any thoughts about where that might be by year-end?

What the reserve might be?

Yes, relative ones.

It probably should not be far from where it is right now.

I cannot see -- I hope I am right.

If our loan experience remains like it's been in the first six months of this year, our contribution has to be reduced.

Alan, one final question for you.

Just on an acquisition adjusted basis could you give us a feel for what your run rate is right now in core fee income and expense, taking out the things you've just bought?

Taking out the ones we just bought, because I think the ones we just bought that are in there, if you look at the current quarter, it is probably a reasonably good run rate.

You think link quarter -- two quarters versus one quarter is all right?

Yes.

Very good.

Thank you guys.

Peyton Green, Midwest Research.

Good morning.

Good morning Peyton.

A question on the securities portfolio.

You mentioned you've got a lot of cash flow.

Can you quantify at least as of June 30, what you thought your cash flow might be in the third and fourth quarters?

And also, what does the --

We run a cash flow of about $125 million a month.

Okay.

You feel comfortable with that?

Yes, that's what it is, so yes.

It's kind of hard to predict because a lot of it is mortgage-backed.

If rates drop that number goes up.

If rates get firm, that number is going to go down a little bit.

I think certainly that even in the best times, $100 million a month is a good number.

Okay and also you mentioned you added to the mortgage servicing portfolio toward the end of the quarter?

Yes.

Can you talk about what that did for the weighted average coupon in the servicing portfolio, how big the servicing portfolio is now?

The servicing portfolio is about -- now it's about 4 billion.

Okay.

The portfolio that we purchased, actually we are still in a period now that anything that prepays goes back to them.

We've negotiated the transaction with a repurchase agreement during a period of time, that'll run out next month I believe.

The portfolio --

(inaudible)

Right.

It's a current coupon portfolio, it's a brand-new portfolio.

So it should remain relatively stable.

The 30 year bond, excuse me, the 30 year mortgage would probably have to drop somewhere in the fours before we would really get risk with that portfolio.

I don't think -- with today it's up around 5 3/4 percent so we have a little push in there.

That takes the whole servicing portfolio up to 4 billion?

Yes, that takes the whole portfolio up to about 4.

Just ballpark, what would the weighted average coupon on the whole portfolio be?

It's impossible -- It would be very misleading because some of our portfolio may be at higher coupons but they are at unusual types of loans.

Years ago, the state of New Jersey came out with this mortgage -- New Jersey FFA loans which we service a lot of which have huge penalties to the borrower to refinance it because when they were put on, they may have been put on at 6 percent but the going rate was 9 at the time so there is a big penalty.

They are locked in.

They can't prepay it for many years so the rate may be a little bit above market today, not a hell of a lot but a little bit above market.

That loan is not going to prepay and it would not distort what our average coupon is.

We have people who have high double digit loans who just never prepay.

Okay, good enough.

Thank you.

John Kline of Sandler O'Neill.

Hi guys.

Hi John.

I want to come back to the MSR very quickly.

I was wondering where you have your servicing portfolio valued at?

(inaudible)

If I take out this current portfolio which really is not fair to add in the costs on that portfolio, we were are talking about a$15 million number.

That's the entire portfolio.

$15 million MSR?

Yes.

And we wrote off so far this year 5. something million dollars so far this year already.

It's obviously coming down pretty quickly.

Other than the fact that we have added some in the way of OMSRs (ph) during the course of the year by the virtue of the fact that we are selling loans and the fact that we just bought this large portfolio, what we have left has been running down dramatically as you know.

We have been writing it off in accordance with that.

Any impairment there?

Small impairment.

I was curious if you guys are going to, this FAS 150 that's coming out and if you discussed this I apologize I came on a little late, reclassifying distributions on capital securities, your trust preferreds?

Yes -- actually there are two issues out there.

One is the reclassification number one from mezzanine to debt (ph) and we will (indiscernible) that obviously in the third quarter.

And then there is the second issue which is a consolidation issue which you are referring to, is that what you are referring to John?

I was referring to the former rather than the latter but I am curious now.

Okay.

What we will be doing, I think the requirement is that in the third quarter we will be required to reclassify that to debt and the interest expense.

It'll obviously affect our net interest margin going forward and interest expense does not change the bottom line but it does effect the margin.

The understanding is that it is not something you even restate on a comparative basis but you just adjust it going forward.

Right.

We will be doing that in accordance with FASB.

In terms of the consolidation issue?

Yes, that's the Fin 46 issue?

Is that what you are talking about?

Yes.

There is no final decision on that as to how that is really going to go forward.

It will affect all kinds of companies, not just banks and obviously, it could have an impact on I guess, if the Fed decides that they do not want to count this as Tier one on a go forward, that would preclude a lot of people I guess from doing any new trust preferreds.

I don't think it's an issue for us and if they decide to take it out of prior Tier one, we don't think is a problem (ph) for us either.

We are rolling (ph) our capital -- during the course of the buyback, we obviously had a major impact on equity going down.

However, on a go forward basis if it wasn't for doing a major buyback, or equity would be growing very nicely and whether we lose the tier one (indiscernible) we would lose it.

It would not be putting us in an undercapitalized position by any means.

If you dump (ph) the entire issue, we are still well capitalized.

Capital is not a problem for you guys. (laughter)

You're right.

Thanks.

(CALLER INSTRUCTIONS) You have no further questions.

Thank you all for coming today.

We appreciate the opportunity to speak with you all.

Have a nice day.

(CALLER INSTRUCTIONS)

(CONFERENCE CALL CONCLUDED)