Valley National Bancorp (VLY) 2003 Q3 法說會逐字稿

Welcome to the third quarter earnings conference call. At this time all participants are on a listen-only mode. Later we'll conduct a question and answer session and instructions will be given at that time. Now if you should require assistance during the call press star then zero. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Gerald Lipkin. Please go ahead, sir.

Good morning and thank you all for coming on to hear our conference this morning. Before we begin, we would like to start out with our forward-looking statements. I'm going to call upon Dianne Grenz, our Director of PR, to cover it. Dianne?

Before we begin, our lawyers have asked us to remind you that today's presentation may contain forward-looking statements regarding the financial condition, results of operation and business at Valley. Those statements are not historical facts and may include expressions about Valley's confidence and strategies, management's expectations about earnings, the direction of interest rates, effective tax rates, new and existing programs and products, relationships, opportunities, technology, the economy and market conditions. These forward-looking statements involve certain risks and certainties. 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 form 10-K for the year ending December 31, 2002 as well as in Valley's other recent SEC filings. Valley assumes no obligation for updating its forward-looking statements.

Thank you, Dianne and good morning, again, everybody. Well, despite an economy that remains relatively soft, Valley continues to post excellent earnings, increased loans and our assets remain strong. The diluted earnings per share came in at 42 cents for the quarter. That was versus 40 cents for the comparable quarter last year. Our year to date was $1.22 per share versus $1.18 and on a linked quarter we improved from 40 cents to 42 cents or a 5% increase. On a net income basis and keep in mind we did have a substantial share repurchase which does effect this, we posted $39,336,000 versus $38,956,000 last year for the same quarter. On a year to date basis we came in at 115,046,000 versus 117,452,000. And on our linked quarter we improved by 4.26% increasing from 37,729,000 to $39,336,000. And that was despite a much higher tax rate. Per 2003 our tax rate was 34.2% versus a year ago when it was 29.2%. So there was a substantially higher tax bill that we face this year yet we still were able to increase both on a per share and on a gross basis. During the quarter, we did take an opportunity that presented us to take some gains on investments that we had made, particularly in some stocks and other banks that were recently acquired, and we used that profit to offset the costs and penalties we incurred in the restructuring of some of our long-term debt. This does have a negative impact, of course, on our net interest margin but we expect in the fourth quarter that will come back. The return on average assets for the bank for the quarter was 1.66%. And that compares favorably on a linked quarter going up from1.62 to 1.66%. Our return on average equity was 24.71% versus last year 23.59%, and on a linked quarter basis we improve up from 24.27% to 24.71%. Our efficiently ratio came in at 47.06% and there, too, we were quite pleased. The net interest margin on a fully taxable equivalent basis came in relatively low for this bank at 3.76% for the quarter but that was the result of several major issues that I'd like to cover briefly. One was the reclassification of our trust preferred issue which now we must carry above the line and that affected our net interest margin by 18 basis points. The penalty that we took on restructuring our debt actually affected us by another 18 basis points when combined with the failure of the Federal Home Loan Bank to pay its dividend to us. So overall although the net interest margin showed a substantial decrease, when you normalize, which is a word I hate to use, but when you take out those major items, it decreased by 22 basis points and we have tried to structure, and I will come to this a little later, our balance sheet so that in the fourth quarter we will show an improvement in our net interest margin if all else goes as planned. The credit quality of the bank remains outstanding. Our non-accrual loans dropped to 19,841,000 from 24,066,000 at the end of the second quarter. We did have some movement within that category. We had some loans that were paid off. We had some loans that we collected a large portion of the loan, and in other cases, we had loans that went in. But when all is put together and looked at as a whole, I think our overall nonperforming assets relative to the size of the bank, we continue to dance on the head of a pin because we come in at 0.32%. Our loans passed due 90 days and still accruing came in at 5,026,000 and our delinquencies totaled 30 days past due and over, 30 days was 0.73% of total loans. Some of our major categories came in so low that they were almost unbelievable but trust me, gentleman, ladies, I did have our people check the computer by doing a lot of it manually and it verified the numbers. Our charge-off provisions for net charge-offs year to date are at 5,044,000. Our provision to date exceeds that, it came in at 6,095,000. During the fourth quarter based on SEC requirements, we will come in very close to what our actual charge-offs are because we are not allowed to manage earnings by putting in more or less than our actual charge-offs and that has been our history. Our loan growth volume remains very strong at the bank. Our commercial loans, which at December 30th were at 1.185 billion, reflect a 65 million or a 5.81% increase. Our residential mortgages are at 1,584,000,000 or $252 million increase or 18.99% and that's after a year to date sale of residential mortgages of $218 million. As everybody is aware who follows our bank, we try to keep our loan portfolio balanced and do not like to see our residential mortgages become too large a percentage of our total loans. Our commercial mortgages were again also at 1,567,000,000 and that represents a 7.82% increase over a year ago or $113.6 million. Our home equity portfolio came in at $474 million or a $29 million increase over last year or a 6.52%. Our automobile loans are at 1,066,744,000. That represents a $43.9 million increase over last year or 4.56% and our other consumer loans are at 120 million or $35 million increase of 41%. Overall the total portfolio reflects a increase of 9.51% over last year and I think it's pretty much been the conservative posture of the bank has been maintained in our credit selection. Our aviation loan and leasing division continues to show nice growth. They are up 19 million over last year or 22.6%, but it's interesting, most of the growth, almost all of the growth has taken place in the leasing division, the aviation loans which we know are small aircraft loans are up $5.4 million, the bulk of it, as I say, came as a result of increasing in our small ticket leasing division. On the deposit side of the ledger, we continue to show nice growth. Over last year we are up 11.58% in non-interest bearing deposits. Our savings deposits are up 12.93%, and our time deposits are up 0.79%. Overall our total deposits are up $6.6 million at 8.32%. So we are generally very pleased with the way our deposit structure has been growing in the bank. Our year to date security gains, as I mentioned before, are up to 12,353,000 versus 5,103,000 last year. A large portion of that gain is the result, as I mentioned earlier, of securities that we had held in some other banks. One in particular larger position with a bank that was acquired or is being acquired by another institution and we took that opportunity to use those gains to offset the restructuring costs of some of our long-term debt. On the branching side, we opened our third branch this year in Union City and we've postured ourselves for a much more aggressive posture next year. We actually have on the drawing boards right now to open at least ten branches next year. We have locations either under construction or under contract right now for that number of locations. On the new product side, our Kids First Savings Account continues to do extremely well. We have opened up over 41,799 accounts with balances exceeding $70 million in the last 27 months. We began a new product, as I mentioned in the end of the second quarter of this year, a Student Rewards Checking going after individuals with their first checking account and we've opened up over 1400 of those accounts. We had a CD promotion believing that rates are going to be trending higher. We had a CD promotion for five-year CDs and we've opened up over 4,000 of those CD's with balances exceeding $112 million in just the past six weeks. In closing, I just think that it's important to mention how we look at the bank. We continue to manage the bank for the long-term. We believe that rates will be increasing over the next 12-18 months and as a result of that, we did a lot of things to alter and fortify our balance sheet to accommodate that change in interest rates. In the quarter it cost us $1.4 million to fortify our balance sheet for the long-term. We made a number of balance sheet changes to make us much more asset sensitive and I guess I'm going to quote Peter Drucker in closing in saying that it's been the history of the bank that we manage for tomorrow and not simply for today. With that, if anybody has any questions.

Ladies and gentlemen, If you wish to ask a question please press star then 1 on your touchtone phone. You'll hear a tone indicating that you've been placed in queue and you may remove yourself from queue at any time by pressing the pound key. Now if you're using a speaker phone, please pick up the handset before pressing the numbers. Once again, if you do have a question now, please press star 1 at this time. One moment please for the first question. We do have a question from the line of Tony Davis with Ryan Beck. Please go ahead.

Good morning. Alan, Gerry, I wanted to get some color here on what was the cost of the 300 million in debt before the restructuring and, secondly, what is your balance sheet posture look like now after the restructuring in terms of interest rates in [INAUDIBLE]?

What we had here is last quarter we had some debt, if you combine both the long-term and the short-term, that debt came in at about 571 and we were able to decrease that to under 3%.

Right. The 228.

Right.

Okay. And Alan, how does that leave you now in terms of your posture for rate changes going forward?

I'm not sure I follow your question, what do you mean.

Can you give us some sense for the impact of 100 basis point change in NI over 12 months.

Basically, if interest rates go up 100 basis points, we'll see an increase of about $8 million in net interest income.

Got you. Good, good. And, Gerry, just as we sit here today, can you give me a little color of the credit demand picture right now versus day three months ago. We were having this discussion on reviewing the second quarter. What's the tone of business today in the C&I part of your portfolio.

We're seeing, it's interesting, we're seeing very heavy growth in our New York operation on the C&I side. Although in New Jersey we are also seeing good strong application volume coming in through the door. We are seeing a mixture of both existing customers who apparently are looking at things a little more optimistically and looking to expand operations. And we're seeing new opportunities from customers who never banked with us before.

You're actually seeing increases in line draws?

We're seeing some increase in line draws, yes.

Okay. Thank you very much.

Sure.

Our next question is from the line of Adam Barkstrom with Legg Mason. Please go ahead.

Hey, guys, good morning. A couple things. Follow up on Tony's question, the borrowing issue, basically you paid down long-term and relocked into -- is it similar term maturity and you're able to shake out basically - ?

No, longer term, Adam. What we did is we paid down about $76 million that was maturing over the next -- it was mostly a shorter term, three years or less, and we extended that out to five years and then we took some short-term borrowings that were really pretty much short-term 30 day, 60 day, et cetera and we took that from about a 1% rate up to a little under 3%. So what you really saw was you saw an increase in our borrowing cost for the quarter so even though we locked in these rates over a five-year terms, on average, you've seen the borrowing cost go up substantially during the quarter because of that.

However, we protected ourselves should rates do as we anticipate over the next 18 months begin to rise.

Plus the fact that we put a lot of assets on whether they be commercial mortgages, residential mortgages, et cetera that are going to be locked in for a number of years. They will roll over, many of them over five year periods of time, and we feel that we've helped to protect ourselves over that five years.

Right. Okay. Gerry, can you give us a maybe a percentage breakout or some kind of, something a little more numerical on the securities gains as to what came from gains from your bonds portfolio versus you eluded to some equity securities gain.

About 40% of it came from security gains, not from the bond portfolio out of the 15 million

12, yeah.

About 40% roughly came out of some investments we had made. As a result of that opportunity, that really pushed us into taking advantage of extending the maturities and taking the penalty. We felt rather than pumping up earnings with security gains, we would rather use those earnings to fortify the balance sheet for the future.

Okay. You ran that -- yeah. Never mind. You ran that penalty through your margin.

Yeah. And adversely affects our margin this quarter, obviously. That's a number that I'm not too sure our shareholders are as concerned with on a quarterly basis as they are that we are protecting their investment for the long-term.

Fair enough. If we boil all the noise out of the margin, you actually had margin expansion this quarter.

No. If you boil everything out.

You had 18 and 18, that's 36 and you said the margin is only down 22, right?

No, no, it would have been 22 without that. It's down 22.

It you look quarter to quarter, Adam, it would have been down 22 basis points. You have to equalize everything up because we were not allowed to restate the prior quarter for the trust preferred which had an 18 basis point decline. So equal out those numbers, it will come out to 22 basis points.

We're down with about 50 - some 58 basis points, I believe.

Right.

Gross. But of that only 22 of it is a true margin compression, everything else is other issues.

The key question is, what are we looking for going forward on the margin. Sounds like we definitely hit the bottom here.

I think so, hopefully. We do see - we've taken some steps as I mentioned earlier which should see the margin improve from this level over the fourth quarter. The cost of the restructuring of the debt obviously won't be there. We have lowered some of our interest rates that we're paying on passbooks. That will have a positive effect next quarter. So we've been watching pretty closely.

Okay. You mentioned on your securities portfolio that some of the new stuff that you acquired, you pushed into, you held to maturity, get your take on that and than can you continue to share with us what types of yield and what types of either duration or weighted average life. And I used just 550 million roughly? What kind of duration and weighted average life on that portfolio?

Duration is in the four-year range and the average life is a longer, about 6.2.

Okay.

Yields on those probably are in the high 4s.

Right.

And they all have 15-year finals. Their all basically 15 year final. I think we've told you before that we have not been buying any 30-year securities, we've only bought 15-year finals.

We felt that securities that we were purchasing today and pretty much were forced to purchase them otherwise the bottom line of the bank would fall out of bed. We have to keep the cash flow invested. We're purchasing securities at levels that it would not be likely that we would be selling those in the future so it just protects us. We don't have to put it against our capital as rates rise, it just fortifies the balance sheet that way.

Share repurchase front, you guys have pretty much filled out the 10.5 million shares?

Correct.

Looking at that?

Correct. Right now we haven't, - we have authorization from the board should we feel it's opportune to purchase stock, right now we are not actively in the market.

Right. Dividend payout ratio, what's that for you guys right now?

The high 50%.

It's in line with what we've always historically been, at least in the last ten years or so been paying.

Okay. Couldn't put my finger on it right away. Last question and I'll yield the call to somebody else, give us a sense of what's going on in the expense side, pretty big drop on the overhead expenses sequential quarter. Any details there?

I think we've worked very hard at controlling expenses, as I think you know we always have, and things are starting to normalize out a little bit in terms of some of the acquisitions we had during the course of the year, during the course of last year. Some of those normalize out. And I think we've just watched expenses. I know salary and benefit expenses, we've watched very, very closely. We watched head count, we watched the expenses on that. Advertising, I think, for the quarter was down a little bit but in general you'll probably see a pickup on that a little bit as we go into the fourth quarter. We also brought our advertising in house, which I think Gerry's told you before, so we've seen some efficiencies there and some savings. But I think overall we've just tried to manage the expense side a little better.

It's one of the hall marks again also of the bank is that we do control expenses. We're looking at everything, we're trying to justify every department as far as the moneys that they are spending and what they plan to spend next year and we've brought some of our health costs, we try to control that by changing to a different third party administrator plan for our self insure, we self insure our health plans. By changing third party administrators we believe we're going to be able save substantial dollars there and we've looked everywhere we can to save money.

Thank you.

Thanks, Adam.

Our next question comes from the line of Peyton Green with FTN. Please go ahead.

Hi, good morning. A couple questions, what was the nature of the securities that you placed into the held to maturity category?

They were basically mortgage backed securities, that's pretty much what we are a buyer of. As I said, they are all pretty much - they're 15-year final maturities, somewheres in the mid-to high 4% on a yield basis.

Okay, so that's the same as the overall -

The most recent purchases.

Okay. And then also to the extent that rates don't go up in '04, do you slow down the branch opening schedule to keep the non-interest expense back or can you talk about that tradeoff?

The opening of the branches have nothing to do with current or future interest rates, at least not in the short-term, it's pretty much a strategy for expanding the bank and growing the bank. It is the desire of the management and the board that the bank continue to grow. Opportunities for acquisition within our foot print are very small. That gives us only one other opportunity to grow it and that's to open up the [INAUDIBLE] branches and we've become much more aggressive on that front.

Okay. And just so I try and think about this clearly, you originally were going to open about 5-7 branches this year and that number year to date is about three, is that right?

That's correct.

So is this just essentially the pushing out of two or three branches so the normal kind of annual rates?

We're going to do more than double what we did this year, we are looking to get more aggressive. We want to catch up on the ones that we did not open this year, where we fell short. In some of those cases, and really it's's nobody's fault, there is nobody to blame, but those of you who are familiar with the marketplace in northern New Jersey, it's just something that you can't make happen overnight. The planning board, boards of adjustment, town boards can extend an opening from what would seem to be a four or five-month project to a 12-month project easily but we seem to be on track now, as I say, to open up at least 8-10 branches next year.

Okay. And then how much SBA was sold in the third quarter and how much residential was sold?

Almost all residential.

Most of it. Residential actually, during the third quarter was 256 million. SBA was about 4 million, 4 or 5 million. Almost everything is residential.

Okay. So the total loans that you sold that you posted the gain on sale on was about 260?

For the quarter, yeah.

That's exactly right.

Great, thank you.

You're welcome.

And we have no further questions at this time, sir. Please continue.

Well, if that's it, then, I thank everybody for tuning in. We look forward to hearing from you in the future. Bye now.

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