Valley National Bancorp (VLY) 2003 Q4 法說會逐字稿

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With that being said, with our opening remarks is Chairman, President and Chief Executive Officer, Gerald Lipkin.

Go ahead, sir.

Good morning, everybody, and thank you for calling in.

Before I start my remarks, I'm going to call on Dianne Grenz our SVP and Director of Public Relations to cover our forward-looking statements.

Good morning.

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

Those statements are not historical facts and may include expressions about Valley's confidence and strategy, management's expectations about earnings, 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 uncertainties.

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

Written information concerning factors that could cause results to differ materially from the results of forward-looking statements contemplate, can be found in Valley's press release for today's conference call, form 10-K for the year ending December 31st, 2002 and other SEC filings.

Valley assumes no obligation to update forward-looking statements.

Thank you, Dianne.

With that being said, despite a national economy that remains soft, Valley continues to post excellent earnings, increased loans, and its assets remain strong.

On a diluted earnings per share basis for the quarter, we reported 41 cents, a 5.13% increase over 12/31/2002, when we produced 39 cents, and on a year to date full year basis, we produced $1.62 versus $1.57.

The decrease in the net income per share came in at $38,369,000 versus $37,164,000 for the quarter.

And on an annualized basis, we were at $153,415,000 versus $154,616,000.

The decrease on the year to year basis was the result of share repurchases that took place in the early part of the year.

The return on average assets came in for the quarter at 1.58% and on the year it was 1.63%.

Our return on average equity was 23.8%, for the quarter, and 24.21% for the full year.

The efficiency ratio for the quarter was 46.56%, and for the year it was 47.35%.

Our net interest margin for the quarter was 4%, and for the year it was 4.04%.

I'm quick to point out, though, that the quarter was the first time in a number of quarters that we were able to show increase.

Last quarter we reported 3.76%.

The result, the improvement in our net interest margin was largely a result of our repositioning some of our long-term debt, our improved investment income, lower cost of funds throughout the bank on our deposit base, and the fact that the New Jersey economy continues to remain stronger than most of the rest of the country.

Our credit quality remains outstanding, as we continue to report numbers that show that our problem loans literally for the size of the bank dance on the head of a pin.

Our non-accrual loans remain relatively consistent with the levels that we had at year end 2002, we produced non-accrual loans of $22,338,000, versus $21,524,000 last year at year end, and our total nonperforming assets including other real estate is at $23,135,000, versus$ 21,567,000.

Loans past due, 90 days, and still accruing, were $2,792,000.

Excuse me, versus $4,931,000, and as we have reported in the past, our delinquencies, 30 days and over, that's 30, not 90, were at $56,920,000 and that's down from last year, of $69,165,000 as a percentage of total loans, 30 days delinquent is 0.92%, and that compares very favorably with last year where we were 1.2%, but both numbers I again remind you are literally dancing on a head of a pin.

Our net charge-offs for the quarter were $1,738,000.

Last year we produced for the same period, $4,768,000 in bad loans, so we had a sizable improvement in that category.

On an entire year basis, our net charge-offs were $6,782,000, versus $13,360,000, and I hasten to report that we have close to a billion dollars in automobile paper, which is also included in those Charge-off numbers, which even further show the strength of our credit quality.

The overall -- the over actual provision was $563,000 for the year, which is long-term standing with our procedures, where we provide against the actual charge-offs, but we had an overprovision.

The loan volume, as I mentioned before, throughout the year remained relatively strong.

The commercial loans at year end ended at $1,184,000,000, and that compares to $1,115,000,000, increase of 6.17%.

Our construction loans only $222 million were up from last year $200 million, $21 million increase or 10.88%.

The residential mortgages, closed the year at $1,596,000,000, and that compares favorably to last year of $1,427,000,000, or a 11.85%, but the number $1,596,000,000 is after the sale of $427 million in residential paper, and I think that's very significant, that paper that was sold, of course was all sold as a profit.

And the reason we sold it because we like to keep our loan portfolio in balance where we don't like the residential portfolio to amount to more than a quarter of our outstanding loans.

The commercial mortgages in the bank ended the year at $1,553,000,000, up $37 million, or 2 and a half percent from the prior year.

Home equity which closed the year at $476 million, reflected a 5.45% increase over the prior year, and that was really, I consider an outstanding result considering the heavy refinances that took place during the course of the year and the significant turnover in our residential portfolio, as well as those of first mortgages of the home equity borrowers who didn't have their first mortgage with us.

So the fact we showed any increase I think was very significant in that area.

Our automobile paper closed the year at $1,000,000,013 and that compares with last year's $932 million or an 8.71% increase.

At this point we are probably just a -- at the level that we were when we had all of the State Farm paper in our portfolio, and as you may recall, at 1 point that was amounting to 60% of our production.

So, I think our folks over in the residential area in the auto area did a wonderful job.

And our other consumer credit closed the year at $114 million or 6.59% up, our total loans ended the year at $6,172,000,000, an increase of 7.11%.

However, if you consider the loans that we put on the residentials that we chose to sell, and you added that back, our loan portfolio really grew by 14.8%, very significant considering the economy.

The question often comes up about the aviation loan and leasing area in the bank year over year we've ended the year at $112 million versus $91 million, or a 22.86% increase.

Again, very comfortable for the bank.

On the deposit side, we showed nice growth in our deposits.

Our non-interest bearing deposits closed the year at $1,676,000,000 or increase of 6.81%.

Savings deposits and those are primarily passbook accounts closed year at $3,283,000,000, increase of 11.59%.

Our time deposits closed the year at $2,202,000,000 compared to $2,170,000,000 -- or 1.46%.

But the time deposits are essentially certificates of deposits and extremely fundable product in this area.

We choose to raise certificate of deposit to fund loan growth when necessary, right now there are other alternatives that are considerably cheaper for us to be using, primarily in borrowing funds, so we've been focusing in that area.

Mortgage servicing rights, the amortization and impairment expense was 2 and a half million dollars for the fourth quarter, or $10.5 million for the entire year.

In 2002, that number came in at $10.10 million, both very significant, and that's an area that we are looking forward to this year, seeing a dramatic decrease as the refi -- should be subsiding -- showing signs of subsiding dramatically.

Our share repurchase program, which I mentioned earlier, during the course of 2003 bought back 1,442,000 shares or $35.3 million.

At an average cost of $24.51.

I remind everybody that most of those did take place in the early part of the year, with no shares being repurchased during the fourth quarter, and only 4,000 shares being repurchased in the third quarter.

So, most of that took place early in the year.

And then, in May of 2003, I remind everyone that our board of directors did authorize the repurchase of an additional 2 and a half million shares should the situation appear advantageous for the bank.

Our branching effort is continuing at the present time we have 6 offices that are presently under construction, and we have another 4 that are about to start construction sometime in the early part of this year, hopefully we are expecting to be opening up about 10 offices this year.

We have added a number of new products which I believe is going to have a nice positive effect on our operations for 2004.

They include a new low cost checking account which in relatively short order has opened up over 2600 accounts.

Our kids first savings club which we have discussed in the past continues to grow.

At the end of 30 months, we now have over 44,000 Kids First Savings Accounts.

And that is up 14,000 during the course of the year.

And we have balances in those accounts in excess of $74 million.

We have some other new service that we've added as well.

We now are open on Sunday, we started doing that in 21 of our offices scattered throughout our trade area.

By the end of the sixth week we are now seeing in excess of 1300 customers visiting our branches on a single Sunday.

We did expand our customer service right after Thanksgiving to 24 by 7, and we have recorded over 6400 calls that have come in during those hours that heretofore we were closed.

So I think we are reacting to the desires of our customer base and we are going to see, I believe, some increased growth as a result of that.

And we have begun a very aggressive business development initiative that I'd like to just discuss briefly.

It is a broad-based cooperative effort between our commercial and retail divisions within the bank, and it will offer an alternative to middle market prospect who may have become alienated or displaced by recently announced metropolitan New York/New Jersey acquisitions by out of state competitors.

We're midway through the process of hiring a dedicated cadre of new business development officers that will complement our existing relationship officers, and these individuals will be focusing on calling on target prospects.

As part of this overall effort, our existing community commercial lending group is offering a simplified product, offering to small business prospects that includes, among other things, a shortened form of loan application, and an under 24-hour turnaround through an enhanced approval process.

I emphasize, however, that all of this initiative is being done with no denigration of our credit culture.

All of the final approval on all of the new business that we're looking for will be handled by existing long-term Valley staff.

As one of my associates like to say, we are not going to be fishing deeper; we're just going to be using more fishermen.

Based upon what we've seen year to date, and I advise it's only half of a month, we are very optimistic about our results for 2004 and hopefully when we report to you next year at this time, it will be a very positive basis.

With that, I will open it up for questions.

Very good and thank you, sir.

Ladies and gentlemen, as you just heard, if you have any questions or comments, we invite you to queue up at this point.

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And representing Ryan Beck our first question comes from the line of Tony Davis.

Please go ahead.

Good morning, Gerry.

Good morning, Tony.

Congratulations on another good year.

Thank you.

I want you to follow up on the new cadre of business development.

Can you give us some color on how many calling people Valley has today and what you're looking at in terms of additional people?

We're going to be adding approximately a dozen new business development officers whose primary function will be to be out there in the field looking for new business.

Great.

And back on fundamentals for the quarter, I just wondered if you could comment on amortization, in terms of the margin improvement, obviously the restructuring that you did in the third quarter helped a bunch, but could you give us some -- Alan can you give us maybe some quarter trends in that regard in.

Yeah, basically what happened, on the -- I'm assuming you're talking about the investment side.

Yeah.

We saw about 25 basis point increase in the yield line investments because of the slow-down in the amortization.

We would like to think that would continue going forward.

What do you have left amortized?.

I don't know if I have that number offhand but it doesn't matter.

Those things are coming on all the time as we buy new securities and we continue to amortize others, so how much we have left, I'm not sure is really relevant to how it's amortizing down.

Okay.

And I wondered if you could give me, finally, you did a few acquisitions last year, and I wondered if you could, on a core basis, give me some sense of what the growth and non-interest income expense was last year, excluding those acquisitions.

The bottom line, I think, in what you're asking is what did it do to our per share income, and they add somewhere between 3 and a half and 4 cents a share to our bottom line.

Okay.

Good.

Gerry, one final question, I guess long growth outlook for '04, what do you think we should expect here?

Well, a lot of that depends upon the economy.

You know, if the economy remains strong, or it continues to strengthen, I think that we will see overall at least as well as we've done this year and actually I'm looking forward to even more.

I think we're going to do better this year than we did last year.

Okay.

Thanks again.

Okay, thank you.

))OPERATOR: Next in queue is John Klein, with Sandler O’Neil.please go ahead.

Congratulations, guys.

Good quarter.

Thank you.

A couple questions for you.

Commercial loan growth, Gerry, you gave it to us for the year.

I was just curious if you saw anything during the quarter in terms of growth?

The fourth quarter at Valley is a hard quarter to compare because we do a very large line of credit business over in New York.

Those loans hit their high point usually during the latter part of the third quarter.

And then they pay down in the fourth quarter.

So, while the fourth quarter ended up relatively flat with the third quarter, there was significant growth in the overall portfolio because we did have significant pay-down in New York under their lines of credit.

Now, had those loans not paid down, we would have a bigger problem.

I understand.

These are very seasonal cyclical lines of credit that we took on when we acquired merchants.

And that portfolio continues, by the way, in New York, to grow, but if they did not have significant pay-downs in the fourth quarter, as I say, we would have other problems.

Those loans did pay down, we did have a very strong quarter.

We had a lot of new loans coming on and we ended up the fourth quarter almost equal with -- just about equal with the third quarter, which indicated a relatively strong growth and a nice outlook for this year.

Right.

How about year over year, Gerry, maybe that's better to look at that measure?

We're up 6.1%, almost 6.2% year over year on the commercial.

For the quarter?

That's year over year.

Well, John, are you talking about an ending balance at the end of December '02 compared to end of December '03, on commercial loans, so you're looking at the end of the quarter?

That's what he said almost 6.2%.

It's up about almost $70 million.

If you compare the quarter.

Whereas, on -- it was pretty much flat.

Okay.

Hey, on the MSR, how do you have that valued in terms of you servicing for others?

What do you mean, how do we have it valued? 1.3-- 1.4 -- 1.37% of the portfolio.

Okay.

We're paying down obviously rapidly although in the fourth quarter we did begin to see a significant slow-down in that.

Okay.

And is this new checking -- is this the perfect checking?

Yes.

Okay.

And just in terms of opening up on Sundays in 21 offices, how do you pick the locations?

We try to do is strategically throughout the service area.

We didn't want any customer to have to travel more than 5 or 10 minutes, you know, further than their existing branch would be to get to another branch.

I mean, you know, we pretty much blanket northern New Jersey as it is, in the northern counties where we're located.

So, we have, for example we have 3 offices in Clifton.

We opened the 1 in the center of the 3, but you could drive from that office to any -- either of the other 2 offices literally in 5 minutes.

So, we felt we would still be able to take care of our customers, satisfy our customers' needs, be able to get to the bank relatively easy without going through the expense of opening all of our branches, so far it seems to be going over very well with our client base.

Our computer systems allow to us service any one of our clients in any of our branches, so that makes it easy.

Even if their particular branch wasn't open, they drive 5, 10 minutes and they're at another branch that services them.

Now, have you guys advertised that at all in.

We advertised it only through statement stuffers essentially at this point.

It is on our web site.

We are going to be doing it a little more aggressively.

We wanted to make sure we got our staff built up.

We are not compelling any employee to work on Sunday.

If they have a religious objection to working on Sunday, it's not held against them.

They have not -- they're not being pressured to work on Sunday.

We have enough volunteers who want to work on Sunday, particularly since all of our branches are not open, it makes it easy and we have hired a number of part time people.

So the overall cost won't be that significant.

Okay.

And just one final question.

You know, Alan, it seemed like maybe you hinted that the securities yield would continue to increase going forward.

Well, I think you'll probably see a leveling out.

I don't know that I'm hinting it's going to increase.

A lot of that is based on where the market goes and as we're obviously always buying securities, you know, how much of that we'll be buying at higher levels.

Rates are down at the moment, so if that stays that way, I'm not going to hint anything about it going up.

It's really going to depend on where the market is, John.

But what I really meant is in terms of the amortization, you know, we may have, depending on how that refinance activity goes on into the first and second quarter, we may have seen it level off.

It looks like you put some leverage on during the quarter.

We actually, we did a little bit of pre-funding on some of our borrowing, some of that has actually been paid off as we moved out into '04, we found some attractive borrowing to replace some of the borrowings that we had.

So, it may look like it's leveraged but a lot of that -- much of that will disappear in the first quarter.

Okay.

And how are you guys positioned in interest rate risk standpoint?

We're asset sensitive, probably a little under 100, $900 million for -- on a one-year basis.

Okay, great, thanks again.

Okay. , you're welcome.

Next we go to Peyton Green with FTN.

Please go ahead.

Hi, good morning.

Good morning, Peyton.

A couple questions just to clarify.

One on the margin.

If we looked at the third quarter and throughout the effect of the FHLB New York dividend situation and also what you all did in the quarter in terms of extending out, some of your borrowings and the CD side that was about 22 basis points of adverse effect in the third quarter, so the third quarter margin of 376 seemed more like 398 on kind of a recurring basis.

Well, I really looked at it a little differently, although not so different from you.

Okay.

Basically, I'm really only looking at the federal home loan bank as being a nonrecurring item.

Okay.

And really I looked at it going to 376 would have been like 392 would have been a 16-point basis cost and you take that out or add that back, if you will, we look at it as being about an 8 basis point increase for the quarter.

Federal loan home bank hasn't come back to paying what they were paying prior to the quarter either.

That's true, that's true, we lost, you know, some of that yield on the federal home loan bank but barring that for a moment, and Gerry is right, just looking at just the federal home loan bank that was a significant impact for the quarter.

On the penalty.

Just so I'm clear, in terms of the FHLB New York, dividend how many quarters are they staying out?

They've announced they're going to come back but much less of a dividend than they've paid before.

It sounds like, it looks like they said it was going to be under 2%.

There was none paid in the fourth quarter.

Right.

So the fourth quarter margin increase was without the fact that they didn't pay anything.

So, I think you really -- you can't really add it back in against the third quarter because we didn't get it in the fourth quarter.

They did announce in the first quarter this year, a small payment, and they did announce, as I said a few moments ago, that they will be paying something under 2%.

They were paying closer to the 6%, so I guess this year they'll only be paying about a third of what they're doing.

We have restructured some of our borrowings and been borrowing away from them because when they don't pay the dividend it's almost like we're forced to maintain a compensating balance at no interest by holding their stock or at a very low rate when you hold their stock.

Okay, so you are using other wholesale sources?

Absolutely.

Good.

That clears up that one.

And then also, how do you get the personnel expense?

I mean, just looking at the last, let's just take the quarterly results in '03, you had about $30.8 million in the personnel in the first quarter, down to about $28.3 million in the fourth quarter and you've talked about expanding the branch network and also open up a few more hours.

What is a reasonable level for that going forward?

I mean, that's a pretty good late quarter drop or 2 or 3 late quarter drop.

Yeah, I mean, we only have -- there was probably an adjustment in the end of the fourth quarter for bonuses we accrue during the year, that settle out at the end of the year.

We accrue through the year can and it gets paid in the end.

Sure.

It probably brought it down a small amount, so if you added, you know, I don't know maybe a couple hundred thousand back in, probably that's a number that at least is a start going forward.

But then on top of that, you know, we have branches coming on all year.

This is not all going to happen in the first quarter, the VDO people Gerry talked about are not coming on the first day of January.

Some may be on, some may be on as we move through.

So I would start with maybe a few hundred thousand dollars higher than where we were at the fourth quarter level.

We've also gone to using a larger base of part time employees, which brings down our overall cost.

I mean, every expense in this bank is looked at.

We start out a budget by using basically zero-based accounting.

We start from scratch and everybody looks at where we have to be and go.

So, it has always worked favorably for the bank.

My point is you all are very efficient to start with and you've improved.

And we should.

You know, that's what our shareholders want to see.

I'm not disagreeing with it.

Okay.

Very good performance.

Thank you.

Did you have any follow-ups, Mr. Green?

That's it for me

We can go to Bob Hughes with KBW.

Please go ahead.

Good morning, guys.

Good morning.

A couple quick questions.

As I look at your '03 earnings, clearly you benefited from high level of loans gains and securities gains which accounted about 12% of your earnings by my estimation and you're certainly aided by a pretty impressive credit loss record this year.

Your level of provisioning is probably at the lowest absolute levels for years.

So, to me it seems like some of these things are not likely to be sustainable in '04.

So, can you either comment on your comfort with the consensus estimate for this year that's out there or maybe provide us with some color on what you think the real drivers of your earnings growth will be this year?

We never comment about, and we never project earnings, we don't give any guidance on earnings so I can't comment on whether I'm buying into or not buying into the consensus estimates for the year.

I did conclude my comments, though, by saying that the way we have begun the year, with the developments we've seen coming through in the first 2 weeks of the year, makes me cautiously optimistic about the outlook for the year.

The thing in this bank is we never like to disappoint our shareholders, so we go out of our way not to disappoint them.

I do think that opportunities that you spoke of, security gains, that's an opportunity that presents itself historically in this bank.

I can't remember a year in this bank that we didn't have some security gains, and I would be very surprised if 2004 didn't produce some security gains for the bank.

Yeah.

So, I mean, I'm relatively optimistic that we will see some security gains during the course of the year.

Certainly with the 10-year down under 4% yesterday, as it was, it does present opportunities for continued security gains.

As far as earnings are concerned, also, I mean, we are making a major push on business development efforts within this bank.

We are in a wonderful market, I don't have to tell anybody how much we think that New Jersey can contribute to this bank.

I mean, this marketplace is growing, we are in a densely populated area, which has the highest median family income in the United States, and it's also, as I've been told by the folks at Rutgers, we have the fifth fastest growing population in the United States.

So we have a lot of wealthy people living in a very confined area and a lot more people coming in.

I think that creates more opportunity for the bank.

So I am always optimistic.

I don't know if I'm answering your question or not.

I think, Bob, by the way, if I can comment on the loan sales as well, because you commented on that and I think 1 of the things once again if you look at Valley's historic numbers, and the way we operate our residential lending area, we consistently produce loan sale gains.

We do that from 2 sources.

Number 1, smaller portion of that would be the SBA, and we have always sold off the guaranteed portion of those loans, and we have been lucky enough to do that, or good enough to do it at a gain, going back for a number of years.

Additionally, we do a lot of residential lending, and we do not always want to keep from an interest rate risk standpoint 30-year loans, but we certainly originate them and we make money on them.

And there is no reason for us to discount the fact that we will do that again in the future.

What level that will be will really depend on how the market moves and how interest rates are and what kind of volume levels we'll do.

And I think, you know, talking about a driver, I think our net interest income historic has always done very well and it's 1 of the first times I think anybody can think of that you've got such historic low rates that caused a margin not to grow or net interest income not to grow as much as it has historically and I think with the loans we've put on and with interest rates eventually going to move up, we see that we will have enough energy behind us to grow the bank.

Okay, great, thanks for taking my question.

Thank you, Mr. Hughes.

Mr.Lipkin, there are no further questions in queue.

Please continue.

Okay.

Well, if that's it, then I thank everybody for tuning in, and we'll look forward to speaking to you at the end of this quarter.

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