Valley National Bancorp (VLY) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 2005 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn conference over to our host, Mr. Gerald Lipkin. Please go ahead.

Thank you and good morning and welcome, everyone. Before I begin, I’m going to call on Dianne Grenz to read our forward-looking statements. Please, Dianne?

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 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 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 Form 10-K for the year ending December 31, 2004, as well as in Valley’s other recent SEC filings. Valley assumes no obligation for updating its forward-looking statements.

Thank you, Dianne. I just want to add the fact that the results we’re going to speak of today have been already adjusted for the 5.0% stock dividend, which was declared on April 6th, and will be to shareholders of record on May 6th. But the requirements of the SEC are that they be included.

Our diluted earnings per share came in the same as last year at $0.37. Our net income was $38,268,000 compared with last year’s almost identical number of $38,432,00. We had a return on average assets of 1.42%, a return on average equity of 21.39%. Our efficiency ratio was 48.83% and our net interest margin, on a fully taxable basis, came in at 3.80%. That’s down 10 BP from the end of the year when it was 3.90%.

Valley continues to maintain itself as an asset sensitive company. As a result, our earnings continue to be negatively impacted by the flattening of the yield curve. The yield on our earning assets were relatively flat. The interest on our deposit accounts, however, did increase.

The commercial or the prime rate, as we all know, on the short end of the yield curve has continued to rise and which our prime based loans, which represent a sizable portion, approximately 20% of our overall loans in the bank, have gone up.

However, we’ve been negatively impacted, as our commercial mortgages, for example, have been re-pricing. And 5 years ago the rate was 7.5% on that type of a loan and they’re re-pricing today something in the low 6.0%’s, so obviously that has a negative impact on interest rates on the bank.

The budget for the bank was also -- results for the bank were also impacted in the first quarter by our attention to regulatory activities, particularly AML/BSA and Sarbanes-Oxley. For the year 2005, we are budgeting a little over $5.0 million to remain compliant with those regulations. Since the passage of the Patriot Act, we have added 44 persons to our staff to allow us to remain compliant.

We really have no choice but to have a robust AML/BSA program since the regulators have repeatedly announced that they will have a zero tolerance towards noncompliance with this. We do believe, however, at this point, that our expenses will be leveling off at their present level.

We have indicated -- and I had some people raise the question so I’ll address it directly on -- last October we put, at the suggestion of our counsel, a precautionary statement in our 10-Q. At the end of the year, again, we put a precautionary statement in our 10-Q. You will see in this year’s and this first quarter’s 10-Q a precautionary statement and we will probably have a similar precautionary statement in the future. And it should not be misinterpreted or interpreted to be anything other than that. At this point, it is just a precautionary statement.

The good news around the bank is that our credit quality remains excellent. The total non-performing assets of the bank came in at $25.9 million, which is really dancing on the head of a pin, but amazingly we’re down from the $30.7 million at the end of the year. Our total non-performing assets to loans and OREO are 0.35%.

Loans past due 90 days and still accruing were almost half of what they were at the end of the year at $1,537,000. Delinquencies total, 30 days past due and over were at $46,166,000 or 0.63% of our loan portfolio. Our charge-off provision for the quarter was $752,000, an excess of $119,000 over our actual loan losses during the quarter.

Our loan growth continues to be very good. Our commercial loans closed the quarter at $1,285,000,000 versus year-end of $1,261,000,000. Our construction loans were at $407 million. Our residential mortgages were $1,895,000,000 and our commercial mortgages were $1,780,000,000.

Our commercial loans, which is really the focus in the bank and has always been, were able to grow 11.6% on an annualized basis in the first quarter of the year. That’s particularly gratifying since the first quarter of the year, as far as loan growth is concerned, has always been a weak point in the bank.

The first quarter tends to be very cyclical, particularly since we’ve acquired Merchant’s Bank in New York. Their loan portfolio is an extremely cyclical portfolio. They see very heavy pay-downs on their lines of credit, mainly because of the nature of the lines of credit and it’s expected and actually should always take place or we would really have a problem if it didn’t take place. They tend to pay down in December and January, hit low points probably in February, and then begin to turn upward.

The same thing applies, actually, to our automobile portfolio. While the results of our automobile loan production in the first quarter is relatively flat to down, slightly down, about 1.0%, that’s an area of the bank that generally comes on much stronger in the spring and summer, particularly in the Northeast where most of our production is generated. It’s just impacted by weather and other factors.

But we are beginning to see growth in those areas, beginning with the second quarter. We’ve already seen it in the first couple of weeks, so we’re looking at it with some optimism. And I want to make sure everybody understands that the numbers I’m talking about excludes Shrewsbury. We have not included those numbers in or portfolio. Shrewsbury brought about $275 million in additional loans to the bank.

Our deposit growth -- also our demand in savings deposits -- continues to show good growth. Our non-interest-bearing deposits grew year-over-year by 5.40%. Our savings accounts grew by 9.33%. I’d point out also, as somebody pointed out to me, that the first quarter of last year our deposit growth also was relatively flat, so we are looking forward to a more robust growth in the months ahead.

The deposits are becoming impacted in this area, to some degree by the level of competition. But fortunately this is a huge deposit base that we’re all going after. The bank funds primarily at the short end of the yield curve. And obviously, as I pointed out earlier, that does have a negative impact on our net interest mortgage, because our funding costs rise more rapidly than our revenues will rise, particularly because of the shape of the yield curve.

I want to talk a little bit about Shrewsbury, because that really one of the great stories in the bank. Based upon our initial results at Shrewsbury, we’ve been very well accepted by their depositors and their borrowers. We’ve added, in the first two and a half weeks, since we owned the bank, approximately 7.1% new accounts to their deposits. We’re very, very excited about it. We feel there’s a real opportunity in this market for us. We expect to see continued strong growth coming from them.

Our new branch openings during the past quarter were in South Orange and in Chester. We have on tap at least another 7 that should be opened this year. Our next office that we have scheduled will probably be in Rivervale in June, but we have almost every month thereafter we’re looking at additional sites opening up.

The Sunday hours and our running customer service 24 x 12, which has impacted us, obviously, in the last year by a little over $1.0 million a year for salaries and benefits, we believe those numbers have stabilized. A lot of people have asked me about those openings and whether or not we really feel it’s worthwhile. Well, I have mixed feelings, but the bottom line result is, when we look at the ratio between account closings to account openings, we’ve seen a drop in account closings by approximately 41% in the last year, so I guess that has had a positive impact.

We did open in Jacksonville, Florida a loan production office. It is retail-focused. It is going to be primarily -- initially, it’s focusing only on residential mortgages, but later this year we plan to bring autos in also from that area. Hopefully that will help eliminate some of the seasonality in our automobile production.

It is not going to be much different opening up automobile loans down there than we did when we had the State Farm relationship. We had an operation in Florida, so it’s not something strange to us. It’s just that we’re going to try to do it on own this time. It was chosen because of the demographics, the loan production in the area, and I think as far as the mortgages are concerned that most of the production will be sold.

I just want to mention, before I open this up for questioning, that for 78 years Valley has maintained a highly focused model of being asset-sensitive and concentrating on quality credits and investments. We don’t believe that we should change those fundamentals because of what we believe to be a short-term aberration in the yield curve. So, while it may impact us negatively because of the yield curve shape in the short run, I believe in the long run that’s the way the bank should be run.

I will now open it up for questions.

[Operator Instructions] And we do have a question from the line of Tony Davis with Ryan Beck & Co.

Good morning, gentlemen. How are you?

Good morning, Tony.

Morning, Tony.

Just a follow-up, Gerry, on the commercial line of business. Can you give us any color here on linked quarter commercial growth - that’s back to December now - annualized versus Shrewsbury? I’m just trying to get a sense. I know you said it was like 11% or 12%, year-to-year.

Yes, we --

What has it been?

The commercial loans at the end of the quarter, the first quarter, were $1,285,617 versus $1,261,854. That’s a net growth on a linked quarter basis of $23,763,000 or 1.88% for the quarter. You annualize that and you multiply it times 4. I think that --

And that’s ex-Shrewsbury, right?

That’s without Shrewsbury.

Right. Okay.

Shrewsbury is relatively small, though on a linked quarter we would show -- if I included Shrewsbury we’d be at $1 billion 310 m versus $1 billion 261 or 48.9, 3.88% growth.

Okay.

I didn’t think it was fair to include the Shrewsbury preparation at this time.

Right, right, right. Is that coming from new customers or are you seeing any increased line usage?

We are seeing -- the growth was actually not an increase in line usage as much as it was from new customers or additional business with existing customers. Our commercial mortgages have shown nice growth in that same period. They actually grew a little bit more on linked quarter basis. They grew $34.9 million or 2.0%, so they would’ve had an 8.0% annualized growth. But the first quarter is usually one of our slowest and our approval in our pipeline is quite strong in the commercial and in all areas of the commercial.

Can you give me a number there of what the pipeline looks like?

I don’t have it in front of me.

Okay. But it has improved further [inaudible - multiple speakers]?

Yes. Yes. I get that reported to me weekly and they’re pretty enthusiastic about the pipeline.

Gerry, just some color now on pricing, on both the loan side and the deposit side. As you look around, the community banks versus the larger banks, in terms of deposit pricing in your market, how does it look today versus a few months ago? And then, on the loan side, any color you can give us there?

In one word, “competitive”. The competition pricing seems to be as aggressive as I have ever seen it in the bank, particularly in the Northern New Jersey area. I see that both on deposits and on loans. We are focused, as I said a few moments ago. We’re also very disciplined. If we are not going to be able to earn a reasonable return on a loan we will not make the loan, if we don’t have -- if we can’t employ the funds effectively we’re not going to pay a rate for them that we can’t deploy effectively.

Right. Finally, the indirect portfolio really hasn’t done much the last year or so and I just wonder, through the LPO and probably other efforts, what are your growth expectations here this year and in the next few quarters?

I think that our growth in our indirect portfolio will mirror that of more historical levels, as we go forward. I think that the first quarter -- I know the automobile market was really impacted dramatically in January and February. It began to turn around in March and the numbers I’m getting from our people on a weekly basis, I think, are encouraging as far as the second and third quarter should be.

As far as the LPO is concerned, on indirect auto it’ll probably have very little effect this year or at least in the next six months. As we do everything, we’re going to walk before we run, so we’re going to be opening and focusing on residential production over the next three months. We do have a candidate to head up the auto business down there, but that will be coming in the later part of the year.

Thanks.

Tony, just as a follow-up real quick, the auto portfolio did grow 5.0% year-over-year and we have still been and we’re just about finished with the runoff on the State Farm portfolio. So a lot of that has impacted us in the last 2 to 3 years while we’ve been rebuilding it on an indirect basis.

Alan, what would that growth have been without the runoff?

Oh it would have been a lot higher. I don’t know off the top of my head. It probably would’ve easily been over 10%.

Okay. Thanks.

[Operator Instructions] Gerard Cassidy with RBC Capital Markets.

Hi Gerry, hi Alan.

Hi Gerard.

Good morning.

Gerry, obviously you’ve been at the bank for a number of years and based on your experience there, can you tell us -- with the credit quality, it’s so fantastic and the industry today is very strong. What has changed in this environment versus the last time we were in a very strong credit quality environment? Can you think of anything that’s different today than when it was maybe in the early 1980’s when we had a period of good credit quality?

Well, there are a couple factors. I think one of the things that has benefited the consumer has been the drop off in home mortgage rates. The consumer was the beneficiary of all that and it put a lot of money in their pocket. I think some of the tax programs that were put in place in the last year, I’m hearing from a lot of people that are getting much bigger tax refunds. Well, that helps. That puts a few extra dollars in people’s pocket.

I think we maintain our discipline on who we lend money to. We have programs that are somewhat unique, when it comes to home equity borrowing. We turn down candidates that a lot of other banks would make loans to, because we do not want to face big problems down the road.

So I think all that comes together, at least from the personal business side. I do think the economy is continuing to improve, so obviously on the commercial side there’s a good market for it. The Northern half of the State of New Jersey where we operate is also a little bit unique, as far as the rest of the country is concerned. There just isn’t a lot of vacant land. So real estate values tend to hold their value a lot better than in other places.

As a result of which, when a company or an individual seems to get in trouble, they always seem to be able to work it out one way or another by selling their real estate or bailing out from the equity in their real estate.

I don’t know, Gerard, if that answers it.

Yes, no, that’s very helpful. The other question I had was on the funding side of your balance sheet, looking at the period end -- I’m sorry, the average balances for March of ‘05 versus March of last year. Your savings funding obviously went up nicely and time deposits have backed off a little bit from an average balance standpoint. Is there a designed effort to cut back on that type of deposit gathering?

No, let me address that. That’s a very good point that you raised. We try to obviously maximize and optimize the returns in our margins. We’re always looking to where we can fund under the best and move favorable circumstances. The situation, over the last couple of years, has been such that we could fund the bank longer-term in the wholesale market by borrowing from the Federal Home Loan Bank and using Wall Street, at a much lower rate than we could by generating our own CD’s.

I see.

CD's tend to be very fungible. They’re very rate sensitive. It’s only recently, as the wholesale funding rates have gone up that we’ve begun refocusing our attention on CD’s. And as such, we've become somewhat more aggressive in the last couple of weeks in our desire to bring in the CD’s, because they’re at a lower cost than our wholesale funding would be at this point.

So it’s just a question of moving back and forth and in and out of different markets, wherever we can feel the funding most advantageous to the bank. And this is an enormously wealthy area. There’s lots of money out there and it’s extremely rate sensitive when you’re talking about the CD's.

The other area we’ve had some very, very nice growth has been in our municipal fundings. That continues to grow at a steady pace, so we’re very pleased with that.

I see. Speaking of deposits and competition, now that Bank of America has started the conversion process, at least with signs and such with the old Fleet branches, are they a better competitor, worse, no different when you guys bump into them?

I think they are a much better competitor than Fleet was, but I don’t think they are any better competitors than the old Summit Bank was when we competed against Summit Bank. So we may have had a little bit of a hiatus during the period that it was Fleet, but it’s nothing that we’re not used to competing against.

Okay and then finally -- and you may have addressed this and I maybe didn’t hear it -- with the margin this quarter at 3.80%, do you guys have a sense of what direction it’s going for the remainder of the year? Will it be slightly down, slightly up, flat?

I wish I could say it was going to be up dramatically, but I don’t think that would be true. We’re going to do everything we can. The only alternative, though, to the shrinking margin -- and it will probably contract over the next few months to some degree -- I think the only solution to that is increased volume. And since we only go at the top tier of borrowers, it means that our staff has to run that much harder. But I’m real proud of our staff and we have a lot of great people here and I think they’re capable of, as hard as they run now, even running a little harder.

Great. Thank you very much.

Peyton Green with FTN Midwest.

Good morning.

Good morning, Peyton.

Good morning.

I’m just trying to get at -- I mean, are you seeing -- the line usage on the C&I side, you indicated, was not really up much. I mean, would you characterize the economy as accelerating or still [inaudible - multiple speakers]?

Well, I think the economy is doing quite well in this part of the country. I think that when I say that you have to remember my line usage in New York is down seasonally, traditionally, and as I pointed out, I’d be very upset if it didn’t go down.

Right.

Then I’d have problems. But that turns around usually in the March-May time frame, is when it starts to head up again. So we’re expecting that that’s going to rise and that will actually -- and I was thinking about that in the car coming in today. That’ll really have a positive impact on us, because those are the borrowings that are tied most tightly to prime. So last year, when they paid off or began paying down in November and December, they were paying down at a lower prime than they’re going on now. So we should end up with a better situation as they turn up.

Sure. But I guess my question is, I mean, when you’re out calling on customers, I mean, do you get a sense that there is more activity possible over the next year compared to a little bit more cautious feel a year ago or --?

I think every businessman always thinks that they’re a little cautious. Everybody wants to be a little cautious. But I think there’s a certain optimism in the air here. I don’t see -- and I know in our bank you don’t see any, but I mean, I don’t see a lot of foreclosures taking place around the marketplace. I don’t see a lot of speculative construction taking place in our market.

So there isn’t a lot of property that’s going to turn around and suddenly be a drug on the market, so to speak. The employment numbers in this part of the country, I mean, the unemployment numbers in New Jersey are as low as they’ve been in ages. So I think that I have to look at it somewhat optimistically.

Sure and then in terms of the variable rate lending, I mean, are you seeing more competition versus the spread that you would’ve booked in the past and is that now an opportunity to [inaudible - multiple speakers] fixed rate?

Yes it is competitive. But I’m not convinced that rate is the sole determinant. When you’re doing business with a company for many years and they have a comfort level of doing business with you. And they know that you’ve been in their corner in good years and tough years, that you stood by them, and somebody comes along and they’re going to offer them for a quarter of a point or half a point, I’m not sure that moves them.

In fact, they may come to us and say, hey, so-and-so is offering it to me at a half a point less and we say, well, you know you’re going to have to take your chances with them, they don’t -- turn around and say, well, I’d like the half a point or a quarter of a point but I’m going to stick with you.

So we’re under pressure from rates. I don’t disagree. I won’t deny that. But a lot of our customers understand that there’s more to a relationship -- and that’s what we really try to foster at Valley, relationships -- than simply the interest rate that’s being charged.

Okay. So, I mean, it's -- okay. That’s fair enough. That’s what I was trying to get at. Okay. Thank you very much.

You’re welcome.

There are no further questions in queue. Please continue.

Well, if there are no further questions, then I want to thank everybody for tuning in today and I look forward to speaking to you at the next quarter. Have a nice day.

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