Valley National Bancorp (VLY) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Valley National Bank's second-quarter 2005 earnings release.

At this point, all the participant lines are in a listen-only mode.

However, there will be an opportunity for your questions and instructions will be given at that time.

And as a reminder, today's call is being recorded.

I would now like to turn the conference over to Mr. Gerald Lipkin.

Please go ahead, sir.

Thank you, and good morning, everybody.

Before we get started, I'm going to ask Diane Grenz to please read our forward-looking statement.

Today's presentation may contain forward-looking statements regarding the financial conditions, 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, 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.

For any 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 ended December, 31st 2004, as well as in Valley's other recent SEC filings.

Valley assumes no obligation for updating its forward-looking statement.

Thank you, Diane.

Well, ladies and gentlemen, I want to welcome you to the conference again.

Considering the shape of the yield curve and the effects of the recent acquisitions that we closed, we are quite pleased with our results.

Our net income for the quarter came in at 38,991,000 versus 36,729,000 last year for the quarter.

On a six-month basis, we came in at 77,259,000, up 2.79% from the 75,161,000 last year.

On a diluted earnings per share basis, that amounted to $0.36 for the quarter versus $0.35 last year for the quarter.

And for the six-month period, we were flat at $0.72 for this year versus last year.

Our return on average assets came in at 1.35%, affected primarily by the flat yield curve; last year for the quarter we were at 1.45%.

Year-to-date, we're at 1.38% versus year-to-date last year at 1.51%.

Our return on average tangible equity amounted to 22.5% versus 23.24% for the quarter last year.

On a year-to-date basis, we're at 22.68%.

Our efficiency ratio, this was somewhat disappointing at 50.75% versus the 48.88% last year for the quarter.

But that was affected I think to some degree by the recent acquisitions and as we are able to pare the expenses on a going-forward basis, I believe we will come back again to our more traditional levels.

The net interest margin for the quarter on a fully taxable basis came in at 3.76%.

Last year, we were at 3.90% and we were down from the last quarter when we were at 3.80%, 4 basis points.

Let me talk a little bit before we go into some of the other details about the Shrewsbury and the NorCrown mergers.

Shrewsbury was put onto our data processing systems in late May and that will begin to show a further improvement in our results next quarter when we are no longer paying duplication of data processing costs.

NorCrown, which the merger was completed on the 3rd of June, will be going on to our data systems over this coming weekend, and that will have a even more material effect on our cost saves in the third and fourth quarters.

We are quite pleased with both of the acquisitions.

The deposits in Shrewsbury alone grew by 13% in dollars, and the number of accounts are up 16%.

We are quite gratified because we believe that this support Valley's approach to mergers and acquisitions, which is somewhat different than a lot of our other banks that we've seen take in doing an acquisition.

We take our time in closing redundant offices.

We take our time in changing rates on accounts, as a result of which, we don't build the animosity with the client base in the target institution that often occurs.

In the long run, we believe this will be most beneficial to our bottom line.

The effective cost saves will of course be implemented over the course of the next several months, and by this time next year, they will all be implemented.

But at that point in time, we will have had an opportunity to appoint ourselves with their client base as their client base becomes better acquainted with us.

And hopefully we will not see the run out of accounts that many of our competitors experience.

Going back to our performance in the quarter, I'd like to address the credit quality in the bank.

We have total nonaccrual loans, which includes the loans from NorCrown and Shrewsbury, of 26,120,000.

That was versus last quarter of 25,951,000; but of course in the last quarter, it's not comparative because they do not have the numbers for NorCrown included.

The non-performing assets to loans and OREO came in at 0.33%, again an improvement from last quarter even though we included the NorCrown non-performing assets.

And last quarter it was 0.35, although at 0.33%, we're really on the head of a pin, as we said in the past.

Past due loans -- 90 days and still accruing are at $4,984,000.

Delinquencies totaled past dues 30 days and over, we're at 53,752,000.

Again, for this size institution, it is extremely low.

Our net charge-offs for the quarter came in at only $936,000.

Our loan volume was quite strong during the quarter.

And on a comparative basis, we will give you our organic growth, not including NorCrown because NorCrown, of course, was only with us for one month.

The commercial loans came in at 1,344,000,000 versus the 1,310,000,000 at the end of the first quarter.

That's an increase of 33,458,000 on a linked-quarter basis.

On an annualized basis, that comes in at approximately 10%.

ON a year-over-year basis, we are up 138 million and this is only in the commercial area, or 11.48%.

All of the other categories are also showing nice growth.

Our construction loans came in at 418 million versus 164 million last year at the same time period -- or an increase of 64.9%.

The residential mortgages came in at 1,991,000,000, an increase of $292 million.

Our commercial mortgages were 1,894,000,000, an increase of $202 million.

Our home equity loans were at $557 million, an increase of $70 million over last year.

Our automobile paper is at $1,104,000,000, an increase of $46 million over last year or a 4.4% increase.

But I hasten to quickly report that last week, we saw the strongest automobile production week that I can ever recall in my 30 years at Valley.

We booked approximately $25 million in new automobile paper.

And I'm told by my staff that this week looks like we'll come in in the same range.

So the incentives that the automobile manufacturers have put out on the automobile paper seems to be having a very positive effect on Valley.

So we are looking forward to seeing next quarter, a nice growth in that area.

Our other consumer loans, which are relatively small, came in at 120 million, up 9.5 million from last year.

And again, and I point out all of these numbers are organic growth.

They do not include the NorCrown numbers.

If we include the NorCrown numbers, our total loans would be 7,844,000,000 versus the 7,432,000,000 I just reported.

And if you include all of the NorCrown numbers, we would have shown an increase over last year of 1,337,000,000 or 20.55%.

Our deposits, also I'm going to report on organic growth, not including NorCrown because they weren't even with us for the full quarter, came in at 8,072,000,000, and that is an increase over last year of $698 million or 9.47% in the quarter.

On an annualized basis, our deposits continue to grow at a 9% annualized rate.

Most of that growth came in the non-interest-bearing and in the savings categories, which again is most enheartening (sic) for the future.

If we were to include the NorCrown into those numbers, our deposit base would have gone not from the 8,072,000,000 o k reported but to 8,627,000,000.

That would have reflected an increase over the prior year of 1,252,000,000 or approximately 17%.

We had virtually, for our bank, very, very little in the way of security gains.

Between the bank and the holding company, together, we had $586,000, not enough to move the needle on a per-share basis.

We are continuing our program of expanding new branches.

We had two of them open so far this year and we have transferred (ph) three of them in Manhattan, Patterson, Rivervale, and Woodbridge, all scheduled to come on later this year.

And in 2006, we are on target to open up our ten branches that we have projected.

It's interesting, the new branch total deposits have come in very strong.

Just on those branches that have opened in the past nine months, we reflected 4,000 new accounts at Valley with $174 million in deposits and that was held in six different offices.

I mentioned before about Shrewsbury.

Again, we are very, very pleased.

We have opened, through July 2nd, 3,799 new accounts just in Shrewsbury.

Now those are not included of course among the 4,000 accounts I mentioned before.

And those new accounts totaled $42.2 million.

Heavily all across the board, we've seen their balances going up by 11%, and the number of accounts by 13% -- 16%, I think.

The -- our Kids First program continues to show strong growth.

We increased that by 5% during the second quarter.

Becoming a hallmark of the bank, the Kids First program.

I would like to briefly mention the subordinated debt issue that the bank put on just recently.

We successfully put on $100 million to replace the cash that we used in our NorCrown and Shrewsbury acquisitions at a gross cost of 5%.

At this point, if anybody has any questions, I'll be happy to answer them.

(OPERATOR INSTRUCTIONS).

James Ellman, Ocean Cliff Capital.

It's James Ellman at Seacliff.

Hi.

It's James Ellman at Seacliff.

Quick question here.

In the past, you've told us how many non-performing home equity lines you have and how many home equity lines to loans you have outstanding.

Could you give us those numbers again?

All right.

He had -- I could be off by a couple accounts, but last time I looked, we had just a hair under 15,000 home equity accounts.

I believe at the end of the last month, we had 16 of those 15,000 loans in various forms of delinquency, although the bulk of them were in the 30-day category.

We have three of them I believe that are held as a result of somebody passing away.

We only had I think three of the total of them delinquent over 90 days.

All right.

And if you could just comment on the new federal guidelines that have been coming out in terms of home equity lending, does that change how you operate that business in any way?

That's a good point.

We have not changed how we lend in home equity and we have not changed how we lend in residential mortgages.

Valley as of today, to the best of my knowledge, has not made any negative amortization loans.

We think that this is a product that is going to be a major problem in the future.

We have not changed our underwriting standards.

This has hurt us, quite frankly, in a competitive sense in that our competitors are writing huge portions of new mortgages into this category.

I've seen statistics as high as 30, 40% of new mortgages going on, going on as negative ams.

We even go a little bit further.

We look to -- when we buy mortgage pools, we look to see if the pools contain zero interest, that type of credits in the pool, and we try to stay away from those.

Okay.

But the changes that the Feds have requested in terms of home equity lending haven't affected how you're lending because you're already within their guidelines?

Well within their guidelines.

Okay.

And just last quick question, Hudson City of course raised a large amount of capital that they want to try and put to work.

To a certain extent, some of their lending might be competing against your business.

Has that had any effect on your market?

Not materially at this point.

It may in the future, but it has not at this point.

All right.

Thank you very much.

Bob Hughes, KBW.

I was wondering if you could quantify for us perhaps what additional cost savings you think you may still have coming from Shrewsbury or NorCrown.

Or if not, then maybe discuss the overall expense outlook given branch -- do novo branching initiatives, et cetera.

It's hard to say in a specific dollar amount, the savings, what that will amount to, although I do believe they will be rather substantial.

We are paying for the -- we paid -- we were paying a lot for their data processing servicing business.

That's going to be absorbed by our own systems at virtually nominal, nil cost.

That is a substantial number to the bottom line.

We have all of the people who are involved in their back office bookkeeping operations still employed and certainly all of them at NorCrown.

And we are just coming to the tail end of the people who were at Shrewsbury.

Even though we ended their data processing servicers contract with us and began doing it ourselves at the end of May, we still needed those people to finish up cleaning up all their records, to get all of their checks put together and put in good, clean order, and then transferring everything over to our operations center.

The individuals who were in charge of those people -- these were not all low-paid clerical staff, so these were highly-paid individuals.

That staff is now just about coming to an end as far as our needing them.

So those savings are all beginning to kick in at this point.

In NorCrown, as I mentioned earlier, we are doing the conversion to our data systems over this weekend.

And by the end of this quarter, we should be in the same position we are at this point with Shrewsbury.

So I think in the fourth quarter, we will see the full, full benefits in the quarter of those savings and we're looking forward to that.

As far as other savings, there are of course branches that in NorCrown's case, in particular, that appear to be redundant to our existing system.

But rather than closing them on day one and disrupting their client base doubly, first everybody is upset when another bank comes in and takes over their bank, and then if you were to close their local office, even though you may have an office a quarter of a mile away, causes a further disruption.

So we try to do an evaluation.

It usually takes us six to nine months before we will close an office, even though it may appear that it should be closed on day one.

Those will add substantially to the savings.

We've been approached by some of the landlords in some of the redundant branches who have other non-bank tenants who could go into the location at perhaps a higher rental than we were even paying.

So we'll be able to come out of the lease without any future expense, without bringing a competitor in it.

But if we did it too soon, I'm just going to lose a deposit base.

Sure.

I just hope I'm -- I'm trying to be as definitive as possible.

It's very difficult to be that quantitative.

I know that they had about $4 million of the $4.8 million in additional expense that you saw came from them.

How much of that we will be able to pare is very difficult at this point to come up with a specific number, but I think it will be meaningful.

Okay.

And somewhat offset by continued de novo branching, I would anticipate?

Yes, that's a totally different issue.

Our de novo branches -- it's interesting, when you do an analysis, they come to profitability very quickly.

So the original thought that it would take us two or three years to bring them up to profitability in a number of their cases, they hit profitability in six to nine months.

Okay.

One of the other things that's in there, by the way, is the core deposit intangible, which is about 600,000 for the quarter.

For Shrewsbury, we figure it will probably be running, starting next quarter, about $1 million by the time we include in NorCrown.

Okay.

That's helpful, Alan.

Thank you.

One final question if I may, just on the indirect auto landscape, it seems to me like some of your larger competitors that have historically participated in this space have really backed away.

Has that created additional opportunities for you?

And secondly, what do the initial yields look like on those loans you're putting on today?

Your answer to the first part is yes.

Our yields overall have been running in the 5.25 to 5.5% range.

It varies from a week to week depending on the mix of new and used that come into the bank.

Remember we are focusing on "A" credits.

We do not do the subprimes.

We have a very, very, very low delinquency rate as a result of that, which offsets the fact that the rate you may see elsewhere might be a little bit higher.

We have a very low -- also, we have a very low cost of service on those loans.

This is a product that the bank has been in now for well over 50 years.

We are very comfortable and we are very consistent in the market.

We are not in and out of the market as some of our competitors are, as a result of which we develop much more stable long-term relationships.

Great.

Thank you, guys.

Dave Bishop, Legg Mason.

Good morning, gentlemen.

Quick question for you.

It is maybe nitpicking here in the details here, but at the time of the announcement, I think we pegged NorCrown around 460 million in loans, (indiscernible) about 10% less.

Did you -- did they intentionally run off some categories there or certain loans you didn't want to bring over? (multiple speakers)

It was probably runoff, if that's what you're looking at.

They had a -- unfortunately, it took us a little bit longer than we would have liked to consummate the merger.

We were required by the regulators to make sure that everybody was satisfied, that their books were handled properly, which I believe in the end, we were able to satisfy everybody that they were.

But it did take a little bit longer.

And when a bank is going through a transaction of this nature, there's always some agitation that develops among staff members and people quit and loans aren't given the same loving care that they would normally give.

But I'm real pleased to say that I know since the acquisition, we've made a full court press on all of their accounts.

I know our commercial lenders have been going out and visiting with their accounts on a pretty regular basis to make every effort to retain as much of the portfolio as we can and to further increase it.

Got you.

In terms of on the income side versus (ph) account adjustments, can you quantify that, if any, this quarter?

Yes, we can go through some of it for you.

Their purchase accounting adjustments, I think, were about $9 million in each one of the institutions, so about 18 million total broken down between all the different marked-to-markets on the assets, the liabilities, et cetera.

And then, of course, the write off of any expenses that went against goodwill.

And finally, I noticed a decline in the insurance fees and commissions.

Is this (multiple speakers)?

I think tbat's cyclical.

A lot of that is a result of title insurance fees.

It's just cyclical.

In fact, prior to this conference, we had a meeting -- our quarterly meeting with all of the various wealth management insurance agencies, and they were pretty optimistic about their outlook going forward.

So.

Rebounds, okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

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

Thank you.

And I thank everybody for tuning in and we'll see you next quarter.

Ladies and gentlemen, this conference is available for replay.

It starts today at 2:30 PM Eastern, will last until July 26th at midnight.

You may access the replay at anytime by dialing 1-800-475-6701 and entering the access code at 786546.

That number again, 1-800-475-6701, and the access code, 786546.

That does conclude your conference for today.

Thank you for your participation.

You may now disconnect.