Valley National Bancorp (VLY) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the third quarter 2005 earnings release conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer period. Instructions will be given at that time.

[Operator Instructions]

And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Chairman, President and CEO Gerald Lipkin.

Thank you and good morning everybody. Before we get started I'm going to call on Dianne Grenz to read our forward statement.

Today's presentation may contain forward-looking statements regarding the financial condition, results of operation, and business of Valley. Those statements are not historical fact, but 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 statements -- these forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from the results of the forward-looking statements contemplate. 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, today’s conference call, Valley's Form 10K for the year ending December 31st, 2004 as well as in Valley's other recent SEC filings. Valley assumes no obligation for updating its forward-looking statements.

Thank you, Diane. And, again, good morning everybody. Well, we feel we had a good quarter, particularly when we consider the effect that a flattening yield curve has on a spread bank like Valley. This good growth results, I believe, are largely a result of our top line loan growth and tightly controlled expenses that helped produce these results. Our net income went from $38,991,000 to $41,942,000 on a linked quarter basis, or an increase of, over the prior period, of 7.57%. On an annual basis, our income increased from $114.5 million to $119.2 million, an increase of 4.06%.

On a fully diluted per share basis, we went from $0.36 to $.038, or an increase of 5.56% on a linked quarter basis. And that resulted in a year-over-year of an even result of a hundred -- $1.10 each year. Our return on average assets came in at 1.37%, slightly better than the 1.35 we showed at the end of last quarter. On a year-over-year basis it does show a decline from 1.51 to 1.38%.

However, we want to point out that we -- in the 2nd and 3rd -- the 1st and 2nd quarters, we had our two acquisitions of NorCrown, which had a return on average assets of 0.87%, and Shrewsbury, which had a return on assets of 1.43% which causes a little more pressure on us. It takes a little time before we can get those assets geared up and their operations running in line with Valley.

The return on average tangible equity came in at 23.94%, compared to 22.50% on a linked quarter basis. On a year-over-year, it was 23.17% this year-to-date versus 24.60% year-to-date a year ago. Again here, Shrewsbury had a return on average assets -- on equity of 10.04% and NorCrown 11.74%, which results -- which causes our results to look worse initially.

Our efficiency ratio, which historically has always been in the 40's, did show a slight improvement on this quarter over last. We came in at 50.31% versus the 50.75%. On a year to year basis it’s 49.98% versus 47.94% last year. Again, a -- I point out that Shrewsbury had an efficiency ratio of 55.47% and NorCrown's was 67.54% and, again, it just takes a little time for us to get those numbers in line with ours. The net interest income for the linked quarter came in at 104,611,000 versus 111,581,000 or 2.98% increase; year-over-year we're at 302,431,000 versus 281,123,000 or an increase of 7.58%.

Our net interest margin did decline during the quarter from 3.76% to 3.66%. That resulted in the quarter of a ten -- say a ten basis point drop. However, I point out we are beginning to see some upward movement in our loan portfolio rates. And we expect slightly less margin compression in the fourth quarter.

The -- the tax rate for the year, as you see, we did a true-up bringing us to a 32% rate. That was a result of shifting some of our operations to states where we face a more favorable state tax treatment. As a result, our effective tax rate for the year is expected to be 32%.

We did the true-up for the quarter which amounted to about $0.01 a -- during the quarter, which amounted to about $0.01 a share for prior quarters and about a half a cent a share for this particular quarter. The credit quality at the bank remains excellent. Our non-performing assets came in at 25,820,000. It's down slightly from the 26,120,000 we recorded on June 30th.

Our non-performing assets to loans and OREO came in at 0.32% versus 0.33%. The loans past due 90 days and still accruing came in at 6,816,000 versus 4,984,000 in the prior quarter. Virtually flat, as you can see. A lot of the -- the problem -- the -- that showed an increase this quarter, we attribute to some lines of credit at one of the banks that we acquired, which matured, which we have subsequently placed on a different system so that it does not run into the technical difficulties that we had in the past and hopefully we'll see that become more in line with our existing levels, although when you look at the total percentage of loans delinquent we're only at 0.73% and that's for the entire bank.

Charge-offs came in at $1,004,000 compared to $936,000 on the linked quarter. We provided $1,125,000 so we actually provided $121,000 in excess of the actual losses. As I mentioned before, we had strong loan growth during the quarter. On a net basis our commercial loans increased by $47,592,000 in the quarter and ended at $1,416,000,000.

Our construction loans increased by two and a half -- $2,677,000 to come in at $459,935,000. Our residential mortgages came in at $2,061,000 an increase of $16 million. Our commercial mortgage loans came in at $2,230,000, an increase of $41,391,000. Our home equity loans grew by $12,392,000 to $5 million seven -- $571,000,000.

Our automobile portfolio, which had the most dramatic growth in the quarter, and was fueled, as we announced in our -- in our press release, largely by the manufacturers' incentive -- buying incentives, came in at $1,233,000,000, an increase of $128,376,000 or 11.62%. But even more dramatically, the rates at which they have been coming in have been increasing almost on a weekly basis throughout the quarter, so that has also helped our margin compression situation. Overall, year-over-year, our loans are up one billion -- are at 1 billion -- increased by $1,259,639,000. If we take out the NorCrown and Shrewsbury loans which were added in there, we had organic growth of about 8.5%. And so we were quite pleased with that.

We've seen some increases in our line utilization. The line utilization -- the lines of credit are up by -- the line utilization year over -- to date is up by about 5.5%. New line growth has come in strong. And our new line growth is also up by about 5.5%.

Excluding payoffs we've booked approximately $567,000,000 excluding [liar] lines of credit in new loans during the quarter versus $425,000,000 in the prior quarter. So you can see our people have been quite busy. Our deposits came in at the end of the quarter at $8,690,000,000 with an average cost of deposits at 1.59%, and that compares to an average cost of deposits on a linked quarter basis of 1.36%. So you can see where the margin compression is coming in on the deposit side.

The security gains in the bank were really minimal during the quarter. We took gross security gains of $361,000, or $226,000 net of taxes. During the quarter we opened up another office in Manhattan, which opened on August 2nd -- August of this past quarter, it is at 71st and 2nd Avenue, and we're quite pleased with the results. We've got over $12 million in deposits there in that short period of time. We've had good growth in new accounts, both in NorCrown and Shrewsbury, and pretty much that sums up the quarter. Anybody has questions we'll be pleased to respond. [Operator instructions]

One moment for the first question. We have a question from Adam Barkstrom from Legg Mason. please go ahead.

Hey, Gerry, good morning.

Good morning, Adam.

How are you?

Real Good.

Good deal. Let's see -- couple of things -- I guess you touched on the loan growth -- good commercial loan growth in autos in particular.You say that that had to do with the manufacturers' buying incentives. Was that -- explain that a little more to me.

Well, the automobile manufacturers allowed their employee discounts to be offered to non-employees through their dealerships. This created a flurry of activity for new cars during the quarter. And our volume just went through the roof.

And what about dealer financing though? Have you seen that slow down? Did that also help the growth?

Yeah. I think it has -- we've seen some slowdown in dealer financing, which has helped us. I think some of the insanity, as we phrase it, in the -- in a desire to put on paper and offer it at interest rates that were just unrealistic seems to be disappearing in the marketplace. I think the market recognizing the increasing costs of the funds have the -- have begun sharpening their pencils more, and not only the manufacturers but some of the other banks that -- that do indirect paper buying have also been raising their rates, as we have, to where a point where we're now getting a much better rate of return on this product than we were seeing in the past two years.

Right. Jump over to the tax rate. You talked about that for third quarter, and we certainly saw the tax rate go down a little bit. What should would we -- what should we use as a normalized tax rate for fourth quarter and next year?

Yes, 32%.

All right. So this is a permanent structural change in your whole tax strategy.

Correct.

Okay. Great. And then I was just looking through the other expense categories, and you're able to -- tight cost controls this quarter again. It looked like employee benefit expenses were down pretty dramatically. What -- what sort of drove that?

Well, all of our salary expenses are really down in the sense that we have made two acquisitions. And there were people that came on board as a result of those acquisitions that really [beat] were somewhat redundant. You know, our -- we discussed this in the past. Valley's policy when it acquires somebody else is not to fire people. We will overstaff in the short run and allow attrition to take up the -- the excess. And that is pretty much what you are seeing, is that when we made the two acquisitions we ended up with more people in some areas than we really needed, and our normal rate of attrition has brought that back in line.

All right. And just a -- I guess bigger -- bigger picture, any more efficiencies that we're going to see in fourth quarter from --

Oh, yes, yes. We've -- keep in mind we haven't closed any of the offices in NorCrown that were redundant to us. There are -- there are at least two or three of them that we will be closing, not immediately. We want to make sure that when we acquire another institution, that their client base becomes comfortable and familiar with Valley. And if they have to go across the street to continue banking with us, that they are going to want to walk across the street because of the level of service and the manner of service that we deliver. If we close the office on day one, we never have an opportunity to show the customer what it is like to -- what it -- what the experience of banking at Valley is truly like. So we -- we've absorbed the additional expense, so as not to lose the client base.

Okay. And then deposit service charge line, is that -- is that a combination of seasonality and earnings credit, or just seasonality, or what is going on there?

I think some of it is certainly -- Adam, it’s Alan -- on the volume side. And plus the fact that we picked up a couple of banks and we will pick up income just based on that.

I was looking at the linked quarter on the service charge line. That is kind of down quarter-over-quarter. And just looking back last year it was down as well. Just wondering if there is a seasonal factor there?

Yes. I'm just taking a look at this to see if I can make some sense out of it for you. I know our -- on a linked quarter basis, the ATM fees were up, and probably the only other thing on service charges is that -- actually, I don't see any real change at all on a linked quarter basis. They are pretty much flat.

Year-over-year we're up --

Yes, we're up about 700,000.

Okay. And then last question. Do you guys -- just looking at your loan loss reserve, and I know you guys provided more than you charged off. But was curious, can you tell us the allocated versus unallocated portion of your reserve?

I don't know if I remember it off the top of my head. 25? No. I -- I -- Adam, I'll be honest with you, I don't remember the exact number. We show it in the end of the year in our 10K. I don't know if I remember the exact unallocated number. [indiscernible]

About 6 million.

6 million unallocated.

All right.

We have -- we've been showing though for the last, I don't know, 15 years or so, actual loan losses and providing approximately our four actual loan losses we haven't provided excess, nor have we under provided. So -- we plan to continue doing that. That is what the SEC has called on us, you know, called on banks to do. We don't have a problem. We have a pretty good formula that we reserve against our loans based upon the category of loan that we're putting on. That's really held pretty well under the test of time.

All right. Great. Thanks, guys.

All right.

Okay.

Our next question is from Tony Davis from Ryan Beck. Please go ahead.

Good morning, Tony.

Good morning. Good morning.

Good morning.

Congratulations on what really appears to be excellent integration at Shrewsbury and NorCrown. I wonder, when you -- when will you complete the NorCrown integration?

It -- it -- it usually takes -- it usually takes about a year, 18 months before you fully integrate another institution. While on the surface it may look like you've integrated them in -- in 90 days, there is a lot of efficiencies that have to be put into the system that take a longer period of time. I -- we have, as we've told you in the past, we have both banks completely converted to Valley's data processing systems, and all of their data processing operation is gone. All of the expense associated with that, which is probably the largest single challenge facing the bank, is to get them on to our systems. And I -- and I'm going to give a little bit of a plug to folks who work at our DP area. They did each of the banks in approximately six weeks from the date of acquisition. So I think they really did a yeoman's job in that regard. There are other things. Like I say, when we are we going to close some of the other offices? It could take 18 months. It could take six months. It depends upon the proximity to other Valley offices and how effectively we think we're going to be able to integrate. You know, we paid a lot of money for each of the banks and we do not want to feel that we spent the money only to have the clients walk out the door.

Right. Gerry, two follow-ons right into them, how do those two banks affect your de novo plans over the next year or so? And are you at a point now in terms of integration where you can look beyond those two and think about more M&A.

We are always looking for potential M&A situations. We have nothing restricting us from doing it at this point. We -- we have a number of branches that are under various stages of construction. We have a total of 13 in New Jersey and five in Manhattan that are either almost finished, somewhere near finished, or we're at the planning board with. But they all fill into our -- into our franchise very nicely. You'll probably see the bulk of those opening up in 2006.

Okay. You mentioned some cost-cutting initiatives. Can you give us a little more detail on that? Timing? Scope? Target benefits?

At Valley, cost-cutting is an ongoing process. It never stops. We're always looking for ways to do things more efficiently. We're looking at expenses that we don't have to have. We look at things from cleaning our offices every night to cleaning them four nights or three nights a week, to, you know, -- to interest rates that we're paying on various products. So we're -- we're looking not -- all of the -- the cost-cutting does not come necessarily in salaries. Though some of it has been coming in that area. We look all over the place. We -- we have a -- literally a weekly meeting among the senior management to brainstorm as to other areas that we feel that we can better economize around the bank. You know, this is -- as I said in my opening statement we're a spread business. I cannot necessarily control some of the spreads, but I can control some of the other expenses.

That is pretty good footwork, Gerry. Let me shift over to the Jacksonville office, finally. How's that going? Are you retaining any variable rate mortgages down there? Are you offering indirect credit down there? What are you doing down there?

We have. We have been seeing some results from the mortgage generation. I believe at this point it's probably on about a break-even basis, based on the volume of new mortgages that are coming in. We have signed up several new dealers down there. And we are starting to get some indirect paper. What -- what has really surprised me, more than anything, was some of the -- was the quality level of what we're seeing coming in the door. Initially we spoke of what we -- what was coming in from that -- from that office, and we would be selling 100% of it, but when we look at the quality, it's -- it's reversing itself. And we're saying, wait a minute, we don't want to get rid of a loan of this nature. We're getting reasonably good loan to value ratios.

You know, when it comes to mortgages, one of the things we -- we really -- I mentioned in the -- the press release, but didn't mention this morning. You know, we're facing a lot of competition from people who are doing things that we just won't do. I personally and -- and I -- I think all of our senior officers in the bank have a very negative feeling towards these negative [am] mortgages. We think that that is a product that is going to produce a lot of problems down the road for those institutions that are putting them on the books. We may be wrong but we -- you know, we just are not going to be doing it, and we haven't done. In fact, we surveyed our bank, we not only have we not put one on the books ourselves, but all of the mortgage-backed portfolios that we hold have none of them. We don't do 100% loan to values, simply to put product on the books. And that impacts negatively on our volume in that area. But we -- we feel we'd rather take it on the chin now, rather than taking it on the chin in the form of loan losses down the road.

Right. Final, final one, that is the BSA investigation, the OCC's review and all of that. Is there anything new there at all?

No, no.

Okay.

And it's -- they have an ongoing process with us. And we said in our past 10Q's and 10K's, you are probably going to see the same comment and I think you are going to hear it from everybody.

Yeah. Okay. Thanks.

And your next question is from Peyton Green from FTN Midwest Securities. Please go ahead.

Good morning.

Good morning.

A couple of questions. One, Gerry, I mean as you look at the margin compression that you all dealt with over the last couple of years, or really the last four or five quarters particularly, is there a point in time when -- when you would consider changing the earning asset mix that you all historically maintained? And then secondly, is there a point in time when you just maybe don't opt to compete on the deposit side as much, or the loan side as much?

I think your second point would be more true if this thing continued indefinitely than the first. We believe very strongly in our model. That model has been the hallmark of Valley's performance for the last 78 years. And we're not going to change it because of what we still believe is an anomaly in the -- in the interest rate curve. You know, it may take three months, it may take a year before it re-normalizes itself.

Okay. And -- and then in terms of the -- the taxable invest yield was down about 11 basis points linked quarter after bouncing back up a little bit in the second quarter. Alan, is there anything in particular there --

Some amortize -- some amortization on the bond portfolio probably caused some of that.

Okay. So that -- that should adjust back out. It should be more favorable in the fourth quarter just because of the lag.

That's correct. That's correct.

Okay. All right, great. And then in terms of the competitive conditions when you characterize what's going on in -- in your market. I mean, do you feel like you are in the 3rd inning, the 6th inning? Where -- I mean -- where do you feel like you are in terms of the situation stabilizing and getting back to, you know, quote normal.

Well, I think I -- as Bob Meyer -- I know he is sitting in the room commented, it is normal for this area. It -- competition has been fierce in this area for the last year or so. But competition has always actually been pretty tight in this area. You know, people talk about banks that we're competing with. Well, remember where Valley is located. We're in the shadow of Manhattan, so we always competed with the big New York banks. We always competed with the little banks. And it's just the nature of the business. You know, we feel that what we have to offer is friendly, personal service, approachable service, you know, that is what we push.

Okay. All right. And I guess the -- the last question and I'll free it up for others. But the loan yield jumped up nicely in the quarter. Was that influenced by paydowns or to what extent was it?

I think it's -- it's -- it's a function of the fact that rates just -- begun to move up. You know, the -- remember, the fed increased rates three times. We do have a large portfolio of loans that float with prime. So they all moved up. As I mentioned, when we talked about the automobile loans, they are up -- at the present time versus where they were 90 days ago are probably up somewhere about 80 to 90 basis points. You know, that's significant.

Okay. Great. No. So you would be optimistic about the loan yield going forward.

Yes.

Okay. Thanks. Thank you very much.

Our next question is from Gerard Cassidy from RBC capital markets. Please go ahead.

Hi Gerry, hi Alan.

Hi, Gerard.

Good morning.

Getting back to your comments, Gerry, on your new branch in Manhattan, how you recently opened it up, and I think that you said there is about $12 million of deposits.

A little over.

A little over. Two questions. One, for that particular branch, where do you think you need to reach in terms of deposit levels to get to break-even. And then number two, the success that you've had so far, can you share with us some of the marketing strategies you used and what kind of deposits came in to build that branch up to $12 million already.

It is higher cost deposits that attract the customers initially. We probably -- a lot of it depends on mix. But at the current mix of deposits, we're probably somewhere in the mid-$20 million range before we would break even on the -- on the operation. But if the deposits start to shift and we bring in more -- you know, free money, checking accounts, then that -- that mix drops down dramatically. You know, it could -- it could -- you could pass the break even point at $15 million. We think that Manhattan is a wonderful market place, as I mentioned briefly a few moments ago, we have additional offices planned to open. We have four that are scheduled to open, certainly within the next 12 months. We've got -- all of them are, at the present time, under construction. So --

In terms --

And that's another point. And our New York operations, we own all of the branches. We own all of the sites. I made a comment which was picked up by several people. [indiscernible] -- I made the comment, that we -- we have done a revaluation on our – internally, on the real estate we own. We own, of our operating offices, I believe 73 of them. We feel we have a value over book value of close to $200 million above what we're carrying. And we're carrying all of the -- the buildings on our books as we -- you can see in our statements. At about $75, $80 million, something in that neighborhood. And we have about -- we feel they would be worth about $200 million more than that if we had to replace them today. And so that's a -- a hidden value in the capital structure of our bank.

It certainly -- oh, certainly it is. To reach the $20 million, do you -- could you give us a time line, when you think for that one particular branch, that is, when you might reach that $20 million goal?

Tough to say. I would hope that it would happen certainly within 12 months of the day from the time we opened the bank. But at the rate it's going, it could be a lot sooner.

I see. Now, are you still running with your initial opening marketing programs that brought in the higher cost funds that you pointed out?

Yes.

Okay. And will that continue for the next six to eight months, or is it -- is it more of a short term thing?

It's hard to say. You know, it -- we -- I do not like to put a calendar or a time clock on it. You are probably right in the six-month period. But it all depends. You know, if it is very successful, you don't want to cut off something that is bringing in a lot of new money.

Oh, no. I agree. No, I agree with you. Assuming for a moment that the Federal Reserve does raise short term interest rates through the fed funds rate in its next meeting, or at its next meeting which is, of course, the first week of November, and then also at the following meeting which is mid-December, and we're sitting the a 4.25% fed funds rate by year-end, what -- the -- the margin pressure I assume you would still feel that going into the first half of 2006?

Oh, sure.

Yes. Any sense of -- of what kind of numbers that we should kind of look to under that scenario on the margin pressure?

We feel -- we feel that we are going to be able to control it, as I said earlier, so that it would be less than the 10 basis points that we showed this quarter.

Okay. Great. Thank you.

[Operator instructions] We have a follow-up from Adam Barkstrom from Legg Mason. Please go ahead.

Hey, Gerry. Could you comment on loan pipeline trends so far this quarter?

On the what?

Loan pipeline.

Loan pipeline.

Yes. They're pretty strong. Our -- our pipeline at this point looks -- it -- it gives me cause for optimism.

Any way that you can quantify that for us?

No.

All right. Fair enough. Thanks, guys.

We have a question from Russ Haberman from Haberman Funds. Please go ahead.

Yes, sir.

Could you talk about the loans, the -- sorry, the deposit runoff in the new bank -- you -- you -- you just bought, and is a run-in at which expected, something more, something less or what?

About expected.

About expected.

You always see some when you first buy a bank, and it -- it takes a little time for the full integration to occur. And people have to get comfortable, and -- and some higher rates may have been paid before. So it just takes a little bit of time. We've -- I think we've always in all the acquisitions we've had, seen runoff initially.

But what's really encouraging here is that we've seen new accounts opening at a very -- a very strong pace. So total number of accounts in the bank, are actually -- I believe they are up. It is the balances that are down in some cases. But then, you know, banks always have large accounts that are tied to relationships that go away, and you can’t help that. We're optimistic though that the -- the -- the trend in absolute dollars in NorCrown will reverse itself in the not-too-distant future.

And just one -- one other question, could you -- I got on a little late, I apologize, could you categorize -- you said competition on the loan side is -- is -- is always stiff, and has been. Is it any more so in the last three or four months with all of these new banks and thrifts converting, and all wanting to get into the commercial loan arena, versus a year or two ago?

In some areas, yes. In some areas, no. There's obviously pricing that, when they come into the market, they try to do. But from a service level, it's very hard for them to compete. When -- when someone has done business with us for many years, and they are comfortable with the relationships they've built with their lending officers or their branch manager and so forth, people don't run out simply because somebody opened another office.

So I'm -- I'm just throwing that in -- an example of -- if Provident, for argument, wants to buy business and gives them a 50 basis point cheaper price on -- on a fixed rate loan, for argument's sake, they’re -- are they going to be able to buy that -- that business, with the -- with that cheaper loan rate?

I'm sure there's some people that will be attracted by it. I do not think that most people on a one-time, one-shot offer would risk a long-term relationship. You know, when someone has done business with a bank, and the same people for 10, 20, 30 years, and they're comfortable knowing that when every time in the last 30 years when the economy got tight their bank stood behind them, when they didn't always show the best earnings growth, their bank still stood behind them, then I don't know that they are going to run for 50 basis points. Now, on an one-time, one-shot, somebody's got a building. They figure well, okay, I can finance the building some place. Yes, that might happen. But on a wholesale basis it is very hard to come in and buy the business. What you end up buying is the marginal business. You know, sometimes we find that it is a good opportunity for to us -- to unload some credits that we are not really thrilled with the direction the company was taking. They come in, they tell us that somebody is offering them a great rate and we tell them, gee, I think you ought to take it.

Okay. Thank you.

You're welcome.

There are no further questions in queue at this time. Please continue.

Thank you all. Appreciate your coming today and listening in. If there's anything else we can do, you can always know where to reach us. Have a good day.

Ladies and gentlemen, this conference will be available for replay at October 20th, at 1;45 PM eastern time, and will remain available through October 27th. The dial-in number is 1.800.475.6701, access code 797039. Again that number is 1.800.475.6701, access code 797039. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconferencing. You may now disconnect.