Valley National Bancorp (VLY) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter 2005 earnings release conference call.

At this time, all participants are in a listen-only mode mode and later we're conduct a question-and-answer session, instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, and good morning everybody.

Before we begin, I'm going to ask Dianne Grenz to please read our forward-looking 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 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, Diane.

Again, good morning, everybody.

Well, the diluted earnings per share for the quarter came in at $0.40 versus $0.38 last year, and $0.38 for the quarter ending 9/30.

For the year, our earnings were $1.49 versus $1.48, but I point out that that includes the two acquisitions this year, which didn't really assist earnings until the latter part of the year.

The earnings increase year-over-year, despite the fact that we've had these two acquisitions, were up 0.68%, however, if we adjust for the security gains for the two years, the earnings increase would be 3.47%.

The net and outcome of that in a moment.

The net income at the bank, was $44,240,000 for the quarter, versus $39,851,000 in the quarter last year, or an increase of 11.03%.

For the year, we showed $163,449,000, versus $154,398,000, or an increase of 5.86%.

Our return on average assets for the quarter was 1.43%.

For the year, it was 1.39%.

Our return on average equity was 19.16%, versus -- and for the year was 19.17%.

Return on average tangible equity, however, came in at 25.1% versus 23.61% for the year.

The efficiency ratio came in at 51% for the quarter, and 50% for the year.

Our net interest income on a fully taxable equivalent basis was $102,803,000 for the quarter with a net interest margin of 3.55%.

For the year, it was $405,234,000, versus $378,708,000, with a net interest margin for the year of 3.69 %.

I'd like to address for a moment, our falling margin which is primarily the result of the flat yield curve.

We are not happy about the trend that has been taking place and we have begun this month taking several steps to improve that margin for 2006.

We've adjusted rates on many floating rate deposits, which were tied to treasury rates when the treasury rate yield was much lower.

Today, those spreads are proving themselves unrealistic and we've begun adjusting that.

We've reset rates on certain of our fixed-rate deposits, to better reflect rates available on alternative sources of funding.

We've increased rates on our auto loan portfolio, which recall represents close to 22%, 23% of our total loans, to better reflect current conditions.

The marginal yield, for example, in that portfolio has moved up 57 basis points on average in the quarter.

We've sold off, as I said a few moments ago, a block of our lower-yielding securities as in we've used those funds to reduce some of the higher funding sources at the bank.

We began utilizing swaps to offset risks and margin compression on longer term fixed-rate loans.

Also, I'd like to point out that as I mentioned before, our regulatory compliance costs which increased in a period of two years from approximately a nil number to almost $5 million with a staff that's grown to approximately 40 people, not to mention software and consulting costs that we incurred during 2005.

We believe these expenses have stabilized and we don't anticipate further increases during 2006.

The credit quality of the bank is one area where we do puff our chest out a bit because we're really quite proud of that.

Our non-accrual loans at year end came in at $25.8 million, which compares to $30.3 million a year ago.

As you recall, a year ago we were practically dancing on the head of a pin and they've actually gone down.

Our total nonperforming assets in the bank came in at $27.8 million versus $30.7 million.

Our nonperforming assets to loans and [oreo] are 0.34% and that's down from last year when it was 0.44%.

The delinquencies in the bank -- and we use a measure total 30 days past due and over came in at 0.89% and that, versus last year, 0.90%.

Our chargeoffs for the year came in at $2,829,000 with net chargeoffs for the quarter at $1,530,000, both extremely low numbers. .

Our loan volume remains strong.

Our commercial loans came in at year end at $1,451 million, reflecting a year-over year increase of $188,705,000, or 14.95%.

The construction loan portfolio is at $472 million, an increase of $103.4 million or 28.1% over last year.

Our residential mortgage portfolio actually came in nicely at $2,000,000,085, an increase of $232 million, or 12.52%.

I hasten to point out that Valley doesn't make any negative amortizing loans, and if you look at the percentage of the loans going on, the books today of banks that are making that in the country, I understand it's somewhere approximately 15% of all loans are negative am, so our refusal to make that product has hurt us to some degree, on our growth.

The commercial loan portfolio, the commercial mortgage portfolio, came in at $2,235,000,000, $489 million above last year, or 28.07%.

Our home equity loans at $566 million are up $49 million, or 9.4%.

Our automobile portfolio is $1,221,000,000, up $142 million from last year, or an increase of 13.2%.

Overall, the total portfolio as of December 31st was $8,134,000,000, or an increase of $1,200,000,000, or 17.3%.

Now I want to point out in all fairness, we bought the two banks who had $688 million in loans, but if you deduct that from our year end closing numbers we still showed an increase of over half a billion dollars, $511.2 million, or 7.3%.

And I also want to point out, I think that to some degree, our commercial mortgage loan volume could have been greater, however, we have had -- been putting up some resistance to the competition in the area, where I think they're making a lot of longterm, 10-year plus fixed rate loans at very, very low rates.

And when the yield curve renormalizes itself, they will prove themselves to be a big drag on their earnings going forward.

We have resisted that to the extent we possibly can.

Our deposits showed -- came in at year end at $2 billion -- our non-interest bearing deposits -- came in at $2,048,000,000, an increase over last year of $279,866,000, or 15.83%, or a growth in our non-interest bearing deposits of 4.8%, if we look at Valley alone.

If you compare the growth of our marketplace to our growth in deposits you'll see that we have exceeded the deposit growth within our marketplace.

Saving deposits came in at $4,026 million, an increase of $434 million, or 12.09%.

Overall total deposits came in at $8,570,000,000, versus $1,051,000,000, or 13.98%, or approximately 4% without the acquisitions.

Again, some of our lack of growth in the quarter, our deposits were relatively flat for the quarter.

In fact, they were down just slightly on a link quarter basis.

It is a reflection of the fact that we have shown some resistance to paying unrealistic rates for hot money.

We are looking towards our bottom line going forward and we feel that we have ability to borrow money at longer terms at much lower rates.

We are -- for example, we have recently put on borrowings in the three to five-year range at rates that are substantially lower then we could have raised similar deposits.

In fact, they are even cheaper then some of the short-term rates that are being paid by our competition.

That just doesn't seem to make much sense to us.

We mentioned before, we took some security losses in the quarter and as a result, we had $3,140,000 in losses versus last year where we showed a gain in the quarter of $1,265,000, for the entire year when you put all of the numbers together, we showed a loss of $461,000 on securities versus a gain for 2004 of $6,475,000.

As far as our new branches are concerned, we opened five offices during 2005.

We opened one in Manhattan on 71st and 2nd Avenue.

And we were very pleased.

It's one of the fastest-growing branches we've ever opened.

We have approximately $20 million in deposits in that location in 120 days.

We have scheduled for openings right now, this year, of 12 branches with 19 under various stages of development in New Jersey, and another four under development in New York.

But we do expect during this year to have 12 more offices opening up.

We have been focusing on our expenses, recognizing the compression on the above line.

And I think that anybody that does an analysis will see we've done a pretty good job in controlling all of our expenses.

We take expenses very seriously at Valley.

In fact, none of the executive officers took salary increases for this year in light of the situation.

We want to make sure the bank's bottom line is what grows.

With that, I'll turn it over for any questions that anybody might have.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Adam Barkstrom from Stifel Nicolaus.

Please, go ahead.

Hey, gents, good morning.

Good morning, Adam.

How is everybody?

Okay.

All right.

Good deal.

Gerry, you mentioned the loan growth and loan structuring.

First of all, I was curious, could you give us some more color on your loan pipeline looking into '06?

We're hearing this across several markets but, would value your perspective on what are you seeing out there as far as loan structuring?

You mentioned some of this 10-year fixed product, but are you -- I guess that's more of a pricing issue, but from a credit structuring perspective are you starting to see some of the credit requirements start to wane a little bit?

And if so, I'm curious if you could share with us maybe who some of the more egregious vendors might be?

Well, Adam, I'd love to share that with you but I don't think that's really appropriate for me to start talking about who our competition is that are making loans that we feel are unrealistic.

We do see a lot of it going on.

I see credits that we would cringe at making at prime plus one, that people come along and are doing it under a longterm basis at 1.5% under prime.

It doesn't make any sense to me.

I don't understand it.

It looks like people are trying to satisfy analysts by showing a lot of loan growth at a time they should be showing some restraint.

I think -- I can't speak to the housing market across the country.

I know the market in northern New Jersey does continue to remain very strong but remember, we have a scarcity of land so we're not seeing large projects being undertaken.

We're really seeing builders that are putting up small groups of houses, five houses, two houses, ten houses, so we don't really see an explosion, or an implosion in the housing market in northern New Jersey.

Around the country the housing market in northern New Jersey.

Around the country I think it's a much different story and what I haven't seen among ours -- and we've questioned it among our customers -- is people doing speculative sales where they were putting up a townhouse project of 40 units and find that 30 are being sold to investors.

We really haven't seen any of that taking place among our customers.

I have seen a stretching, and I can't blame the customer because the inverted yield curve makes longterm rates extremely attractive, and we have customers who is are pushing to go out 15, 20 years on fixed rates and we're just refusing to do it.

We can't -- I can't get a swap that would make any sense that would go out more than 10 years and even that's pretty hard, but that's what we're looking to do.

I admit we may be taking it on the chin a little bit the last quarter and this quarter because we're not showing the growth rate that the analysts would like us to see.

But I do want to preserve the loan quality that our shareholders expect from us.

So, I don't know.

It's a tough decision, but it's one that we've decided here at the bank we'd rather hunker down a little bit and ride out this period, much the way we behaved if you look back at our records, in 1987, '88, '89, we didn't make the loans and then in 1990, '91, '92, when the other banks were giving it all back, we didn't have to.

Right.

Your point is well taken about your competition.

Could you share, maybe -- what types of loans or loan categories are you seeing sort of more?

Is it commercial real estate, CNI, across the board?

It's heavily in the commercial real estate, but I see people doing things, you know that we just cringe at and I have to be careful because I wouldn't want to identify a particular customer, but we've had situations where our competition goes out and they're strictly trying to show loan growth.

At any cost.

Now, I guess if rates go back down to 1% they'll look okay.

But if that doesn't happen they're in big trouble.

You know?

They're taking loans that we wouldn't do on a -- other then on a floating-rate basis and they're fixing them, and they're fixing them for 10 years.

You know?

That doesn't make sense to me.

Right.

A couple of other things, nice rebound -- slight rebound in the mortgage category.

Can you give us some color behind that?

Our people are working hard at it.

You know?

It's tough when you're not making negative amortization loans, maybe we're a little moralistic, maybe we're trying to prevent a situation of ill will developing among our borrowers towards the bank when they realize that six months after they made the loan their payment is going to go up three times, four times from where it was.

We just don't do that.

You have to look -- if you look at our average FICO scores, I mean, it tells you who we're lending to.

I mean it's just -- in our home equity loans, we have an average FICO of 755.

I mean, it's just -- our first mortgages have an average FICO of 745.

You know?

Our average loan to value in the home equity, when you count in the first mortgage, is 45.5%.

Our average loan to value in our mortgage portfolio is 59.8%.

I mean, that's the reflection of who we're doing business with and we try to keep the loan portfolio in this bank pristine.

That's my number one challenge is to keep that loan portfolio in the condition that our shareholders and everybody expects that we're going to maintain.

We start running out to build up volume, it's easy to build the volume.

We could show huge growths in loans if we didn't want to show restraint.

But eventually it's going to come back and kick you.

So, I don't know what else to say, Adam.

Okay.

Okay, two other things, I wondered if you could comment -- three other things actually, service charge, income was down linked quarter, that's kind of a trend we're seeing across the board?

We've actually put in some products that should help that on a go-forward basis.

We should see some improvement in the first quarter of this year.

You'll see even more improvement further down throughout the year.

What was the explanation for that being down linked quarter?

Was that a commercial earnings credit issue?

Or--

No.

Lower NSF charges?

What drove that?

Just a drop in OD charges.

Customers are becoming more attuned to the fact they they don't want to have to pay it, so they're maintaining higher balances in their account, the marginal customers, it doesn't show that much in our deposit growth, but it does make a difference in our service charges.

And then, looking at the other expense line, that was down nicely, any big items there?

We try to control all our expenses.

We have employee benefits, employee salaries, we watch it and try to run the Company with as few people as possible.

That's why the regulatory costs impacted so heavily on us because we had no choice.

The government expects and demands that we do certain things.

The people that we put into those positions are all -- they're not junior positions they are highly compensated positions and as a result, that had an impact, but we've offset it in other areas, you know?

A large portion of the staff of this bank are shareholders of the bank, and we all look the at it at a shareholder what's good for the bank is good for us in the longrun, so--

What in the other expense, not salaries, in the other expense, that's down, I don't know, 4% linked quarter, any--

We had some -- occupancy was down a little bit, Adam, and that was just really across-the dashboard -- I looked at it to see where it was and it's across the board, there's nothing in particular that I can point to.

We put some measures in two quarters ago to watch some things a little bit more closely and I think that's reflective of some of those items in the occupancy costs.

That's not to say the numbers will stay down.

Some of it is -- it's not even year-end issues but as we to next year we get higher depreciation for things we did back in '05 so you're going to see some of those go back up in '05.

The same thing with, even employee benefit expense, as you get to the end of the year you see social security and certain taxes go down, you see some of the benefit expense go down.

Some of that is certainly going to go back up as we move back into '06.

It's not something that's going to stay but we still are watching it very closely.

The other thing that we have done over the last nine months, or so, is that we have really come down very hard on the vendors that we use at the bank.

Everybody who is using outside, third-party vendors to do anything knows they're under pressure so they put the vendor under pressure.

Our customers put us under pressure for rates, we put the vendors under pressure to make sure they're delivering us the product as cheaply as we could get it anywhere else.

Last question, tax rate, can you us some color there, and then what you think should be a normalized tax rate going forward?

Adam, first of all, the normalized I think we said we expect it to be very similar to exactly where we ended up in '05.

We expect it to be right around the 29% range.

We've done a number of different things that began earlier in '05.

A lot of it came to fruition in the fourth quarter of '05 when we put some strategies into place that, you know, are all just a matter of making sure that we're getting the best benefit we can from everything that we do in every area that we operate in.

In addition, we've been putting on over the last two years or so, some housing credits that are affecting two things, first of all, year-over-year it's affecting our non-interest expenses by probably over a million dollars.

It's gone up.

But on the other hand, it's affecting our tax line by bringing our tax line down and actually, it's benefiting us on the bottom line because the tax benefits outweigh, obviously, the costs, otherwise we wouldn't be doing it.

So that's been helping us, and again, a lot of state tax-type planning events that have really taken hold and we expect that to continue right through '06.

Great, thank you.

Thank you, Adam.

Your next question comes from the line of Peyton Green from FTN Midwest Securities .

Thank you very much.

I think you partially addressed this in the previous answers, Gerry, but do you feel like we're headed into a recession in terms of the national economy and that might have some kind of benefit for you all to grow?

I think it's opposite.

I don't think we're going to head into a recession.

I think we'll head into stronger times and as a result, interest rates will go up.

I don't necessarily see --I don't have a pessimistic attitude about the economy.

I think the economy is very resilient.

I think the weakest area in some places in the country are certainly in their real estate markets.

Real estate prices that go up 30%, 40% in a year in some areas in Florida are destined to have trouble.

It doesn't keep going up forever like that.

But we haven't seen that in New Jersey.

New Jersey housing prices have increased.

They haven't gone up that fast or that much, and, as I pointed out before, we're pretty selective of who we're lending to and we take the rise in prices into consideration when we're making loans, if we think the house increased in price dramatically in a relatively short period of time we're more reluctant to lending 80%, for example, against that house than we would if the house showed a more stable price pattern.

Overall, I think the economy in the metropolitan area, barring some unexpected results or events, I think will remain strong.

You know, I don't think we'll see double digit growth but I do think we'll see growth.

Okay.

And then in terms of what your CNI customers are saying, are they leading you to believe that CNI volumes should be much better in '06 versus '05?

I think it's pretty stable.

We've had decent commercial loan growth over the last two years.

And I think that's going to continue.

Our position in New York, which really began with merchants, is really just taking hold.

You know?

It takes several years before the client base really gets to know you, is comfortable with you, and starts to recommend you to other people, you know?

A large portion of our growth comes from our existing customers referring us to other customers and we've taken some measures.

We've recently formed a professionals' group, to advise us, made up of accountants and attorneys, and I think that that's going to be able to generate additional business.

You know?

As the bank -- the number of banks in New Jersey has continued to shrink and particularly, the larger banks that service these accounts continues to shrink, a lot of these -- the professionals, the attorneys, the accountants who refer business to banks like to feel that they're dealing at the very top of the organization, if they're not dealing with me, the CEO of the Company they're dealing, certainly, with one of my leading executives.

They're not being passed down to an assistant cashier some place and we've been getting a lot of referrals from them.

We've also taken advantage, and I really should point this out, of the aggressive, competitive nature of some of our competition to nudge out some customers that we really haven't been comfortable with.

Customers that we feel the economy does contract.

If their business shows a contraction we would have a problem with.

Because people are so aggressive today, they're having a feeding frenzy they'll take anything.

We have actually been able to shed some of those accounts which shows a slowing of loan growth.

Okay.

And I guess the pricing initiative on the indirect side does that limit your growth to half what it was this year, or is it more of the portfolio catching up with the change in yields?

I think it's more of the portfolio catching up with the change in yields.

Okay.

Great, thank you.

All right.

And next we'll move to the line of Gerard Cassidy from RBC Capital Markets.

Please go ahead.

Good morning guys.

This is actually [Jake Sevio], Gerard's associate.

How are you?

In describing the potential for economic growth, you mentioned that you think rates could potentially go up in 2006.

Longer term rates.

Right.

But assuming that the Fed stops raising rates, or even begins to cut rates in, say, like October time frame can you give us any idea--

You have to remember the fed is only raising short-term rates.

If the Fed stopped today, never raised short-term rates, the relationship between short-term rates and longterm rates at the present time is unrealistic.

We have people coming in to borrow for 10 years, looking for an interest rate of a half, 3/4, 1% below prime.

Think about that.

We're lending somebody overnight money at one rate and somebody is going to expect, the same person expects that we're going to lend them 10-year money at a point less.

It's ridiculous.

That' s where the market has become irrational.

And I think that's going to change.

And I think that when -- once those longterm rates readjust themselves, you're not going to see, unless the Fed does something, you won't see the short-term rates come down, you'll see the longterm rates come up.

Everybody talks about the rate structures today, how we did a little bit of a look back over the last, I think it was, we used 25, 30 years, and the -- the prime rate has averaged in that time period, 9%.

And if you take out the high and the low, if you take out the very low rates that is we saw in the last two, three years, and you take out the very high rates in the late 70s, early 80s you still average 9%.

So I think that our rates today on the prime rate side are still relatively low, and except for a few years where we had an aberration, the longterm rates have always been higher than the short term rates.

So it's a little bit of taking it on the chin now so that you don't follow the lemmings off the cliff and put on a lot of loans that everybody will be worried about a year, two, three years from now.

You know?

We do look at the bank with a longterm horizon, you have to look at a Company that way.

And we don't believe in placing our assets in jeopardy.

Okay.

Thanks for your time.

Your welcome.

[OPERATOR INSTRUCTIONS] We'll go back to the line of Peyton Green from FTN Midwest Securities, please go ahead.

Okay, thank you.

Just a follow-up.

If the loan growth outlook is a little bit slower over the next year because of you all's restraint, what does that do for you in terms of capital management?

First of all let me say this.

I think there's a misinterpretation.

Loan growth I don't expect to be slower.

I say we put restraint on.

That means that our lenders have to work twice as hard.

You know?

I have Bob Meyer sitting here, feels like I'm hitting him with a whip, but it's true.

That's what we've e done.

It's a challenge.

If you have a good staff of lending officers they're up to the challenge.

I don't think the loan growth rates are going to slow.

I just think our people will have to work harder, that's all.

Fair enough.

In terms of capital management though, would you anticipate buying back more stock?

We'd have to see how the year progresses and what our alternative uses of the funds are.

If we can use the funds to do another acquisition I think we'd prefer to do that.

If that doesn't present itself as an opportunity, then, perhaps, we would look to use some of that capital to buy back stock.

One of the things, Peyton, that we're looking at and I think we indicated this, was because we're looking at reducing the investment portfolio, even though as Gerry indicated we'll continue to grow the loan portfolio, probably you'll see very little asset growth or earning asset growth at the end of the year unless the yield curve changes, so we will be using those funds out of the investment portfolio to fund the loan growth and/or to pay down borrowings as we see fit.

Okay.

And then just an update on the NorCrown and Shrewsbury acquisitions.

How has the integration gone and what's the outlook for them?

The integration has gone very well.

We're at the point now where we're starting to look to close some of the NorCrown offices that did overlap with ours.

We have been a little lethargic in doing that because, as you know, we never like to upset the customer base, so it takes us a little longer than most banks in closing some of the offices, but we think we've gotten ourselves pretty well entrenched in their client base so it's not going to be a problem if we start closing them, and we'll see in 2006 several of their offices closing.

So you still feel comfortable that the cost saves you would have gotten from the two acquisition also show up in '06?

Oh, yes.

Great, thank you.

All right.

There are no further questions at this time.

Well, thank you all for coming.

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