Valley National Bancorp (VLY) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter 2006 earnings release. At this time all participants are in a listen-only mode. Later we would conduct a question-and-answer session, giving instructions at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Chairman, President and CEO, Gerald Lipkin. Please go ahead.

Thank you, and good morning everyone, and welcome to our conference. At this point I would like to turn the meeting over to Dianne Grenz who will read our forward-looking statement.

Today's presentation may contain forward-looking statements regarding the financial condition, results of operation and business (technical difficulty). 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, relationship opportunities, technology, the economy and market conditions. 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 regarding Valley's 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, 2005, as well as in Valley's other recent SEC filings. Valley assumes no obligation for updating its forward-looking statements.

Thank you, Diane. During the quarter Valley again produced solid results, earning $40.9 million after taxes. While we would have liked to have seen even better earnings during the quarter, the bank actually performed as we expected given the interest rate environment and the choices we made based upon our views of the economic cycle. Our challenge as we saw it was do we increase our top line revenue growth and increase our operating leverage to meet the short-term expectations of the marketplace, at the expense of long-term profitability. During the quarter we could have easily expanded our loan and investment portfolio, improving current quarter net interest income by increasing the bank's operating leverage.

However, we the increased credit and interest rate risk in our thinking does not make strategic sense. We feel as if we would be doing the shareholders a disservice to focus on current quarter earnings while sacrificing long-term shareholder wealth. Management teams which attempt to focus on exceeding quarterly market consensus estimates at the expense of future profits do not have the true understanding of their fiduciary responsibility to shareholders.

During the first quarter we focused on the structure of our balance sheet. We grew our loan and deposit portfolio within parameters prevalent in the marketplace. Bidding 1% over federal funds for short-term municipal deposits, combined with originating ten-year fixed rate commercial mortgages at rates of approximately 6% didn't make long term sense. Since October 2005 we allowed our investment portfolio to shrink by approximately $200 million rather than roll into investments that would be well below book value today. While this would have improved our results in the short run, it would have cost us dearly in the long-term.

Historically we have placed asset quality above all else. We are steadfast in our determination not to sacrifice the future by stretching our credit standards, particularly at this point in the economic cycle. We could easily show double-digit loan growth if we were willing to lower our credit standards. However, with real estate prices at unprecedented values in our market, we are remaining true to our time-tested conservative lending approach. It proved us right in prior economic cycles, and we feel that it will again show to be the best approach in the future.

Again on a positive note we anticipate that the second half of the year will show better results. Approximately 20% of our commercial mortgages reprice annually. During the past five years they consistently repriced down the following the path of the five and ten-year treasury notes. Now it appears they will be repricing up if current interest rates remain the same or increase. Also, $300 million of our loans will go from 5.96% to prime on August 1, as our two-year interest rate swap expires.

Our auto loan portfolio, which represents 25% of our loans, turns over every 24 months or so and is also repricing up on a month-by-month basis. Most importantly, our New York loan portfolio, which is very seasonal, will reflect the steady increases in the prime rate, which took place during the last year as they come onto our books beginning this month.

Also we continue to expand our footprint by opening branches in additional communities within our market. We opened one new office in the first quarter and plan to open two to three more in the second quarter. We will be establishing a presence in Brooklyn and Queens in the months ahead, and in total at the present time, we have 21 properties under contract and plan to open at least 10 new offices this year and even more in 2007.

At this point I would like to turn the presentation over to Alan Eskow, our CFO for comments on balance sheet and performance during the quarter.

Thank you, John. First let me remind everybody that all of our share and per-share data reflects the 5% stock dividend which was declared on April 5th at our annual shareholders meeting and will be issued on May 22nd to shareholders of record on May 8th. So all of the shares have been adjusted.

Our diluted EPS for the quarter, as you probably read, came in at $0.35, and that is unchanged compared to last year at $0.35. Our net income increased by approximately 7% to $40.9 million compared to $38.2 million a year ago. Our annualized return on average equity came in at 17.4% for the quarter, and that compares to an annualized return on average tangible equity of 22.61, adjusting for all the goodwill and intangibles that came about from our recent acquisitions.

Our net interest income came in at about $100.2 million or 4.16% increase over $96 million one year ago, and the net interest margin declined to 350 and it was down from 355 in the prior quarter and 380 a year ago. I would like to spend a few minutes talking about our balance sheet on a linked-quarter basis, telling you that our earning assets which were nearly $11.4 billion decreased by about $50 million during the prior quarter. Our investments decreased $85 million, and most of that came out of our available for sale portfolio. The yields on our average investments increased at the same time by 2 basis points to 5.16%. Loans increased by nearly $30 million and was characteristic of our typical first quarter, which shows lower volumes in many of our areas.

The automobile volume was seasonably light due to the winter months in the Northeast. Our commercial loans in New York were cyclically light also in the first quarter. And as Jerry has said previously in other conferences that if we didn't see that we would be concerned about why it is not paying down, but we have begun to see an increase in those lines as we've moved into the second quarter. The overall loan yield decreased by one basis point on a linked-quarter basis. However attributable to a number of factors, one of those is a decrease in the number of days between those two quarters. There were two less days and that negatively impacted the yield by about 8 basis points. In addition, there was a decrease in prepayment penalties between the two quarters, and that also combined to decrease the yield on loans by about 2 more basis points.

On the liability side our deposits decreased by $211 million from the prior quarter. A large majority of that or about $190 million as a result of actions taken by management to adjust the pricing on our government deposits. And these were very interest rate sensitive, and I believe we told you about this at the end of last quarter that we would be doing it. We also typically see a reduction in the first quarter in our demand deposits because of our commercial New York lending practices and their balances.

During the quarter we also experienced about a 12% increase on an annualized basis in time deposits as management has attempted to lock in funds with longer maturities. Last quarter those time deposits represented about 31.5% of deposits that had a one-year maturity or greater. And at this current quarter that has increased to 33.7% for an increase of about $75 million. The cost of deposits I'd like to say only went up by 3 basis points from the prior quarter, and that is the smallest linked quarter increase since the Fed began rising rates in the second quarter of 2004.

In our borrowed money area that increased by a net of $68 million from the prior quarter. Short-term borrowing actually decreased by $175 million or 30% as management continued to structure the balance sheet based upon the level of short-term interest rates and their continue to rise. Long-term borrowings increased nearly $245 million as management put on about $470 million of new long-term borrowings during the quarter at an average rate of 4.08%. So we felt like that was a good direction to go. We took some of the sensitivity out of our borrowings, and we also locked up funds for a longer period of time, rather than using right now the higher cost deposits, which are of such a short-term nature. The course of our average borrowings during the quarter increased by 5 basis points to 4.28% based upon the aforementioned actions.

On the income statement our net interest income declined by $2.6 million on a linked-quarter basis, and a lot of that or 50% of it was representative of the fact that our average earning assets decreased by about $125 million. And this is something also that we told everybody would likely be happening, and we expected that loans would increase during the year by about 8%. But at the same time we expected our investment securities to decline during the course of the year and with the cyclical level of our lending during the first quarter, it looked a little worse than it probably will as the year moves on. Our total interest income declined by $1.5 million, and it was really -- the decline was totally the result of the number of days in the quarter, and that represented about $1.6 million decline in interest. Our loss of some fee income during the quarter or a decline in that, that represented about another $0.5 million. And our decrease of about $128 million in the investment portfolio which I mentioned before, which had an impact of $1.6 million decline in our net interest income during the quarter. Our interest expense, offsetting that, went up by -- actually not offsetting it but adding to it -- went up by $1.1 million, and it was partially the result of the shift I mentioned earlier and the borrowing of funds and moving from short-term to long-term. And combined with that minor increase I'd also mentioned in the course of our deposits.

On the noninterest income side, it increased $3.7 million, but we had a gain during the course of the quarter of a little under $1 million. And that compares with the prior quarter where we had a loss of approximately $3.1 million. And we told you last quarter that that $3.1 million was representative of our selling $60 million worth of securities with a give-up yield of 4.42%. So we felt that put us in a better position. Some of our fees which showed a decline during the quarter were representative of also of shifts between what happens in one quarter and another and not necessarily an overall decline. We had a decline in Christmas club fees and international fees which are higher typically in the fourth quarter than they would likely be in the first quarter. We also by the loss of a couple of days during the quarter, our service charge income does not necessarily grow in the first quarter, and we also saw a swing in our trust and investment services because we reported there some unrealized gains and losses on trading securities. And that basically showed a swing of $90,000 decline from last quarter to this quarter.

Our noninterest expense increased about $800,000 from the prior quarter, and that was representative of a number of different things. Our employee benefit expense went up based upon some increases in pension and stock option expense. As everybody knows, FAS 123 took place during the quarter. It only had a small impact on us, but it still represented $200,000, and it is a permanent difference and does not necessarily provide us with a tax benefit.

We also saw an increase in our payroll taxes because people were tacked onto [ficor] and so forth and we also paid some bonuses during the quarter. So all of those things helped to increase our benefit and salary expense during the quarter. Lastly in regards to the noninterest expense of our occupancy expense, typically once again in the first quarter we see a large increase because of snowplow bills, [cam] charges which also reflect snowplow bills from our rental facilities. And overall that probably caused an increase in expenses of about $700,000 during the quarter. And we figure that probably 500 of that will be reduced as we move forward into the second quarter.

The last item on the P&L would be the income tax line. We have told you we had expected our rates to be approximately, our effective tax rate to be approximately the same as last year at 29%. It came in a little below 27%, and basically it is difficult to estimate every number in advance, and we got some benefits that were a little greater than we anticipated back at the end of the fourth quarter.

So that is pretty much a wrapup of what the quarter looks like on a linked-quarter basis.

Thank you, Alan. Two points I would like to cover. First, I would like to reiterate that our overall cost of deposits at Valley National Bank came in on average for the quarter at 1.85%; from the numbers I've heard released by other banks that puts us among the lowest. Also I would like to cover just briefly the credit quality issue which I alluded to in the earlier part of my presentation. Valley continues to dance on the head of a pin so far as it's nonperforming and loan losses are concerned. We came in again with total nonperforming assets at $35 million and keeping in mind that this is almost a $13 billion institution. And as a percentage of total loans our nonperforming loans, our past due loans, all delinquencies as a percentage of total loans was 0.74%, extremely low for a bank of our size and the type of lending that we do. Again, we think it reflects strongly on the fine job that our lending staff does at Valley National Bank. Our charge-offs, again, came in for the quarter -- it is $584,000. We had a provision of $1.294 million; we actually provided in excess $710,000 in the quarter, above our actual loan losses. With those comments being made, I will now open it up for questions.

(OPERATOR INSTRUCTIONS) Adam Barkstrom, Stifel Nicolaus.

Good morning. Talking about the loan growth and I guess a lot of that as you sort of indicated, you guys aren't going to step up and do some of these crazy credit structures and pricing structures out there. I was just wondering if you could share with us --.

That is a correct statement.

I was just wondering if you could share with us some of the more egregious terms that you are seeing out there.

It goes beyond description. We have customers, longtime customers who come to us with lending opportunities that we just walk away from. A person bought a building a year ago, pays one price for it. Today they claim it is worth 25%, 30% more, now they are looking to double their, to take out their original investment claiming there is 25% equity in the building. We don't do that. We have people in our home equity department who are up to the top of their limit, they are up to their ears in debt and they are coming to us saying well, lend us more on our house. It has appreciated 25% in the last six months. We don't do that. We use other banks as our workout department when it comes to that type of a situation.

We had a situation that was presented to me just this week where another bank has come to the plate to make a loan in Manhattan on a building that -- the bottom line is the borrower has nothing into the deal. His appreciated equity -- he bought the building initially putting a minimal amount of equity in, it has appreciated over the last couple of years as he says to literally double, triple what he paid for it. And now he's looking to expand the building by adding a number of floors to the above the building, and his equity in the project is all this phantom equity that came about as the result of the appreciated value. We don't do those things.

Now we could easily show double-digit loan growth. I commend our lenders for showing the restraint. I remember maybe because I'm a little bit older than some people, what it was like here in the late 1980s when we didn't follow the herd and do a lot of things that other places thought was good business. We took it on the chin back then because our earnings weren't growing at double-digit. But then again our earnings continue to grow all through the early '90s when they were showing losses or going out of business. So I think that is just a philosophy that this bank has that we take a long-term view of everything.

Right. Let me ask you this, I mean you are kind of painting a sort of a pretty bleak picture here. Do you think -- seriously I value your experience, you have been in the business for quite some time, and are we -- do you think we're starting to set the stage to get back to perhaps a credit cycle like we saw in the early '90s?

I don't know, Adam. I really don't. Your guess is as good as mine. But we are preparing ourselves that if that should occur the effect on Valley would be minimal. We operate in an environment that there is obviously going to be overflow and spill-off onto everybody. But I think the impact on Valley will be minimal. We don't do negative am loans, none. We have no negative am loans on our books. In fact, we don't buy mortgage-backed securities if they have negative am loans in there. Maybe we are old-fashioned, but we think that is only going to be a path that is going to lead to disaster. The experience that other banks claim they've had in prior years with this product, I'm not so sure will last on a widespread basis. Our loan to value at Valley National Bank, our weighted average loan to value in our residential first mortgage portfolio is 46.31%. And I don't think that our concerns are simply with Valley National Bank. If you follow what the regulators are doing they have this new commercial real estate, the CRE guidelines initiative that they are putting forward. They are concerned that the banking industry may be going too far and they are forcing banks to focus on the makeup of that portfolio and to better analyze their commercial real estate portfolios. So I don't think we are alone in this.

If I could just one more thing, something you mentioned I wanted some clarification. You were talking about municipal deposits and if I heard you right, you guys refused to pay 1% over Fed funds for munis, which is -- people are paying up 575.

Yes, we have one we lost this week.

575?

It was actually more than, 575 was the base rate plus they are paying other fees on top of it (multiple speakers) payroll and these things of that nature. On top of that interest rate.

(inaudible) know who that was?

No. No, it probably isn't who you think, but Adam I think the point is that is why we allow some of those deposits to run down. Because we were uncomfortable with the level of interest rates that we felt we had to pay to retain it. And we think we can get other deposits elsewhere at a cheaper price or as we've shown, we can get borrowings for somewheres between 3 to 5 years and lock in rates substantially below those levels. And that is why we did what we do during the quarter.

But you are really seeing 575 (multiple speakers)?

True story.

How do you make money on that?

We don't know.

In the short term, in the short term, I can cover that. I can run out and I can make a 6% loan, a 6.75% loan, and over the next quarter I show a positive income. You want to play short-term gain, it's easy. This bank doesn't play in the short term. We like to look forward.

By the way, Adam, those are also floating rates. Tied to some index which is historically been the Treasury or Fed funds or whatever. And we just decided that with the structure of our balance sheet and the way we operate the bank that is not something we want to do. We still have a fair amount of debt, we got about $500 million but we've been very cautious about how we price those and we've actually repriced to the extent we can many of those.

At one time, Adam, when Fed funds were 1%, if you paid 1% over Fed funds you were only paying 2% money and your mortgage portfolio, almost all your loan portfolio is well above that level. And that worked out until Fed funds went to the 4.75%.

Right. All right then, thank you.

(OPERATOR INSTRUCTIONS) Ross Haberman, Haberman Fund.

Gentlemen, how are you? Could you tell us where I think you said you were going to open up four, five branches in '06?

No, in all of '06 we will end up opening about 10.

Could you tell us where in New Jersey you have those planned for?

Sure. We have an office opening up in Edison, Milltown, North Brunswick, Woodbridge. We got one opening up in Upper Montclair, we got one in Hackensack. Some of these could fall over -- I (indiscernible) through a number of them but some of them could fall over into the first quarter of next year depending on weather and construction and so forth. We got one opening up in Freehold, Highlands, [Keansburg] --

Are these all new locals, or are some of them --.

The ones I've mentioned so far are all new locales except for Hackensack. I have Keyport we are relocating. I have a new one in Manalapan, a new one in Denville, a new one in Paterson, a new one in Hillsborough. We also have offices opening up in Manhattan. We have one on 88th and 3rd, one in Franklin and Church, Hudson and Lake Street, 18th and 8th. All of those are actually under construction at this point. We signed one in Brooklyn, and we are looking at -- excuse me -- two in Brooklyn. Excuse me. One must have happened this morning. And we have identified, and we are under negotiation for probably another six or seven in Brooklyn and about the same number in Queens.

And historically the New Jersey branches what is it taking in either deposits or time to hit a breakeven historically?

It usually takes us eighteen months, 24 months (multiple speakers)

The composition of those deposits has a lot to do with it. If you end up with all kinds of deposits at a high level it is going to take longer.

Sure.

Somewhere in the eighteen month period. If you're not going to transfer money from one location to another I can make a branch profitable by transferring deposits from one branch to another, but we don't do that.

(multiple speakers) cannibalizing yourself then, right?

That's right.

But 18 to 24 and again, has that time you're saying that timeframe has gone up as rates have gone up, is that true?

That's true, but we have locations -- we opened one last summer in Manhattan, and I believe that one is profitable at this point. It's $25 million in deposits.

Got it. Okay, all right. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

We thank everybody for tuning them. Look forward to speaking with you at the end of next quarter.

Ladies and gentlemen this conference will be available for replay after 2:30 PM today through midnight April 27th. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and enter the access code 821269. (OPERATOR INSTRUCTIONS) That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.