Valley National Bancorp (VLY) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

We do appreciate your patience today while the conference assembled.

And good morning, welcome to Valley National Bank's second quarter 2006 earnings release.

At this point, we do have all of your phone lines muted or in a listen-only mode.

However, after the Executive Team's presentation today there will be opportunities for your questions, and those instructions will be given at that time.

[OPERATOR INSTRUCTIONS.]

As a reminder, today's call is being recorded for replay purposes, and that information will be announced at the conclusion of our release.

So, with that being said, we'll get right to the second quarter agenda.

Here with our opening remarks, is Chairman, President, and Chief Executive Officer, Mr. Gerald Lipkin.

Please go ahead, sir.

Thank you.

And good morning, everyone, and welcome to our conference.

Before we begin, though, I'd like to have Dianne Grenz read our forward-looking statement.

Today's presentation may contain forward-looking statements regarding the financial condition, results of operations, and business of Valley.

Those statements are not historical facts and may include expressions about Valley's confidence and strategies, Management's expectations about earnings, the direction of interest rates, effective tax rates, new and existing programs and products, relationships, opportunities, technology, the economy, and market conditions.

These forward-looking statements involve certain risks and uncertainties.

Actual results may differ materially from the results of forward-looking statements we contemplate.

Written information concerning factors that could cause the results to differ materially from the results of forward-looking statements contemplated can be found in Valley's press release for today's conference call, Valley's Form 10-K for the year ending December 31st, 2005, as well as in Valley's other recent SEC filings.

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

Thank you, Dianne.

And, again, welcome.

Well, during the quarter Valley again produced solid results.

Our earnings $40.8 million or $0.35 per diluted share after taxes.

For the initial six months of 2006 Valley earned $81.7 million or $0.70 a diluted share compared to $77.3 million or $0.69 a diluted share in 2005.

Given the current operating environment we are pleased with Valley's performance as we continue to focus on managing the Bank for the long term.

Valley has consistently produced shareholder returns ahead of peers, and this quarter was no different.

Valley's annualized return on average tangible equity exceeded 22%, marking the 26th consecutive quarter this metric has topped 18%.

On a linked quarter basis our net interest margin contracted only 2 basis points, the smallest linked quarter decrease since the third quarter of 2004.

We continue to focus on proven balance sheet management strategies.

During the quarter our loan portfolio grew nearly 9% annualized.

While we have experienced a slow-down in residential mortgage activity, this has been more than offset by our commercial loan growth coming from existing and new customers.

To fund the growth in earning assets we elected to both raise deposits, as well as continue to enter into three and five-year wholesale fundings which more closely mirror the expected life of many of the assets originated.

As a result of a flat yield curve, we have continued to let the investment portfolio shrink, since September of 2005 the book value of the investment portfolio has decreased approximately $300 million.

While in the short run our interest income has been negatively impacted, we believe the potential erosion of shareholders equity is not worth the short-term earnings accretion.

In the flat yield curve environment Management feels that it would not be prudent to leverage the Bank's assets with historically low spread opportunity.

To us, the economic benefits of incurring additional financial leverage at this juncture in the economic cycle does not make long-term sense.

During the past six months our branches opened approximately 17,000 consumer checking accounts, representing a 47% increase over the same period last year.

Additionally, we opened 22,000 savings accounts, resulting in new core account originations totaling 39,000 which should prove to be beneficial to the margin in the future periods.

As the uncertainty of the economic cycle continues to unfold, our resolve to maintain Valley's credit quality standards remains steadfast.

For the quarter total loans delinquent in excess of 30 days equaled $54.3 million or 0.65% of total loans, a decrease of over 6.0 million or 9 basis points from the prior quarter and the lowest levels we have reported in the past year.

Our outlook remains positive for the remainder of the year.

On August the 1st, our $300 million swap derivative, which we've discussed in the past, expires.

This will convert from a fixed rate of 5.96% to floating prime rate of 8.25%.

Additionally, approximately 46% of our loan portfolio will reprice in the next 12 months.

Recently, as predicted, we have seen our adjustable commercial mortgage loans repriced at higher rates for the first time in recent years.

This is a trend that we anticipate to continue as long as interest rates remain at current or higher levels.

Also, we continue to expand our footprint by opening branches in additional communities within our market.

We opened two new offices in the second quarter, and plan to open four in the third.

We currently have 22 properties under contract in various stages of development.

By yearend we intend to open our first two branches in Brooklyn, furthering the branch expansion strategy we outlined last quarter.

I'd like to now turn over the microphone to Alan Eskow, our Chief Financial Officer, to follow-up with some financial highlights from the period.

Thank you, [Gerry].

Good morning.

What I'm going to talk about is a little bit about the linked quarter balance sheet, to start out with, with using end of period balances.

So our total assets grew $112 million or 3.6% annualized.

And we continued to decrease, as Gerry mentioned, our investment portfolio which during the quarter went down by $80 million or a little over 10%.

We increased our gross loans during the quarter by $172 million or 8.4% annualized, and this was in almost all categories with the exception of residential mortgages where we've been seeing some below rate offerings by other institutions.

Total funding liabilities increased 135 million or 4.8%.

We continue to focus on matching funds according to our assets originated.

During the quarter we shifted nearly $275 million from funds due within one year to various longer term funding sources.

Focused on deposit growth by offering money market and certificate of deposit specials in conjunction with checking account promotions, originally offered at the beginning of the – at the end of the first quarter, we did that, into the second quarter.

Mitigating the retail deposit growth that we saw was a decrease in municipal deposits.

The decrease in these deposits was about $92 million during the quarter, and compared to last year it currently represents about 5.7% of our deposit base, and last year was about 8.1%.

Moving to the income statement, our net interest income remained relatively flat at about $98.3 million.

As Gerry mentioned, the margin contracted an additional 2 basis points during the quarter, mainly as a result of the flat yield curve, the competitive deposit rates, which are increasing faster than most loan rates, coupled with an increase in wholesale funding rates.

Our expectations for the remainder of 2006 is for the net interest margin to be initially helped by the expiration of our derivative but remain under pressure from competitive deposit pricing and the relatively flat shape of the curve which is based upon the current level of interest rates.

The provision during the quarter was higher than the first quarter, resulting mainly from loan growth, our evaluation of the economy, and the higher level of net charge-offs.

And our provision was 200,000 less than net charge-offs for the quarter but in excess of net charge-offs by about $500,000 for the first six months of the year.

Non-interest income remained relatively flat at about $19.4 million, and if you exclude the decrease in security gains on a linked quarter basis it increased by almost 9%.

Non-interest expense increased 7.5% annualized, and this was mainly the result of some increased expenses related to branch expansion, advertising and promotion activities.

In regard to income taxes, the effective yield during the quarter was 22.6% which was lower than our previous quarters.

We completed a few years of IRS examinations recently, and released reserves in regard to those examinations.

Additionally, we invest in low income housing projects which increased non-interest expenses above the line and provide tax benefits which have been increasing in the last year.

Lastly, we have lower state income tax expense based upon our corporate structure for many of our operating subsidiaries.

As mentioned in the press release, we expect the rate for the remainder of the year to be approximately 27%.

However, that projection is based upon Management's judgment regarding future results and could vary due to changes in income, tax planning strategies, and changes in tax laws.

In regard to some of the ratios, our increase in net charge-offs during the quarter was attributable to two commercial customers, and we haven't seen any real deterioration across the entire portfolio.

Current non-performing asset coverage ratio is about 250% and that is as compared to 216% last quarter, so that actually came out better.

Our overall credit quality remains strong.

A linked quarter drop in non-accruals was offset by an increase in the 90-day past dues.

However, the total past dues of 30 days and over, as Gerry mentioned earlier, was .65% down from .74% last quarter, and also down from .89% at the end of the year.

Our return on tangible equity remained high at over 22%.

Our efficiency ratio which did see an increase during the quarter from 51.53 to 52.59 is mainly attributable to the flat net interest income and increased expenses, such as branch expansion, which should cause the ratio to decline in the future as revenues begin to increase.

And, again, reiterating something Gerry said, we do not believe it is the time in the economic cycle to add financial leverage to the balance sheet, as we do not see the financial benefit.

We indicated at the end of 2005 that we did not anticipate substantial balance sheet growth based on a flat yield curve, which has continued throughout the first half of 2006.

Although this will negatively affect operating leverage, we are growing quality loans funded by deposits in wholesale borrowings.

Growth levels during the quarter for loans and deposits were in accordance with our expectations.

Gerry.

Thank you, Alan.

At this point, we'll open it up if anybody has any questions.

Indeed, and thank you very much, Mr. Lipkin and Panel, for your time and that overview today.

We do appreciate that.

And ladies and gentlemen, as you just heard, at this time we'll turn to your questions and comments, and we invite you to queue up simply by pressing star, one on your phone keypad.

[OPERATOR INSTRUCTIONS.]

And representing Stifel Nicolaus, our first question, we go to the line of Adam Barkstrom.

Please go ahead.

Good morning, Adam.

Hey.

Good morning, Gerry.

Good morning, Alan.

Good morning, Adam.

Let's see, you guys covered a lot on the call already.

But I was just wondering, nice rebound in service charges.

Anything else going on there?

I mean sort of what we're hearing out there, off a seasonally weak 1Q level, is there anything else we can read into that service charge number?

No.

Not really, Adam.

Just normal activity.

And, again, we're increasing accounts, so as you increase accounts you anticipate an increase in service charge to go along with it.

Okay.

And then you may have mentioned it on the call, but maybe I missed it, but any more color on the increase in trust fees?

Trust fees.

No, actually, we had, we have a situation where a customer began giving us some business that we were able to take advantage in the Trust Department, which did add materially in May and June to some trust fees that actually helped the Department along.

We anticipate that, that activity will continue throughout the rest of the year on a diminishing basis, but hopefully this customer is going to be utilizing us again in the future so we're hopeful that our trust volume will go up, although I don't believe it's going to be something extremely material.

Gerry, I was curious if you'd give us a little bit more color on the two commercial credits, the 2.2 million that was charged off during the quarter?

No, they're just – historically, it's not unusual at the Bank for us to find a credit that we're not happy with, that's not performing well.

We tend to be more aggressive at the Bank in charging off, and then in the future we end up with recoveries.

These are not names of anybody that has been published in the newspapers, it's not somebody that would be known to anybody, and certainly we wouldn't reveal the name of a customer.

How about new – I guess if I look at the numbers…

We're dancing on the head of a pin here, Adam.

I mean, you know, when people ask us, and they've asked me over the last several quarters, 'what's going to happen to our non-performing, our delinquencies?'

And they can't go down, they're only going to go up.

Right.

You know, when you're dealing with charge-offs in your automobile portfolio of, you know, of less than a quarter of 1%.

I mean when you're talking about virtually zero in charge-offs in your residential portfolio, you know, it's not going to go down.

Right.

Our home equity loans, we had a total of three delinquent loans at the end of the quarter, and that's out of 18,000 loans.

And we're very, very tough in our underwriting.

It's not a question that it's an anomaly.

But I mean if I have three delinquent loans, three loans that are delinquent 30 days or more at the end of June, it's not going to go down.

Although I'm probably going to get kicked because the three loans that were delinquent, someone told me we were reporting after July, [they were more current].

So the – you know, our commercial loans, too.

I mean, you know, we are a commercial lender.

Remember, this is a commercial bank and it's not a thrift, and as such we do take on a certain amount of risks when you're lending to businesses in the greater metropolitan area, you know, they're going to have good years and they're going to have bad years.

Hopefully, we insulate ourselves so that in a bad year we don't suffer a loss.

But it's going to happen.

You know.

Right.

Now, you guys are – I mean on the credit side, you guys are ahead of the curve, as far as recognizing areas of weakness and things of that nature.

Any particular, and I don't mean your portfolio or maybe I do, but any particular lines of business, geographies, products, et cetera, that you guys are either starting to maybe shy away from, take a closer look at?

Any signs of, yes, merit that you might not necessarily [curating] but you might have a little bit a little bit of [tightness]?

Well, you know, the real estate market, everybody is worried about, so we probably tightened the screw half a notch or a quarter of a notch from where we were.

Although we do believe that the folks that we are funding are all good, and they're sound, and they're going to pay us back.

You know, it's not an industry wide era reaction that we take.

We actually drill-down to individual customers.

If we're not happy with a particular customer's performance, if we're not comfortable with their prospects going forward, we've found in the last year or so it's been a good opportunity to encourage them to find another home.

And rather than building up our workout department, we let other banks do that for us.

Right.

You know, it's just, you know, if we're not happy with an individual that's what we're focusing on, it's not an industry though, by far.

I mean we're so diversified here that it'd be kind of difficult to say, and be an industry.

Right.

Do you guys have any exposure to [Dwet, Solomon Dwet]?

Yes.

We have a total of $9 million in seven loans.

We – some of those loans, in fact, most of the loans came from acquisitions that we made.

We did not make the loans ourselves.

We have done a legal review on all of the credits.

They were all closed by outside counsel.

They all have valid title policies.

They're all secured by pieces of real estate.

As of July the 1st they're all current as to payment.

One of the loans, which is probably the largest loan, comprises more than about 40% of what is owed to us, is sold under contract, and I have been told that the courts have approved the sale.

So…

Gerry, that one loan you say comprises 40% of the exposure?

Yes, and that's been sold under contract to a third party, and the courts have approved the sale.

Got it.

So we should be getting paid-off on that relatively shortly.

All right.

You know, I mean I don't think that we're – we face, from what I can see at this point, we certainly don't seem to face any loss.

Right.

So, and all of them are secured by real estate so they're lower margins.

Very good.

Thanks, gents.

All right.

And thank you, Mr. Barkstrom.

Next, representing KBW, we go to the line of Bob Hughes.

Please go ahead, sir.

Hey, good morning, guys.

Good morning, Bob.

Hey, had a quick question for you.

The – of the 800 million in short and long-term borrowings that were repriced during the quarter, at what, a rate of 442, what was the average cost of those borrowings previously?

Or how should we think about that?

Well, there was obviously an increase.

I mean anything we did a number of years ago, and, you know, as we've told you before, you know, we redid a lot of borrowings over the last couple of years, and we actually refinanced a lot of them at much lower interest rates.

But those rates were right around 4%.

Right around 4, okay.

The securities gains in the quarter, what was the source of those gains?

How much did you sell, what did you sell?

It was something – at the holding company level.

There were no bonds being traded, that I remember.

Yes, we had an investment that we had that we…

Most of it came from the stock in another bank, that another bank bought.

We had a small piece of a commercial bank, that another bank bought the bank and that generated a gain to us.

Okay.

Nothing, there was not…

It was [bought].

Okay.

And I was wondering, the expense in the quarter was a little bit higher than we had projected, but I was just wondering if you could discuss your marketing budget for sort of the, for the balance of the year?

Yes, it's been up.

We've been focusing more on corporate identity advertising.

We've been on television a lot more.

We've been in the newspapers and in print a lot more.

Radio.

We went from practically no exposure with radio and television in the last three years to where we're becoming I'd like to think a household name but it's, the frequency has increased, you know, many fold.

Yes, without a doubt.

I've definitely seen it myself.

And then with respect to the deposit programs you have running now, could you perhaps discuss those a little bit?

What types of deposits and accounts are you attracting?

We've – we're going after all types of deposits.

Consumer checking was the biggest jump there in consumer savings, I should say – I mentioned the numbers, we had 17,000 consumer – we had 17,000 checking accounts most of which were consumer, although we did bring in some nice corporate accounts, as we always do.

The savings accounts are primarily consumer.

We are in the process right now of a campaign for small business checking so, hopefully, at the end of this quarter we'll see a nice bump-up in that area.

We sort of rotate it, you know, we give the branches a sense as to what we would like to have them bringing in, and rather than having them take a shotgun approach we try to use more of a rifle approach.

And say, 'okay, this quarter we're after consumer checking, next quarter we're after small business checking, ' and then [maybe] we will go back to the consumer.

We were also quite successful in an IRA campaign that we put out this year, so we were pleased with that.

Okay.

You certainly seem to stem the bleeding you saw in some of the retail deposit, or the transaction accounts.

Yes.

Certainly, a lot of growth is still coming in time.

What maturities are you targeting there?

Well, we would like to get as long as possible but I don't think the marketplace is attuned to that.

Right now, we're getting mostly in the nine-month category to a year, that range.

That's one reason we look to the wholesale funding.

I mean from our estimation that's the smart way to go.

You know, our borrowers on the commercial side are looking for interest rates that are fixed for five or more years.

To get a five-year CD from a consumer today is almost impossible, right?

Yes.

But the wholesale funding makes that money available to us.

So our – on a matched fund basis we're much better off as a result of which if interest rates move-up we're not being hammered as badly as we would be if we were just simply relying on overnight funding.

Okay, great.

Thanks a lot, guys.

You're welcome.

[OPERATOR INSTRUCTIONS.]

At this time, we do have Gerard Cassidy with RBC Capital Markets in queue.

Please go ahead.

Thank you.

Good morning, guys.

Good morning, Gerard.

Good morning, Gerard.

A couple of questions.

Gerry, on the swap that's coming off, the cash flow hedges, can you remind us of what the thinking was at the time you guys put it on?

Sure.

And would you consider doing another one?

Does it make sense to do another one?

No!

Okay, that's an answer [inaudible].

Let me explain where it makes sense, back when we did it two years ago.

We recognized that interest rates, that we believed interest rates would rise.

By doing the swap the way we did, we were able to take our current income and the increase, because obviously when we took the 594 prime rate was probably somewhere in the 5% range so we had an immediate gain on the swap.

We believed that rates would continue to go up and that during the first year it would be positive to flat, the second year we'd go negative.

However, we also felt that the yield curve would take a more normal shape, and that the long end of the curve would go up.

As a result of which our net interest margin would increase during the second year so that what we were enjoying in the way of greater revenue growth in the second year from the rest of the portfolio would far offset the portion that would go underwater, other than derivatives during that time period.

Okay.

That obviously didn't happen.

The yield curve stayed flat, the short rates went up, and as predicted it just worked against us.

I was approached at the end of the year to extend the derivative which would have caused this year not to become negative but it would have hurt us, you know, in a future date.

I felt once burned twice stupid, all right?

So we did not do it.

And the derivative is expiring in the next 10 days or so, and we will then begin to enjoy the benefits of an 8.25% prime, and if Mr. Bernacke decides that he's going to raise it again it'll just increase the benefit.

Okay.

Can you share with us the branches that you opened in this quarter, were they in Manhattan or in New Jersey?

One was in Manhattan.

The balance of them were in New Jersey.

Okay.

We are – we have a whole host that we plan to open up – one in New Jersey, one in [inaudible].

The branches, most of them that will be opening in the remainder of the year will be in New Jersey.

We have one in Manhattan that will open this year.

I've a second in Manhattan that I'm hopeful will open this year.

Oh, wait, excuse me – we have two in Manhattan that will open this year, and a third one that I'm hopeful will open later this year.

I am hopeful that two of the branches in Brooklyn will open, and one I'm positive will open this year, in fact, should open in the next few weeks.

The second one in Brooklyn will be towards the very end of the year.

We have several other sites in Brooklyn that will be opening up next year.

We're in Queens right now, and, hopefully, we will be opening those at the beginning of next year.

And we have a number in New Jersey, particularly, the Middlesex County and Western Monmouth County areas are where we have focused most of our attention because we wanted to fill-in the gap between our [Shrewsbury] acquisition and our existing branch locations.

As I mentioned, we have 22 properties under contract that are in various stages of development.

Hopefully, most of them will be opening up within the next 18 months.

Okay.

On the branches, when you guys look at the metrics after three, six, twelve months, whatever the time period is that you choose to look at, when do you normally see breakeven?

And has that period of time changed in the last two or three years from branches that you opened up two or three years ago?

You know, it's – it generally takes us probably – I always looked at two years.

I'm trying to be a little realistic.

I feel that it should take us two years before a branch becomes profitable.

But we opened up, the last one we opened up in Manhattan became profitable in probably five months because of the amount of deposits that came in in a relatively short order.

I am hopeful that that's a trend that will continue, but realistically it takes you two years to cross the line before a branch becomes profitable.

You know, we have some that take longer, we have some that take a lot less, but usually it's two years.

I see.

Are you finding the nominal rate of interest rates today being, you know, you can mini market, be able to find CDs paying over 5%.

Are they starting to have a meaningful impact on so-called lazy money, money that's sitting around in accounts that traditionally wouldn't be as interest sensitive but now the 5% number is catching customers' attention and they're moving the money?

Of course, you know, when rates were 1% people really didn't care.

You know, people would leave their money I checking accounts, it didn't matter.

You know, at 2%, you know, well, it probably didn't make much of a difference.

At 3, people start to open their eyes, 4, 5, you know, it obviously has an affect.

You know, at some point the lazy money is no longer lazy.

You know, people say, 'wait a minute, there's too big a gap here, I have to make a change.'

And then, finally, circling back to the credit, as you pointed out your absolute numbers are very, very low.

The commercial loans that you identify, both in the charge-offs and then the 90-day past due, were those commercial real estate or just plain commercial C&I type loans?

They were, I think real estate – one is a C&I, one is real estate.

It's all over the place.

It's not, you know, we have collateral on all of our loans.

All the loans, even if we've charged it off we have collateral behind it and we have guarantors that we feel will perform, so.

But if it's going to, after a certain point and we're in legal, or whatever, we take a more aggressive stance and charge it off.

Great.

Thank you very much.

All right.

And thank you, Mr. Cassidy.

Next in queue, we go to the line of John Pancari with JP Morgan.

Please go ahead, sir.

Good morning, guys.

Good morning, John.

Good morning, John.

Just wanted to see if I can get some color around the real estate environment there, you know, just in your – throughout Jersey, and some of the construction loan growth that we saw certainly in the quarter was pretty strong and pretty good growth in CRAs, so I wanted to just get some color of what you're seeing there on the real estate front?

I think it's starting to slow a little bit.

I think prices are starting to weaken a little bit.

The projects that we have, a lot of them are user occupied so I'm not really concerned about from a pricing standpoint going forward.

We have very strong people behind the projects that we do.

We don't do an awful lot of a spec building type of lending.

Most of it has got a way out at the other end.

Where we are building with homebuilders, for example, we generally don't allow them to go very far ahead of sales.

We run control, we run pretty tight controls over that.

So if a builder wanted to put up, you know, 50 homes we would generally fund, you know, one or two models and maybe one or two homes ahead of sales, but that's it.

You know, then as you sell, we're only too happy to fund the construction of them.

You know, we've got an out, then we're just doing a bridge financing.

So we really don't have much in the way of large exposures to individual builders.

Certainly, not unless they have very, very strong financial statements personally, a lot of liquidity, and they personally guarantee our loan.

We look at all of our loans, not just the real estate but on all of our loans, we try to get paid back in three ways on every loan.

We want to see the cash flow is going to pay us back.

We want to see collateral behind it, and we like to see personal guarantees.

So the majority of our loans have those three elements behind them.

Okay.

That's very helpful.

And then separately on the trust piece, I know you indicated in the press release that you had a pricing change around your investment management fees.

I just want to see, is that more of a onetime jump here to like a newer base?

And then, also, you know, any I guess any outlook here in terms of the growth we can expect there?

No, I don't think so.

I think it's just normal steady growth in the various areas.

When you say 'trust,' I don't know if you're talking about our asset management companies that we own?

They have shown some nice growth over the past year, so their fee rep income has increased.

We have our Trust Department, as I mentioned, at the question before that, you know, had a new line of business, a new customer coming in, that actually helped them considerably in the last quarter and, hopefully, will continue to help us in the future.

Okay.

That's helpful.

Yes, I missed your earlier comment.

Thanks.

And thank you very much, Mr. Pancari.

And, with that, Mr. Lipkin, I'll turn the call back to you.

There are no further questions.

Well, I thank everyone for tuning in, and we look forward to speaking to you after the next quarter.

And, ladies and gentlemen, Mr. Lipkin is making today's conference available for digitized replay for five full days, starting at 2:30 p.m.

Eastern Daylight Time July the 20th, all the way through 11:59 p.m.

July the 25th.

To access AT&T's Executive Replay Service please dial 800-475-6701.

At the voice prompt, enter today's conference ID of 833078.

And that does conclude our earnings release for this second quarter.

Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service.

You may now disconnect.