Valley National Bancorp (VLY) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thanks for standing by.

Welcome to the fourth-quarter 2006 earnings release conference call.

At this time, all participants are in a listen-only mode.

Later, we will 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 and welcome to our fourth-quarter earnings conference.

At this time, I would like to have Dianne Grenz 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 in strategies, management's expectations about earnings, the direction of interest rates, the effective tax rate, 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 the 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, Dianne.

Well, 2006 marked another challenging year.

The shape of the yield curve continued to create net interest margin pressure for Valley.

The average spread between the two-year treasury and the 10-year treasury averaged a negative 2.5 basis points in 2006, representing the fourth consecutive year of declining market spreads.

At the same time, the northern New Jersey marketplace remained one of the most competitive in the nation.

For the last two years, nearly 100 net new branches have opened in Valley's 11-county northern New Jersey footprint, each with the finite goal of obtaining market share.

These new entrants to the marketplace not only helped drive up the cost of deposits, but also diminished the spread on loans, creating added margin pressure from both sides of the balance sheet.

During recent years, we have witnessed many of our competitors generate tremendous loan volume at very low rates, often ignoring credit quality and duration in their pricing decision.

Valley remains steadfast in its approach to underwriting, which has been the hallmark of our Company.

We have found this strategy to be beneficial in all past credit environments and believe the same to be true in the current economy.

Fluctuations in our nonperforming loans and net charge-offs continue to remain minor in relation to the size of our loan portfolio; and we do not see any significant deterioration in our loan portfolio at this time.

In the past year, we maintained Valley's long-term strategy of creating consistent shareholder wealth.

We actively expanded our franchise and laid the groundwork for new products designed to compete in the current market environment while at the same time not denigrating the Bank's conservative credit culture.

During 2006 Valley declined over 48,000 auto loan applications.

Many of these credits are known as near-prime and represent a category for which investors appear to have a strong appetite.

Recognizing the fact that there may be a non-interest income opportunity in this situation, we are in the final stages of introducing a program which will allow the Bank to close many of these loans and sell the underlying credit into the secondary market without credit recourse, while in most cases maintaining the servicing relationship.

Since we already have the application flow and incur a considerable portion of the cost of underwriting these loans, management is enthusiastic about this opportunity and believes the program will be mutually beneficial to all parties involved and accretive to Valley's earnings.

In 2004, we contracted to purchase a building in New York City and convert it to a branch site.

As a result of the escalating real estate values in Manhattan, we received an offer to sell the building, which generated a net profit of $3.8 million to the Bank.

We believe it would have taken years to produce a similar profit from continuing to pursue a new branch at that location.

We recently opened our first branch location in Brooklyn and plan to open at least two more in Brooklyn before the end of the year.

In total, in 2007 we intend to open 12 new branches, bringing the Bank's two-year de novo total to 21 branches.

One of the two 2007 locations will be Valley's first branch in Queens.

Management is quite excited about the opportunities 2007 will present, and now I'm going to ask Alan Eskow to provide a little more insight into the 2006 financial results.

Thank you, Gerry.

Good morning.

Total assets remain relatively flat on both a linked-quarter and annual basis as management continued to deemphasize the utilization of the Bank's investment portfolio.

Over the last 12 months, the investment portfolio was contracted nearly 12%, shifting from 26.3% of total assets down to 23.3%.

During the same period, loans increased over $200 million or almost 2.5%.

Historically, loan volume in the fourth quarter tends to be slow, as the demand for automobiles in the Northeast wanes, and our New York City customers pay down holiday lines of credit.

On a linked-quarter basis, loan growth of $19 million was negatively impacted by approximately $65 million of commercial loan line paydowns.

Exclusive of these line paydowns, the linked-quarter annualized growth in total loans was over 4%.

We reduced our pricing on higher-cost deposits, including many of our municipal relationships, which decreased by over $500 million since December of '05.

Exclusive of this reduction in municipal deposits, our total deposits increased over 6% on a year-over-year basis.

Due to the long-term nature of a significant portion of the Bank's assets, we continue to maintain a long-term funding position of nearly 25% of our earning assets.

During the quarter, we began to observe a decrease in the shifting of deposits from lower-cost savings accounts to higher-costing money market accounts.

While this should help reduce the margin compression witnessed in 2006, we do not foresee an increase in the margin until the shape of the yield curve positively steepens.

We anticipate some further margin compression as our marketplace remains extremely competitive.

Historically, the first quarter's linked net interest margin contracts to a greater degree than other periods, partially as a result of paydowns in the Bank's New York City commercial lines of credit.

As Gerry mentioned earlier, we will focus on some new noninterest income sources during 2007.

Non-interest income did increase $6.3 million on a linked-quarter basis, mainly the result of nonrecurring items in both the third and the fourth quarters.

During the fourth quarter, as Gerry had mentioned, we recognized the $3.8 million gain on the sale of an office building in Manhattan.

In addition, approximately $67 million of securities prepaid, resulting in approximately a $2.3 million loss.

Noninterest expense in the fourth quarter decreased $3.6 million to $62 million.

Decreases were in accounting and legal fees of $1.3 million; employee benefit expense of $1.1 million; and advertising expense of approximately $500,000.

We anticipate 2007 noninterest expense to be in line with the current quarter, increasing slightly for the 12 new branches expected to open in 2007.

During 2006, even after adding nine new branches, we were able to limit large increases in staff and other employee expenses.

We will continue to monitor this area and all other expenses closely during 2007.

Our income tax expense for the current quarter was $13.1 million with an effective tax rate of 25.6%, compared to 20% in the fourth quarter of 2005, which included an adjustment based on management's assessments of income tax accruals.

For the year, our effective tax rate was 19.6%, slightly below our previous annual guidance of 20%.

We expect the effective rate in 2007 to be approximately 29%.

The provision for the quarter was $3.2 million compared to net charge-offs of $3.9 million.

We continue to review our methodology in the calculation of allowance for loan losses.

Based upon our historical credit quality and review of current risk factors, we concluded a coverage ratio of approximately 90 basis points is appropriate based on our portfolio.

The increase in net charge-offs on a linked-quarter basis is mainly attributable to a few credits in our commercial loan portfolio and not a systemic problem in the entire portfolio.

Our nonperforming ratio decreased from $34.7 million in the third quarter to $28.9 million in the fourth quarter.

During the quarter, we purchased approximately 1.3 million shares at an average price of 25.71% (sic -- see press release) and at a cost of $33.2 million.

We recently received approval from our Board of Directors to repurchase an additional 3.5 million shares after the expiration of the May 14, 2003, repurchase plan.

As indicated last quarter, our minimum target threshold for tangible equity to tangible assets is [5 75], and Tier 1 leverage ratio of 7.75%.

Valley's 12/31/06 results were 6.06% for its tangible equity ratio and 8.10% for its leverage ratio.

We can now, I guess, open it up for any questions you may have.

Thank you.

(OPERATOR INSTRUCTIONS) Adam Barkstrom from Stifel Nicolaus.

Alan, your comments, I kind of missed it.

Couldn't write it down as fast.

But you were talking about municipal deposits.

Right.

Those were down $500 million since -- what was the period that you gave?

2005, December of '05.

Okay, all right.

Give us -- is that just a pricing issue?

Why are those down?

That was obviously a targeted runoff, correct?

Yes, most of it is a pricing issue.

Actually all of it is a pricing issue.

We made a decision earlier in the year that those cost of those deposits was rising way too rapidly, as two or three years ago, the cost of those was substantially lower because they were based on a treasury return to the municipalities.

As those costs began to rise, we found out we were paying more for those deposits than anything else.

How were those priced?

Were those priced to a floating-rate, LIBOR-based pricing, or three-month treasury pricing?

It was treasury.

So like a short-term treasury price?

Yes, exactly right, on a floating basis.

Monthly changing.

Okay.

All right.

Then, Gerry, was wondering if you could give us some color on the pickup in charge-offs.

I guess we're up to 19; not a big deal, but up to 19 basis points now.

What is going on with that?

Nothing.

We had a couple situations that -- one was unique.

They're all unique, I guess, because we don't have very many that go bad.

I guess that this year -- we're dancing on the head of a pin here.

So it's kind of hard.

If I say I am at the upper end of my range, at least my anticipated range, how much could it come back?

You know what I'm saying?

Unless we go negative, unless I collect more of it -- which I have done actually in the past, where we collect more of what we charge (indiscernible) than what we actually have as charge-offs.

As a percentage of our total loan portfolio, it is nil.

Our nonperformings are down.

Our internally criticized and classified are all down at this point compared to last year end.

So what will that lead to?

The forward-looking indicators right now look favorable.

But again, as I say, we're dancing on the head of a pin here, you know?

Right.

I was just curious if you could frame up size of the credit, what type of credit it was.

Was the whole thing charged off?

Nothing, you know, we had a -- one single credit was $1 million; that was the biggest.

Most of it is small stuff.

You know, $300,000, $500,000 on a loan, $100,000.

The bulk of them, on average, would probably be very small.

Remember, a large piece of that is automobile charge-offs.

You know, that is cyclical.

Then it's, again, our automobile portfolio doesn't lose a quarter of 1%.

It loses less than that.

So if I build up more volume in the automobile business, I am going to have more losses there.

But it is still we are dancing on the head of a pin.

At this point, we don't see any significant deterioration.

Okay, let's see.

You mentioned the tax rate.

Alan, you mention something else in your opening comments. $67 million in securities had prepaid.

Yes.

Then you said something about a $2 million loss.

I didn't quite understand that.

Were those sold for a loss?

No, no, no.

These are some trust preferreds that we own that got called; and we had an unamortized premium.

Okay.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

Well, we thank everybody for turning -- [joining] in.

Look forward to speaking to you at the end of next quarter.

Ladies and gentlemen, this conference will be available for replay after 2.30 Eastern Time today through January 25.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 855122. (OPERATOR INSTRUCTIONS) That does conclude your conference for today.

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You may now disconnect.