Valley National Bancorp (VLY) 2007 Q2 法說會逐字稿

Welcome to the Valley National Bank second-quarter 2007 earnings release conference call.

At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being reported.

I would now like to turn the conference over to our host, Gerald Lipkin, Chairman, President and CEO.

Thank you and good morning and welcome to our second-quarter 2007 earnings conference call.

Dianne, I'm going to ask you to please read our forward-looking statement.

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

The statements are not historical facts and may include impressions about Valley's contents and strategy, management's expectations about earnings, the direction of interest rates, the effective tax rate, (inaudible) products, relationships, opportunities, technology, the economy, market conditions and the impact of management's implementation of -- statements of Financial Accounting Standards 159 and 157.

These forward-looking statements involve certain risks and uncertainties.

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

Written information concerning factors that could cause results to differ materially from the results that 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, 2006 as well as in Valley's other recent SEC filings.

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

Thank you, Dianne.

Many of my remarks today may sound familiar with commentary from our previous earnings conference calls; however, I firmly believe that credit quality is the number one issue facing banks today.

Although the shape of the yield curve remains a challenge to many bankers, the relaxed loan structures prevalent in the marketplace today will be the driving factor affecting bank profitability in the near future.

High loan to value ratios in some cases in excess of 100%, negative amortization of loans, sub prime mortgage lending and debt servicing ratios not stressed for movements in the level of interest rates reflect some of the common themes in the marketplace.

These institutions which have elected to pursue loan growth under these lax underwriting criteria in my opinion have a very strong likelihood of experiencing problematic performance.

To the contrary, Valley has remained consistent in its underwriting standards during the 32 years I have been an active member of senior management.

History has repeatedly reaffirmed our approach to lending as the most prudent for the long-term.

During each of the U.S.

recessions that have taken place during my tenure at Valley our performance has been exemplary.

While other banks showed rapid loan growth and earnings growth in the periods immediately prior to economic downturns, in most cases they gave ball all of those gains and more during the subsequent downturn in the economy.

It has been during those trying periods that Valley has proven its approach time and time again.

At Valley management made a decision not to pursue sub prime or negative amortization loans for the Bank's residential mortgage portfolio or its investment portfolio.

Although our decision cost us loan growth, our long-standing opposition to these types of products was based upon our strategy of building shareholder value without offering products that provide the Bank with short-term economic rewards but could have a negative effect in the long-term.

Once again our approach has proven itself to be correct as we see others who participated in this arena awash with problems.

Our culture of restraint is evident in our loan performance numbers this quarter.

Bank wide total nonperforming loans as a percent of total loans remains flat and low at 0.35%, similar to the 0.35% last quarter and the 0.35% this time last year.

Delinquency rates, which typically provide an indication as to looming credit difficulties, remained very low.

Loan delinquents in excess of 30 days -- keep in mind, this is a 30-day figure, not a 90-day figure as reported by many other institutions -- are 0.8% as of June 30, 2007, less than the 0.81% reported last quarter.

Home equity delinquencies at Valley are an insignificant 0.07%.

Only $411,000 of Valley's home equity loan portfolio totaling more than $0.5 billion is delinquent as of June 30, 2007.

Our residential mortgage portfolio, consisting of approximately 9000 loans or nearly $1.9 billion, had total delinquencies on June 30th of only 0.29% and in management's analysis none of those delinquencies should result in losses to the Bank.

Exclusive of our SBA loan portfolio, which is guaranteed by the U.S.

government, our commercial lending delinquency rate of 1.08% would be only 0.8%.

Also included in our delinquencies are current but mature commercial real estate loans which are held in this category until paperwork is completed and/or current financial statements are received before we extend the loan and are not indicative of credit deteriorations.

We believe our historical approach to lending should continue to translate into continued profitability, modest loan problems and above-average returns for our shareholders.

During the quarter Valley produced net income of $39.7 million after one time trading losses and hedging expenses associated with converting long-term mortgage-backed securities in our trading account to short-term money market instruments.

This compares to $40.8 million in the year ago period.

Adjusted for the 5% stock dividend declared on April 11, 2007 diluted earnings per share for the quarter were $0.33 compared to $0.33 per share for the same quarter of 2006.

Our return on average shareholder tangible equity of 21.89% for the quarter and 24.9% for the first six months ranks Valley amongst the highest performers within the industry.

Strategically we continue to focus on expanding our customer base through de novo expansion of the retail branch network, expanding our commercial lending staff and the expansion of our consumer lending productline and geographic presence.

During the quarter we opened nearly 9000 non-interest-bearing checking accounts, 45% more than the prior quarter.

In total our recent deposit account marketing initiative produced over 16,000 new core deposit checking and savings accounts, exceeding management's goal for the program.

Additionally, in May we opened our second branch in Brooklyn which is generating similar results to that of our Bensonhurst branch which we opened in January.

To date the combined deposits in these two branches are $58.9 million, none of which includes transfers from other branch locations or municipal deposits.

By year-end we intend to open two more branches in Brooklyn and our first branch in Queens.

With the opening of our Edison, New Jersey branch this week we have now opened five new branches in 2007 and intend to open an additional eight through the remainder of the year.

During the last 18 months we have opened 13 new branches and absorbed all of the operating costs while still generating strong financial results.

Just this week we hired our first consumer auto loan dealer representative in the state of Connecticut bringing our dealer lending geographic presence to five states.

We continue to work towards finalizing our auto loan secondary market sales program which we discussed during our prior quarter earnings conference call.

As we previously noted, we already incur a considerable portion of the underwriting expense associated with these loans.

Again, we reiterate the fact that we intend to sell them without financial recourse.

To date we have not originated or sold any loans under this program because we have been engaged in enhanced due diligence to assure ourselves that we will not encounter unanticipated recourse.

We believe the program should be immediately accretive to Valley's earnings and expect commencement shortly.

I'm going to now ask Alan Eskow to provide us with a little more insight into the second-quarter financial results.

Alan?

Thank you, Jerry.

Good morning, everybody.

I'm going to start with the balance sheet.

Total assets remained relatively flat on both a linked quarter and annual basis as management continued to deleverage the Bank's investment portfolio.

Since the last quarter total securities decreased by nearly $150 million continuing management's focus on increasing Valley's loans and asset sensitivity.

During the last two years the investment portfolios contracted over 21% and at the time was comprised over 30% of total earning assets.

The portfolio now makes up 24% of total earning assets.

Our investment portfolio, as a result of balance sheet management strategies during the first quarter of 2007, now has approximately $1 billion included -- including unsettled trades as of June 30, '07 in a trading account.

The majority of these investments are in shorter term higher yielding securities than the previously owned long-term mortgage-backed securities.

The balance sheet management strategies provides management with better flexibility in the future to manage the net interest margin, asset sensitivity and, among other items, potentially fund future loan growth.

We have attempted to utilize cash flow from the investment portfolio to fund our loan growth rather than increase interest rates on deposits to fund the growth in earning assets.

During the quarter loans increased 7% on an annual basis from the first quarter.

New loan originations exceeded $500 million, an increase of over 40% from the origination volume just one quarter earlier.

Nearly one-half of the new origination volume is attributable to growth in the auto loan portfolio.

Origination volume is more geographically diversified as approximately 56% of the new unit originations were generated in New Jersey.

We continue to expand our dealer network and, as Jerry mentioned, we are prepared to enter Connecticut bringing our total dealer network to five states.

From the first quarter commercial loans increased 19.4% on an annualized basis.

The increase in commercial loans was primarily an increase in commercial lines of $18 million in conjunction with increased volumes in healthcare lending and our aviation lending group.

Continued fallout in the housing market, both nationally and locally, combined with the recent rise in long-term treasury rates, has negatively impacted the growth in both construction and commercial mortgage loans.

Origination volume during the quarter decreased nearly 64% from one year ago and management does not anticipate this trend to change in the near future.

While linked quarter deposit totals of $8.3 billion decreased by $8.7 million, excluding the decreases of $108 million in higher cost municipals stadiums and time deposits and the $50 million in brokered deposits, our total deposits would have increased 7.2% on an annualized basis from March 31, 2007.

We replaced much of these funds with retail deposit accounts which enable us to cross sell other Valley products.

Additionally, during the second quarter nearly $70 million of demand deposits were converted to repo sweep accounts which are reported as short-term borrowings on the balance sheet.

The net interest margin remained flat at 345 from the prior quarter.

Average earning assets decreased $21.2 million due to the funding of $75 million in BOLI during the quarter.

This income of approximately $800,000 from the BOLI previously was recognized as interest income and is now shown as non-interest income.

Total earning asset yields increased from 6.39 in the first quarter to 6.47 in the current quarter.

Closely mirroring the increase of 8 basis points in the yield on earning assets, the cost of funds increased 11 basis points from the first quarter.

The increase is mainly caused by deposit of initiatives which typically accompany our de novo branch openings.

The cost of deposits increased during the quarter from 2.44% to 2.51%.

Net income for the quarter of $39.7 million includes items associated with the reporting of fair value for certain financial assets and liabilities.

Exclusive of the $2.8 million loss on trading securities associated with fair market value adjustments and a gain of $2.7 million on fair value liabilities, we generated positive operating leverage for the quarter of 2.5%.

Net interest income on a linked quarter basis decreased a little under $400,000.

The decrease was the result of a reduction in earning assets combined with a decrease in loan fees of approximately $300,000.

On a recurring basis non-interest income increased from approximately 19.1 million for the first quarter adjusted for trading gains in the sale of a building in New York to $22.5 million adjusted for trading losses.

The increase is mainly a product of increases in service charge income, asset management fees, debit card fees and the aforementioned additional BOLI investment of $75 million executed in April of '07.

Non interest expense decreased $3.3 million from the first quarter.

However, exclusive of the fair value adjustments recorded in both the first and second quarters, the linked quarter decrease was actually an increase of $777,000 or 4.9% annualized.

The increase represents increased operating expenses of de novo branches as well as increases in the cost of employee benefit expenses.

During the last 12 months we have opened 10 de novo branches which have directly added an additional $2.2 million in year-to-date operating expenses compared to the same period a year ago.

In addition to the direct increase in operating expenses, indirectly our net interest income has been negatively impacted in the short run due to the Bank's de novo branching activity.

During the last 18 months we have allocated nearly $60 million of capital to open 13 new branches as well as the branches currently under construction.

Although these branches will add franchise value to the Bank in the long run, they negatively impact the operating results in the short run.

Income tax expense can fluctuate quarterly based upon many factors.

The first quarter's effective tax rate was higher than our expected rate as there was unusual income taxed at a higher rate relating to the sale of our Manhattan building.

This quarter the income was more normalized and our tax rate adjusted towards our expected effective tax rate for the full year.

This takes into account an increase in BOLI income not subject to tax during this quarter.

Credit quality and provision -- in regard to those, credit quality remains strong.

Net charge-offs on a linked quarter basis increased by $2.1 million for the first quarter.

The increase is the result of two charged off commercial credits and does not represent a systemic change in the total loan portfolio.

Loans past due and still accruing were $6.7 million on a portfolio of $8.2 billion which Valley believes to be relatively small.

The linked quarter increase in loans past due 90 days or more and still accruing of $3.7 million includes a $1.8 million loan which is current as of June 30, 2007 as to its payment and has recently been renewed.

However, this was reported as past due until all requirements were met to complete the renewal and these requirements include current borrower financial statements which can take time to receive from borrowers' accountants.

Total nonperforming loans remained relatively flat from the prior quarter at $30.9 million.

The reserve for credit losses as a percentage of total loans decreased from 0.94% to 0.91%.

The allowance for credit losses is determined from a myriad of factors including delinquency levels, historical and current net charge-offs and growth in loans to name a few.

Based on the composition of the loan portfolio at June 30, 2007 combined with delinquency levels, the level of the allowance calculated as of June 30, 2007 was deemed adequate and supported the quarterly provision.

The current accounting rules do not allow for matching of net charge-offs to the provision quarterly without taking into account all of the above factors.

Valleys capital ratios decreased slightly on a linked quarter basis after our partial call of 20.6 million or 10% Ameritrust preferred securities.

During the quarter we repurchased over 420,000 shares of Valley stock at an average cost of $23.84.

For the year we purchased nearly 1.2 million shares at a cost of nearly $30 million.

With this I conclude my prepared remarks and we can now open the floor to questions.

(OPERATOR INSTRUCTIONS).

Collyn Gilbert, Stifel Nicolaus.

Good morning, guys.

Could you just talk a little bit about the strategy behind your indirect auto business and your five states now and where you see that going from here and kind of the growth prospects you're seeing in that segment?

Sure.

In fact I've got Al Engel sitting next to me, he heads up that area.

I'll let Al answer it directly.

Good morning.

We've historically dealt with our indirect auto business in New Jersey and over the last few years expanded into Pennsylvania and new York.

And our results of that expansion outside of New Jersey were reflective in some of the statistics that both Jerry and Alan gave previously where we're now getting a significant share of our indirect auto business outside of New York -- outside of New Jersey.

The nice thing we like about this business is it does not require a tremendous amount of capital infrastructure to expand the footprint and we can continue to maintain our credit quality as we spread the geographic scope of that business.

It is our intention over the next five years to continue to expand into additional states and we like the performance of the business that we're seeing thus far.

This is Jerry Lipkin.

I'd like to add too that this isn't something really new to Valley.

As you recall, for over 40 years we had, up until about 10 years ago, a substantial relationship with a major insurance company and we used to take in loans from them from Maine through Florida as well as through all of Canada.

All of the underwriting, all the purchasing is done here in Wayne as it was at that time, so we have a central control over it.

We're able to maintain, as Al said, the credit quality.

And the marginal cost of putting on the expanded business is very small.

Okay.

And do you -- I mean in terms of percentage of overall lending business or percentage of income generated on your loan portfolio, how do you see this business?

I think it's going to be an increasing percentage of our business.

As you know or may know, Valley has always tried to maintain its loan portfolio into four equal quadrants of commercial loans, commercial mortgages, automobile loans and residential mortgages.

That was done as a strategy, as a hedge against interest rate and economic fluctuations in the various -- in the economic cycle of the country.

The residential mortgages, however, have changed and while they are slow to change in a rising interest rate environment, they are no longer slow to change in a decreasing loan interest rate environment.

The public has been trained that if they can save a half a point or a quarter of a point on their mortgage they ought to refinance it.

That being the case, we have begun deemphasizing that quadrant of our loan portfolio and placing additional emphasis on the automobile portfolio which remains far closer tied to interest rate cycles and less apt to refi itself in a movement of interest rates.

Okay.

That's very helpful, thanks.

And then just quickly, Alan.

You mentioned the tax rate given some of the things that are going on with the balance sheet.

Is that 24% then maybe what we could expect in the second half of the year?

No, I think we indicated in the press release you should look at something just shy of 28%.

Sorry, I missed that.

Thanks very much.

(OPERATOR INSTRUCTIONS).

Peyton Green, FTN Midwest Securities.

I was wondering if you could talk a little bit just about the banking environment.

It seems like we're about to enter our third or fourth year of a pretty serious revenue wall and I was just wondering if you think you might see more opportunities to acquire other banks that you could possibly add value to?

We're always looking to acquire other banks, particularly if we think we can add value to it.

I think the contraction of the banking industry is going to continue over the next several years.

I don't think that the consolidation is anywhere near over.

I think that other institutions may have more trouble coping with the yield curve than we've been able to -- have more difficulty dealing with than we've been able to.

We've actually I think done a fairly good job considering what we've faced in the way of a yield curve and the fact that we are a spread bank.

Nevertheless, we continue to grow our income and we've pretty much held our net interest margin pretty stable now for quite some period of time.

Okay.

And then I guess to follow up on the residential question, that certainly seems -- I guess you all have about 1.8 billion or so of balances on the residential business left after the sale.

How do you see that transitioning over a longer-term perspective?

It sounds like you (multiple speakers)?

I don't think it's going to be a quarter of our loans going forward.

It will probably drop down to something under a fifth, maybe a sixth of our loans.

And we're not going out of the business by any means.

We are a retail bank and we do want to service our customers.

We may look in the future to sell off more of our production than we have in the past, but we certainly are not going to exit the marketplace.

Okay.

And just out of curiosity, how much did you all originate and retain on your balance sheet in the second quarter or over the first part of the year?

Give us a minute and we'll tell you the number.

Okay.

Peyton, we may have to get back to you with that number.

No problem.

But again, we shouldn't necessarily look --?

About $71 million.

Okay.

So we shouldn't look for it to necessarily go down dramatically.

No, no.

And this is not -- whatever Jerry is saying, none of these things happen overnight, it's over a period of time.

Okay, good enough.

Thank you very much.

Harry [Hummel], Alliance.

Alan, you commented on the incremental cost of growing the new branches, but it looks like you've managed to wrestle down the noninterest expenses somewhat.

Yes, we have.

You also know that from quarter-to-quarter things tend to change a little bit.

But I would think that we will continue to have noninterest expense kind of typical of what we've been showing you.

I don't think we're going to see lots of increases there.

We're going to have some areas that will continue to go down and we'll have the branch expenses going up.

And as those branches continue to stay on they will bring some revenues in.

I noticed that one of the items that went down was other and I know (multiple speakers)

But I think we explained that other had some of the fair value items in it I think of about 2.7 million (multiple speakers) credit.

So that brought down the other substantially and then there was another number in last quarter of about 1.3 million or so.

So it's not down the way it appears to be.

This is Jerry Lipkin.

One of the areas that has been the hallmark of Valley is really looking at our other expenses and keeping them under control.

In fact when you look at our efficiency ratio, if you look at the Bank alone and you take out the insurance company and couple of asset management companies that we own, the Bank alone we calculate as somewhere in the 48% range.

Right.

We've monitored that all along.

Some of those subsidiary companies operate very differently from the way the Bank operates.

But we calculate for six months that our efficiency ratio at the Bank level would have been about 48%.

So if you were going to -- could you give some guidance on to what to expect from that cost -- the other cost category going forward?

Will it be more like the 7.4 you had for this quarter or closer to the 11 you had last quarter?

I think what you should do is if you look at our current numbers and we back out those couple of items, the 2.7 million out of the current number, because you have to add that back because that was a credit, it probably shows that we're doing about 5% on an annual basis in noninterest expense growth.

Great.

Thank you very much.

(OPERATOR INSTRUCTIONS).

[Stephanie Lewis], private investor.

Good morning.

I have to switch the gear a little bit talking about the talent war that's going on and being in full throttle, how many companies' most important they've been talking about is their people and the human capital.

Can you bullet out two of your top challenges in which Valley faces in recruiting and retaining top talent?

It's finding the right people.

We're always looking for good people.

It's a question of compensation in the marketplace that has gone up dramatically over the last couple of years.

That creates a challenge.

It's the supply in the marketplace also.

The number of banks that have closed over the years through consolidation have really driven people out of the industry, at least in this particular part of the country, and we have a smaller pool to draw upon.

What we have done is we've emphasized and we have continuously for the last 15 years or so emphasized taking younger college graduates, putting them through training programs here in the Bank and developing our own talent from within the Bank and then promoting from within the Bank.

We have a number of people who have gone through management training programs who are with us today who are with us for over 15 years.

So we look to develop the people internally.

You see (inaudible) hiring college graduates and training them internally and then bringing them through the latter is where most of your emphasis will be these days (multiple speakers)?

It's where a good part of our emphasis will be.

Obviously we're always on the lookout for talent outside of our institution.

As other banks continue to consolidate we try to get on the scene quickly and see if we can get some of their best talent, particularly when you look at the philosophy that a lot of banks use when they acquire another bank and that's to quickly pare down to their expenses and they often create situations that we are able to find additional talent.

Got it.

Thank you, guys.

(OPERATOR INSTRUCTIONS).

Sir, I'm showing no other questions from the phone line.

We want to thank everybody for tuning in.

We 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 PM Eastern Time today through July 26, 2007.

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