Valley National Bancorp (VLY) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2008 Earnings Release Conference Call.

(OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Director of Shareholder and Public Relations, Ms.

Dianne Grenz.

Please go ahead.

Thank you, Cary, and good morning.

I'd like to thank everyone for participating in Valley's Third Quarter 2008 Earnings Conference Call, both by telephone and through the webcast.

If you have not read the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules from our website at ValleyNationalBank.com, by clicking on the "Shareholder Relations" link.

Also, before we start I'd like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to Valley National Bancorp.

Valley encourages participants to refer to our SEC filings, including those found on Form 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements.

And now, I'll turn the call over to our Chairman, President, and CEO, Gerald Lipkin.

Thank you, Dianne.

Good morning and welcome to our Third Quarter 2008 Earnings Conference Call.

Exclusive of an impairment and realized loss on Fannie Mae and Freddie Mac perpetual preferred stock, we will--which we will discuss, we are pleased with our quarter results.

Our avoidance of sub prime mortgages, SIVs, and other forms of exotic, high-risk financial instruments allowed us to produce consistent results in a very tumultuous market.

Without the charge, Valley's fundamental business performance and core operating earnings for the quarter were strong and in line with our expectations, reaffirming the fact that all financial institutions are not experiencing significant asset deterioration.

Our core adjusted return on average tangible equity was 23.92% for the quarter, compared to 20.18% in the year ago period.

Our core adjusted return on average assets and efficiency ratios were all in line with Valley's historical averages and actually reflected an improvement from the second quarter of 2008.

Our operating earnings for the quarter, exclusive of Fannie Mae and Freddie Mac charge, were $47.7 million or $0.35 per fully diluted share.

The linked quarter increase in earnings is mainly derived from strong loan growth coupled with an expansion of the net interest margin from 3.48% to 3.64%.

As I mentioned earlier and as we have preliminarily disclosed in our--in Valley's Form 8-K on September 4, 2008, during the quarter Valley incurred a net after tax charge of $44.1 million associated with 12 separate Fannie Mae and Freddie Mac perpetual preferred securities.

We are obviously disappointed with the government's decision to forego their implied guarantee on these securities and suspend their dividends.

While both Fannie Mae and Freddie Mac are not in bankruptcy or receivership and may in the future resume paying the dividends, accounting guidelines require us to write-down the value of these investments at this time.

Nevertheless, our prudent and conservative lending philosophy has in part enabled Valley to create a balance sheet in which such a charge, while large, is not fatal and will not have a significant impact on future business operations or strategic decisions.

Within the same 8-K, we announced Valley's preliminary intention to possibly monetize some of the appreciated fair value of specific branch and office properties we own and provide cash for future company growth through a sale leaseback transaction.

Since that release, Valley's liquidity and capital alternatives have expanded.

We will continue to analyze our portfolio of approximately 100 properties and will probably announce a sale leaseback transaction in the fourth quarter, which will generate GAAP gains and cash.

However, the scale of the initial transaction will most likely be less than the 25 properties previously disclosed in Valley's 8-K.

During this time of market dislocation and extreme volatility we are most pleased to report that credit quality remains strong and continues to be the hallmark of the institution.

We maintain our strategic focus of operating for the long-term benefit of our shareholders, irrespective of marketplace credit trends.

Valley operates under a traditional approach to banking.

Although the landscape and competition may change, determining the viability of a borrower to return his or her principal through various economic and credit cycles remains unchanged.

If lenders diligently underwrite each loan from the perspective of lending their own money, credit concerns are reduced and the long-term shareholder profitability is increased.

For the quarter, Valley's credit metrics were outstanding.

Valley's annualized net charge-offs were 0.18% of average loans, a decrease from 0.22% the prior period, while Valley's total nonperforming loans as a percent of total loans remained flat at 0.30%.

Total loans past due greater than 30 days declined from [year-end], decreasing from 1% to 0.86% this quarter, but increased slightly compared to the prior period.

Just yesterday, the Federal Reserve Bank of New York published a report reflecting 90-day plus mortgage credit delinquency rates as of the first quarter sorted by state.

Nationally, the rate was 1.90% and New Jersey was 2.08%.

I believe both of those numbers have increased since the first quarter as well.

Valley's ratio for the third quarter was 0.18%, while our 30-day-plus delinquency rate of 0.53% is only 30% of the national 90-day-plus average.

Home equity loans are no exception.

Out of a portfolio of over 15,400 loans, only 15 loans are delinquent more than 30 days.

We are diligent in our initial underwriting of every credit and active in monitoring each facility.

We routinely analyze home equity line usage so far as manually scrutinizing for checks made payable to credit card companies and other financial services businesses.

If habitual, we freeze the line in accordance with the terms of our loan agreement.

Valley's auto portfolio, which has been an area of concern for many analysts and investors, continues to perform better than the industry and in line with management's expectations.

As of September 30, Valley's auto loans past due greater than 30 days equaled 1.52% of that--of the total auto loans.

This represents approximately 50% of the New Jersey average according to a report from Experian.

Origination activity has slowed considerably in the current quarter as demand within the marketplace has deteriorated and Valley has increased its already lofty credit underwriting standards.

During the quarter, we originated 78 million in new auto loans while declining an additional 511 million in applications.

At Valley, we focus on a litany of terms in underwriting each credit as opposed to generically making a decision solely based on the borrower's FICO score.

Of the 511 million in declinations, over 110 million, or 22%, maintained a FICO score in excess of 700.

Once again, it is the return of the principal, not the return on the principal, which drives our conservative loan underwriting guidelines.

We refuse to rely on complex automated computer models in making credit decisions, but rather fall back on good old fashioned underwriting criteria, common sense, and time tested experience.

As a result of the above, our auto loan portfolio decreased approximately $60 million during the quarter.

Commercial loan demand throughout the organization continues to be robust.

As the severity of the current market dislocation impacts numerous borrowers to a greater degree, many seek banks with strong capital and the ability to provide lending facilities which enable them to meet their financial objectives.

While in recent years conversations with prospective customers focused on rate, the current focal point from the customers' perspective is whether their financial institution will be a trusted and viable business partner for the years to come.

Valley's stable balance sheet and consistent core results provide an opportunity for Valley to extend its book of business at a spread that encompasses risk adjusted pricing.

Valley has the liquidity and capital to grow.

However, we will not undermine our credit culture merely to expand the balance sheet.

That being said, as quality loan opportunities present themselves, we will attempt to increase our market share.

During the quarter, annualized organic loan growth exclusive of Greater Community Bank was nearly 9%.

Growth in Valley's commercial lending portfolio, including construction and commercial mortgage, grew on an annualized basis 23% as a result of new relationships and expanded line usage.

Partially mitigating the growth in commercial lending was an annualized decline in residential mortgage and automobile lending of nearly 9%.

Growth opportunities in the commercial lending spectrum will be the emphasis of Valley's balance sheet growth.

During the next 12 months we expect to see continued declines in lending for automobile and residential mortgages as the economy continues to show signs of weakness.

On July 1, we closed on our previously announced merger with Greater Community Bancorp.

Although our current period earnings were negatively impacted, we anticipate the acquisition will be accretive by early next year.

All of our initial model assumptions are consistent with the current projections.

Our systems integration in August went smoothly and we have already begun to realize a large number of our projected cost savings in the fourth quarter of 2008.

As a result of the acquisition, combined with the non-core impairment and losses on Fannie Mae and Freddie Mac perpetual preferred securities realized during the quarter, Valley's linked quarter regulatory capital ratios declined slightly.

However, they all remain above the regulatory guidelines for a well capitalized bank.

Although Valley does not presently need capital, we are currently evaluating the Treasury Department's TARP capital purchase program and the benefits it may have to Valley and its shareholders.

Based on discussions we have had with our regulators, we are of the belief that the program is an opportunity for healthy banks like Valley to expand lending operations and enhance market liquidity.

We view the terms of the program to be favorable and an attractive alternative to other forms of tier one capital.

Maintaining a strong capital base on an absolute base and relative to Valley's peers is paramount in providing Valley long-term strategic flexibility in either growing the balance sheet organic or via acquisition.

Although for many within the banking industry current conditions are arduous, the changing landscape has created an outstanding opportunity for Valley to generate lasting shareholder value.

I will now call on Alan Eskow, who will now provide a little more insight into the financial results.

Thank you, Jerry.

Good morning.

As indicated earlier in Jerry's comments, and exclusive of the impact of the Fannie Mae and Freddie Mac preferred securities, we are quite pleased with Valley's third quarter core operating results.

Valley's conservative lending philosophy coupled with our balance sheet management strategies have proven valuable in creating and preserving shareholder value while providing a foundation and opportunities with which to capitalize on current market conditions.

Reported net income for the quarter of 3.6 million, or $0.03 per diluted share, included a number of significant items, which impacted the results.

Also affecting operations in the third quarter was the acquisition of Greater Community Bancorp.

While the newly issued over 8.7 million shares of Valley stock to Greater Community Bancorp shareholders are immediately added to Valley's outstanding share count, many of the cost saves and synergies anticipated from the merger will not be realized until the fourth quarter of 2008 and into the first quarter of 2009.

In August, we converted all of Greater Community Bank's back office operations and presently run the entire bank on one network managed and operated by Valley.

Until the completion of the combined back office functions, many of the redundant operations at Greater Community were necessary, resulting in third quarter non-interest expense, which should decline in the fourth quarter of 2008.

On a sequential quarter basis, the net interest margin expanded 16 basis points in addition to the 13 basis point increase in the second quarter.

The increase is mainly attributable to a reduction in the cost of deposits and borrowings combined with higher new loan origination rates, which exceed the existing portfolio.

Additionally, $25 million of Federal Home Loan Bank advances were prepaid during September, resulting in a one-time reduction of interest expense equal to $1.8 million, or six basis points on the net interest margin.

Valley maintains an asset sensitive balance sheet.

The recent and probable future declines in the target fed funds rate will likely have a negative impact on the net interest income and margin in the near term.

However, to the extent Valley is able to originate loans with an incremental spread in excess of Valley's current margin, we anticipate the fed actions to be largely mitigated.

Non-interest income on a linked quarter basis declined $50.1 million, mainly due to the other than temporary impairment and realized losses on Fannie Mae and Freddie Mac perpetual preferred securities totaling $70.9 million and trading losses of 6.1 million on specific securities held in Valley's trading account.

Partially offsetting the decline was a market value gain of 20.8 million on the change in market value of Valley's junior subordinated debentures and 3.4 million of gains on certain available for sale securities, which were sold during the quarter.

Non-interest expense increased 9.7 million to 73.8 million for the third quarter.

As previously indicated, operational expenses associated with Greater Community Bank and penalties of 1.2 million associated with the aforementioned prepayment of Federal Home Loan Bank advances negatively impacted the current quarter.

In addition, during the last 12 months, Valley has opened nine de novo branches, which during the third quarter directly added over 1.1 million of non-interest expense and indirectly resulted in the short-term decrease of interest income.

Nearly $40 million of capital has been allocated to these de novo branches and others currently in various phases of construction.

At Valley's current earning asset yield the annual foregone interest income is over $2 million.

The linked quarter growth in the balance sheet was attributable to assets acquired via Greater Community and strong organic loan growth, which was partially mitigated by a decline of the investment portfolio.

Gross loans increased over $200 million, or nearly 9% annualized, exclusive of those acquired from Greater Community.

Loan demand for the quarter was brisk as Valley's lenders originated over $500 million in new loans despite a sequential quarter reduction in automobile and residential mortgage originations of $110 million and $75 million, respectively.

Commercial line usage was up slightly during the quarter as many of our New York lending customers prepare for the forthcoming holiday season.

Exclusive of investments acquired via Greater Community, the securities portfolio declined over 230 million from the second quarter.

As loan demand remains robust, Valley intends to actively utilize the investment portfolio as a source of liquidity rather than solely competing on rates for price sensitive deposits.

Linked quarter total deposits increased $691 million inclusive of 714.9 million in deposits acquired from Greater Community.

The decline is mainly attributable to some initial decay of Greater Community deposits typical in any acquisition.

The slight decrease in Greater Community Bank's deposits is in line with management's expectations and was forecasted in management's acquisition analysis.

Valley continues to focus on matching the duration of newly originated assets with that of their funding source.

As a result, Valley typically offers higher rate certificates for extended maturities.

Where demand for deposits is not sufficient or the cost of each deposit is prohibitive, management utilized wholesale funding as an alternative to match duration.

Although in the short-term, Valley's funding costs will be higher and core deposit funding as a percentage of overall funding may be less than our peers, we believe this is a prudent strategy in managing interest rate risk.

As can be seen in our margin analysis, the cost of all deposits declined from 1.83% to 1.77% factoring in our large base of non-interest-bearing and savings deposits.

The loan loss provision for the quarter was $6.9 million, an increase of 1.1 million from the prior quarter.

Net charge-offs were 4.4 million, approximately $2.5 million less than the provision.

As a result, the allowance for credit losses as a percentage of total loans increased from 0.84% in June to 0.89% in September.

Valley's provision is determined based on multiple factors, including Valley's expectations relating to loan growth and the current economic environment.

In the press release, Valley included a table outlining the allowance allocation by loan category.

Exclusive of Valley's residential mortgage and home equity loan portfolios, Valley's current allowance coverage ratio is 1.18%, up from 1.13% in the prior quarter.

We believe our current reserve allocations are adequate, based on the current composition of loans, current delinquency rates, loss history experience, and expected future losses.

Future period loan loss provisions will continue to reflect actual and expected delinquency rates, net charge-offs, as well as economic conditions prevalent in the marketplace.

Additionally, continued strong loan growth is another variable, which will directly impact the future provision levels as that is included in our methodology.

The linked quarter increase in non-performing assets of 5.7 million is mainly attributable to five commercial properties and does not reflect a systemic change in Valley's overall credit quality.

The non-performing asset to total loan ratio for the quarter was 0.42% and is in line with management's expectations given the current economic environment and is microscopic compared to many of our peers.

As of September 30, the Bancorp's tier one risk based capital ratio was 8.94% and the total risk based capital ratio was 10.65%.

Valley's capital ratios were impacted during the quarter as a result of the impairment in realized losses on the Fannie Mae and Freddie Mac perpetual preferred securities.

These losses reduced Valley's ordinary earnings generation, which ordinarily sustains capital levels and balance sheet growth.

Valley's anticipated normalized earnings during the fourth quarter are expected to increase current capital levels and allow for balance sheet growth in line with management's expectations.

Internal minimal targets for tier one risk based and total risk based capital are 9% and 11%, respectively.

As a result of the Greater Community acquisition, Valley realized $114 million of goodwill, which had an immediate negative impact on Valley's tangible equity ratios.

For the period, Valley's tangible common equity to tangible asset ratio was 5.50% and the tangible common equity to risk weighted assets ratio was 6.90%.

As stated above, Valley's normal operating earnings provide sufficient income to generate capital required to expand these ratios and meet management's growth targets.

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

All right.

Thank you.

(OPERATOR INSTRUCTIONS.) And our first question comes from Morgan Stanley's Ken Zerbe.

Please go ahead, sir.

Thanks.

I guess the first question I have, in terms of I guess increasing funding through CDs, a number of firms this quarter have seen a decline in sort of the core checking and savings and they've been offsetting that through CDs and it seems that Valley is no exception there.

Could you just talk about, (a) I guess the duration of the CDs that you are putting on and how sticky those are, and is this something that is sustainable or where you want to be over the long-term by shifting more into CDs?

Thanks.

Well, we always look to bring in the deposits--our core deposits as our first source of funding.

We like to match funds against our loan portfolio or our assets to the extent that we can.

To the extent we get in longer term CDs, the happier we are, obviously, because most of our term lending is for more than a three or six-month period.

The competition in our area continues to be very stiff, especially with regard to certificates of deposit, and the pricing that we are facing is what we're adjusting our rates to.

I'd be very happy if the competition in this area were to drop a bit and we would be able to drop it.

We did have an experience, as I'm sure many financial institutions did, a lot of concern on depositors with regard to their deposits being in amounts in excess of FDIC insurance.

And initially, we did start to see some withdrawals of funds.

That seems to have reversed itself though ever since the FDIC has increased its limits.

I think there's more comfort on the Street.

I hope that when the Street reads our numbers and they see the level of our performance that will further fortify the confidence of the depositor base and we will continue to see deposit inflows.

And what was the duration of the CDs you were putting on during the quarter, or the average duration?

About nine months is probably on the average.

I see.

Okay.

And then, just the second question I had, I guess under the assumption that your--or the knowledge that your auto portfolio is still holding up very well relative to the industry, what--when you think--when you look going forward, I mean, obviously, the economy is weakening.

What do you look at as being sort of the potential drivers of that?

I mean, is it just as easy as rising unemployment, if that goes up by 100 basis points then auto--the losses are likely to pick up, or is there other things that you also look at for--?

I think that you have to look at the geography of where we do most of our lending.

People need that car to get back and forth to work.

They need that car for survival.

It's not a luxury item.

So I think the fact that they continue to pay is heavily driven by that factor.

We do look to make our loans to people who have strong FICO credit, strong, clear TRW-Experian credit reports.

Also, we are seeing the price of gasoline drop materially.

In New Jersey in particular, the price of gasoline seems to be a lot lower than the rest of the country.

We're--we've been well below $3 for some time now, so I think that's all helping it.

But I think most of it has to do with how we underwrite.

I think that has more to do with the fact that our loans tend to perform.

Great.

All right.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) And our next question comes from FTN Midwest Securities' Peyton Green.

Please go ahead, sir.

Good morning.

I was wondering if you could comment maybe on how your collection process is a little different maybe, because it seems like there's a lot of art in getting paid back on loans--.

I'm with the bank--this is Jerry.

I'm with the bank for almost 34 years.

We have always had more people collecting loans than making loans.

The squeaky wheel is the one that gets the oil.

We jump right on a case--if somebody goes a couple delinquent, we're already on the case.

The car doesn't sit out there very long.

We'll repossess the car certainly by 60 days and maybe in some cases 45 days.

So we really monitor it very closely.

Again, it's a grinding out business.

You have to keep making phone calls and getting in touch with the borrower.

Nothing magical.

Okay.

And then, on the commercial end, are you all seeing anything not necessarily non-performing, obviously, but in terms of your credit classifications.

Are you seeing any change in grades that concerns you more about the credit outlook six to nine months down the road?

No.

Okay.

No.

Well, what our experience has really been is that--and I've said this repeatedly--that we're facing more a crisis of confidence than anything else.

The economy in our part of the world still is pretty robust.

We have unemployment rising, but you have to look at what levels that employment is rising at.

I was at a restaurant in New York City last night and it's a pretty big restaurant and they didn't have an empty table.

So people are still going out and they're still spending money in this part of the country.

Okay.

And then, just going forward, at least a quarter ago anyway there seemed to be a pretty good opportunity for you all to take business just because the spigot had been turned off at a lot of places.

Is that still true now?

That is very true.

Okay.

More so now than I can recall in the last 15 years.

Okay.

And I guess how?

Have you all changed your underwriting criteria or is it just--.

--No--.

--The market's moved towards you?

No, the market moves to us.

They--we have continued to take good care of our existing customers.

A lot of times people are having problems with banks.

They talk to friends and they say, gee, we bank at Valley and they never told me no when I needed money.

Obviously, as long as the customer has the capacity to handle the credit we're anxious to lend them the money.

Okay.

All right.

Great.

Thank you.

Thank you.

And our next question comes from Sandra Osborne of KBW.

Please go ahead.

Thanks.

I was just wondering if you could talk briefly about the sustainability of the net interest margin, especially given the limited pricing flexibility that you have in deposits and also the--.

--Well, we--that's a good question, because what we are seeing now is a return to rational pricing on the asset side.

While we're still facing a lot of competition on the deposit and funding side for rates, we are seeing now much better margins coming in on our loans even above the higher pricing of deposits.

The marketplace is starting to price risk back into loans again.

And we're starting to see much more rational pricings.

So should the better asset yields completely mitigate the deposit pricing?

Well, it's going to largely mitigate it.

I think there's no doubt about it.

And remember that even in the environment we just are coming through where rates were unreasonable on the deposit side from some of the depository institutions out there, our margins still increased.

So I think we've already seen that.

I think if anything we might see some of those deposit pricings start to come down as we go further out into the end of the year and into '09.

So I think the margin should hold up.

All right.

That's all I have.

Thanks.

Thank you.

And we have no more questions in queue.

Please continue.

Well, if there are no other questions, we thank everybody for turning in--tuning in on our conference today and look forward to speaking to you at the end of next quarter.

Thank you.

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