Valley National Bancorp (VLY) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Valley National Bank fourth quarter earnings 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, today's conference call is being recorded.

I'd like to turn the conference over to your host, Ms.

Dianne Grenz.

Please begin.

Thank you, Amy.

I'd like to thank everyone for participating in Valley's fourth 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 and 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 relate to our SEC filings, including those found on forms 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

And now I would like to turn the call over to Valley's Chairman, President, and CEO, Gerald Lipkin.

Thank you, Dianne, and good morning, everyone, and welcome to our fourth quarter and full year 2008 earnings conference call.

2008 marked a challenging year for many within the banking industry, Valley not excluded.

However, unlike many of our peers, 2008 was a profitable year for Valley.

While our absolute net income is disappointing and the return to our shareholders inadequate from my perspective, our results must be viewed in the context of the environment in which we operate, as well as the quality and long-term sustainability of each dollar of net income.

In our current operating environment, not every loss is equal.

Credit loss is attributable to poor underwriting decisions, reflect tangible losses, and an erosion of shareholder wealth.

Conversely, many fair value losses based upon circumstantial market valuations enforced by the accounting industry create confusion within the investment community, and significantly understates the true [asset validity] and equity of each company impacted.

As a testament to our time-proven underwriting standards and guidelines, in spite of the current economic conditions, Valley's credit quality remains stable and stellar compared to our peers.

Current period delinquencies and loan losses remain relatively low compared to industry norms.

Our commercial loan and commercial real estate portfolios each reported year-end 30-day plus delinquency rates of under 1%.

Our residential real estate and home equity loan portfolios continue to outperform industry delinquency metrics by huge margins, and their delinquency levels remain under 1%.

And finally, while our automobile portfolio showed increased losses, the portfolio continues to perform better than many analysts' expectations.

In part, as a result of the tangible and paper accounting losses realized throughout the banking industry during the fourth quarter of 2008, the Treasury Department created TARP capital purchase program in which Valley was a participant, designed to spur lending activity and provide liquidity to the investment community and consumers alike.

Through capital injections into sound financial institutions, the Treasury Department provided liquidity at a time when secondary markets had seized and credit availability to the average American began to disappear.

At that time, the government's investment in sound banks was made to enhance confidence in the industry.

As many of the money center banks have begun to release worse-than-anticipated full year and fourth quarter earnings, our government has once again begun to debate the merits of providing additional capital to the banking industry.

It is my opinion that most banks in the United States, including Valley, do not need more capital nor another capital infusion, but rather a return to sanity by the accounting profession.

The manner in which mark-to-market accounting and other-than-temporary impairment rules are applied, wreak havoc on the banking industry and cause serious damage to bank earnings and capital.

The dislocation prevalent in the securities markets make it near impossible to ascertain true value for many investments.

As a result, owners of those securities are mandated to realize losses on certain investments based upon unrealistic markets, or even worse, through artificial metrics pricing.

Just this quarter, the Valley incurred non-cash impairment losses of $14.3 million on three securities, which are current, meeting all contractual obligations, and a potential that no actual loss will be incurred.

Had these securities been classified as loans, there would have been no write-down.

The lack of uniformity in valuing varying classes of assets and deposits in general, distort the financial condition of all banks.

Prior to mark-to-market rules, the fair values of non-trading financial assets would have been reflected in a footnote on the financial statements.

Transparency is often given as the reason for mark-to-market accounting.

But always -- but that was always present to anyone who took the time to read a bank's financial statements.

Our country's financial institutions performed well and have maintained the confidence of the world since the Great Depression.

It was not until FASB and the SEC decided to fix something that wasn't broken, that many banks began to have capital problems.

If Congress is eager to see bank lending expand, we must first deal with this fundamental issue by immediately calling upon the FASB and the SEC to again review the mark-to-market guidelines and OTTI rules as to their applicability to banking institutions.

As I earlier stated, Valley participated in the TARP capital contribution program, receiving $300 million in cash in exchange for 300,000 shares of preferred stock.

Valley's capital ratios prior to receiving the proceeds were strong, and the Company was not in need of additional capital.

However, with economic uncertainty looming and the void of a crystal ball, Valley elected to participate in the program as an insurance policy, which guarantees the long-term viability of the institution, should economic conditions deteriorate further.

The cost of the issuance is slightly dilutive to our shareholders.

However, it demonstrates our management's philosophy of managing for tomorrow and not for today.

Prior to and subsequent to receiving TARP proceeds, Valley's lending operations have always been open for business.

During 2008, Valley originated over $2.0 billion of new loans; over $400 million of which were in the fourth quarter.

Since receiving the TARP proceeds, Valley has supported local businesses and consumers in the form of direct loans or investments in mortgage-backed securities of over $450 million, well in excess of the proceeds we received under the TARP capital purchase program.

Our lenders are actively pursuing new banking relationships and are eager to provide financing to creditworthy borrowers.

Valley has the liquidity and capital to grow.

However, we will not undermine our credit culture and irresponsibly expand the balance sheet.

Our primary allegiance remains to our shareholders, and we must staunchly manage the institution as stalwarts of their investment in the Bank.

In doing so, all senior management at Valley National Bank have forgone raises in 2009.

In addition, senior executive management, including myself and my top five executives, have recommended to our Board of Directors, and they have implemented decreases in our total compensation from the prior year ranging from 25% to 40%.

Although Valley was profitable in 2008 and management successfully navigated one of the most difficult operating environments during my 46-year career in banking, the return to our shareholders must improve, irrespective of the operating environment in which we operate.

During 2009, we will preserve the quality of our balance sheet.

Historically, we have operated with an industry-leading efficiency ratio.

In 2009, we plan to operate even leaner.

Our shareholders deserve better returns and in 2009, we plan to deliver them.

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

Thank you, Gerry.

The fourth quarter results include a number of non-core items, which I will begin my discussion with.

First, there were the following OTTI charges recorded in non-interest income under net losses on securities transactions in the financial statement during the quarter, totaling $17.5 million, of which the major items are -- one, the write-down of $3.3 million of Freddie Mac/Fannie Mae preferred securities, as their values declined further from the third quarter, and leave only a small balance of $1.3 million remaining after the write-down.

Two -- we own two pooled trust preferred securities classified as held-to-maturity and known as [pretzels], for which we wrote down $7.8 million and are left with a small balance of $1.1 million.

These are the only two pretzels we own, but we do own one other non-pretzel pooled trust preferred security, which is currently rated AAA and classified as available for sale.

Three -- we also took a $6.4 million OTTI charge on a private label, mortgage-backed security classified as available for sale.

This is a security which is performing with only 2% delinquencies and only a small possibility of loss.

However, we calculated the fair market value loss, using matrix pricing from a third party vendor for this illiquid security at 60% of book value.

We believe, based upon pre-payment speed, delinquencies, loan-to-value ratios and performance of this pool over the last few years, that we will recover most of this write-down.

Also included in non-interest income under the same line of the income statement, net losses on securities transactions, we recorded a gain of approximately $6 million on securities transactions, some of that coming from the sale of Freddie Mac/Fannie Mae securities being sold and reinvested into other instruments with better collateral guarantees.

We also recorded losses during the quarter from mark-to-market adjustments included in trading losses on the income statement.

These include a mark-to-market of our own trust-preferred security for a loss of $5.8 million and a mark-to-market loss on trading assets of $2.2 million.

Included in non-interest expense were the following two items -- we recognize accelerated expenses of $3.1 million on two interest rate caps due to the termination of the hedging relationship, which were designated as cash flow hedges, to protect Valley against movements in interest rates.

The hedges are still in place for the next 4.5 years, and we anticipate that it will be beneficial to Valley over that period.

We also recorded an immediate expense of $4.6 million for a check fraud scheme perpetrated by a long-term commercial customer during the latter part of December.

We anticipate future recoveries to offset this loss.

On to the net interest margin.

On a sequential quarter basis, our net interest margin declined by 34 basis points to 3.30%.

The decline is largely the result of the economy and actions taken by both Valley and other institutions, that were affected by the turbulence in the market over the last quarter.

The decline was the result of five very specific factors, including -- one, liquidity throughout the marketplace at the end of the third quarter was a concern to Valley.

The banks were not lending to each other.

Some large depositors were removing deposits and investing in treasuries to obtain government guarantees.

The Federal Home Loan Bank of New York, a source of short and long-term borrowings for Valley, reduced all of its lending to a maximum two-week term.

As a result, in September, we initially borrowed $400 million for two weeks, and in early October, paid off $100 million of that borrowing, as we were able to extend the duration to five to seven months in new Federal Home Loan Bank advances for $300 million, with an average rate of approximately 3.56%, thus providing guaranteed liquidity through the end of 2008 and into 2009.

As a result of declining market interest rates, those funds earned very little interest income and will do the same for the first quarter of 2009.

During the fourth quarter, the impact on our net interest margin was approximately 7 basis points and the effect on the net interest income was approximately $2.4 million.

These borrowings mature between February and April in 2009 and are expected to be repaid in full.

We were, and remain, comfortable providing additional liquidity at a time of much ill liquidity in the marketplace, and we're prepared for the cost of such additional sources of funds.

Two -- as interest rates decline, due to the Fed's aggressive interest rate actions, our asset-sensitive, prime-based loans on our balance sheet were impacted.

We will recover some of this reduced income beginning in the first quarter of 2009, as maturing CDs of approximately $830 million should reprice downward.

Additionally, in an effort to counter the decline in the prime rate, Valley has its own internal prime rate, which is presently 125 basis points greater than the market level of prime.

We believe this action, coupled with instituting floors on many of our Commercial Lending relationships, will positively impact the margin in 2009.

Three -- the fourth quarter was the first full quarter of lost interest on the Freddie Mac/Fannie Mae preferred securities, which approximated $1.4 million before the tax benefit of a 70% tax exclusion.

Four -- the Federal Home Loan Bank of New York reduced its dividends in the third and fourth quarter of this year.

The accrued estimated third quarter dividend and fourth quarter dividends were adjusted downward to actual in the fourth quarter.

The impact resulted in a negative accrual for the quarter of approximately $650,000.

We have reduced our first quarter dividend expectations accordingly.

Five -- as discussed last quarter, the result of prepaying $25 million of Federal Home Loan Bank borrowings during the third quarter resulted in an improvement of 6 basis points in the third quarter net interest margin, partially explaining the large increase in these costs for the fourth quarter.

As mentioned in the press release, we do not expect the net interest margin to increase during the first quarter.

We do expect the net interest margin -- excuse me -- to increase during the first quarter of 2009.

Although we do not expect to recover the absolute decline in our net interest margin, we do anticipate a significant portion will return during the first quarter, and a projected larger amount in the second quarter of 2009.

We were not surprised by the decrease in the margin due to the severe and immediate decline in short-term interest rates, based on our short-term asset sensitivity, which generally recovers beginning in the next quarter, as our certificates of deposit begin repricing.

Income taxes during each quarter are recorded based upon an estimated effective tax rate.

That estimate is utilized throughout the year and adjusted for specific items not necessarily part of normal operating results.

As discussed in the press release, the reduction in income taxes, compared to 2007, was due to the lower book income for 2008 and the reversal of the $6.5 million valuation allowance attributable to a capital loss carryforward from the prior year.

The change in taxes to the fourth quarter of 2007 was also due to the reversal of the $2.9 million state tax valuation for capital losses, set up in the third quarter of 2008, and the lower book income compared to the prior year fourth quarter.

We are anticipating that the effective tax rate for 2009 will be approximately 31%.

Credit quality.

Our total 30-day delinquencies remain very low at 1.06% compared to many of our peers.

As mentioned in the press release, despite this level of delinquencies, we increased our quarterly provision for credit losses to $11.6 million from $6.9 million in the linked quarter.

We increased the provision to provide for the potential risk of loan losses resulting from a continued downturn in the US economy.

In the early 1990s, we also provided additional reserves in response to the then-economic turbulence, which was not needed or used by Valley at that time.

This increase increases the allowance to total loans by 4 basis points to 0.93% at December 31, 2008.

Additionally, the coverage ratio of the allowance to non-performing loans increased from 237% at December '07 to 282% at December of '08.

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

Exclusive of Valley's residential mortgage and home equity portfolios, Valley's current allowance coverage ratio was 1.22%, up from 1.18% in the prior quarter.

We believe our current reserve allocations are adequate, based on the current composition of loans, our delinquency rates, loss history experience, net charge-offs, as well as economic conditions prevalent in the marketplace.

Capital ratios.

As of December 31, 2008, Valley National Bank met the well-capitalized minimums and the Bank Corp.'s leverage ratio was 9.10%.

Tier 1 risk-based capital was 11.45% and the total risk-based capital was 13.19%.

These capital levels afford us a multitude of opportunities to expand the Institution organically or through acquisition, and ultimately enhance shareholder value.

Our tangible common equity to tangible asset ratio was 5.42% at December 31, and excluding the TARP funds and additional short-term liquidity we spoke about, the ratio would have been 5.61%.

This concludes my prepared remarks and we now open the call to questions.

(Operator Instructions).

John Pancari, JPMorgan.

Can you just give us a little bit more detail on the delinquency trends and the loss trends in your indirect auto book?

And just the trajectory of that book during the quarter?

I think they were pretty much consistent.

There was not a big increase over the prior quarter.

We fund some charting on our delinquency trends over many years.

And it would appear that, from that, that delinquencies tend to come in the first two years that a loan is on the books.

After that time, they tend to trail off very, very quickly.

We began cutting back severely on our consumer credit lending and tightened up on some of our already tight standards about a year and a half ago.

So, I think that we are reaching the end point of where the loan losses in that portfolio will be of the magnitude they are.

And I would expect that we will, as 2009 progresses, see a continuing decrease in the levels of delinquencies and losses.

Do you have the absolute amounts on the delinquency ratio for that book and the charge-off ratio?

Because I know you indicated they remain well below peers.

So, do you have that number?

Yes.

As of December 31, the past due -- 1.74%.

Probably about a third of -- a quarter [a tenth of] --

And that's total 30-day and more.

That's total 30-day -- 1.74% delinquent, not loss.

And that's starting at 30 days.

Okay.

And do you have the charge-off ratio?

Just one second, we'll pull it up.

We got it.

You know what?

Why don't we come back to that as soon as we -- somebody --

Yes, I've got to look.

Okay.

And --

I'll get you in the back -- so do you have any other --?

Okay.

Yes, actually, just one other question on credit.

Can you just give us a little bit of color in terms of the credit trends you're seeing in your New York C&I portfolio?

Not -- so far, it's been holding up.

We haven't seen any trends, anything beyond pretty much the norm, which is very small.

We have not seen an increase in any of the New York loans.

Including CRA?

Yes.

That's predominant.

Our -- most of our New York lending is commercial real estate, commercial lines, as both of them continue to remain very strong.

The loss was 86 basis points, which is probably around the best of industry norms.

I mean, ours is usually a little bit less than that; but at 86 basis points, we're -- I'm not happy with it, but it's still very low.

Okay.

And one last question -- on the margin, I know you indicated that you expect a rebound in the first quarter.

Can you give us an idea of the magnitude that you are expecting, in terms of your projections for such a rebound for the first quarter?

I would probably say that at this point, it's a little bit of a guesstimate, because I don't know on the CDs exactly what's going to reprice.

But we would guesstimate about 50% of what we lost will come back to us during the quarter.

Okay.

Thank you.

Now, just take into account, though, that the 6 basis points I mentioned really -- it's really, instead of being 34, you should look at 28 basis points.

And so I would say we should be looking about 50% of that number coming back, give or take a little bit.

Okay, thanks.

Collyn Gilbert, Stifel Nicolaus.

Just a follow-up on some of the -- the question in terms of commercial activity in the New York area.

Maybe -- could you guys give a little bit of detail as to why you're not seeing stresses?

Or what it is about your underwriting process, whether it's in terms of cash flows or the collateral or -- kind of how you go about that business that's allowing you to not see negative trends.

Because that's certainly an anomaly.

I really have to give the credit to our lenders.

We have a very, very tight lending policy.

And our people are forced to adhere to that policy.

We've always -- take the residential market.

Why did we not have problems?

Well, we always insisted that people put money down on a house.

We encourage one-third, but on certain circumstances, 20% down; but when you look at the portfolio, you see that, as a portfolio, we always got maybe 40% down.

We kept out of speculative type of lending.

If someone is buying a commercial building in New York City, they had our skin in the game; they had to put money into the building, just like we do here in New Jersey.

The banks that felt that they could lend 100% because inflation would put them in a good position, was an approach that we never took.

We get personal guarantees -- thank you, Bob Meyer is with us -- we get personal guarantees on most -- almost all of our loans.

You know, there are exceptions to the personal guarantee, but we do push for it.

If we're doing a piece of real estate without personal guarantees, today we're looking for 50% or more down.

How about in terms of cash flow projections and you know --?

We do cash flow projections on all of our commercial loans.

We (multiple speakers) -- I'll let Bob speak.

We look at global cash flows.

We look at contingent liabilities on projects that may be under construction within the family of borrowers that we're dealing with.

When we're talking about the traditional commercial loans, we've seen virtually -- I've got to knock on wood, but we've seen virtually no deterioration.

The past due percentages in the commercial portfolio in New York are down in the 30 basis point range.

So, we hope our underwriting standards will hold up.

Obviously, this market is very challenging, but our clients so far have withstood it.

Okay.

Who -- (multiple speakers)

Underwriting is really the key.

And also, what we are experiencing today is a lot of banks that got themselves in trouble with their lending have really been forced to pull way back.

And a lot of their good customers are now coming to us; people who -- they also would have gotten a guarantee or a large down payment from.

And they're coming to us.

So that's one of the reasons I think we're seeing some good loan growth.

Yes.

I guess I'm just thinking -- underwriting gets you to a certain level, and then it's just the economic forces could be even more powerful than that.

I'm just trying to decipher where the risk is, just from the economic standpoint.

And if you guys aren't seeing stresses in your portfolio, I mean, are there areas or segments that you're concerned about or that you're pulling back on growth?

I was actually surprised to see that you're growing construction -- more to the fact that there's demand out there for construction loans.

Or maybe you could talk a little bit about that.

Yes.

Let me just comment on one thing on the construction.

Included in our construction loans was a loan made during the most recent quarter, and that was $60 million for the purchase of a building in New York City, a residential building in New York City.

The loan was actually given for purposes of acquiring that $60 million property --

[100 and some-odd-million dollars].

Well, right, the loan was $60 million.

We gave $60 million.

The end result is, is that that is going to end up being a condo-conversion or co-op conversion (multiple speakers) -- condo-conversion.

And they're going to be using their own funds or other funds to do that conversion.

It's a fully rented out building right now.

And they're going to go through the process.

So, the point is it really probably should not have been shown as a construction loan, but it's in there for the quarter.

So, when you say it's growing, I agree it's in the number and we're reviewing that at the moment to decide the appropriate classification.

And that being said, there are some projects that were underway that are completing and selling out; a couple of projects that we expect to pay down significantly in the first quarter.

And we would anticipate continued reductions of those loans, as we go.

Yes.

Not to be too scared, I mean, this particular loan, while it's a large loan, the borrowers put in well over $40 million of their own money in front of us.

And on a conversion basis, if we had to do it today, it would come in somewhere in New York City in the $300 a foot range; way, way below market for --

What kind of pricing are you guys getting on these types of projects?

I would think it would be pretty good.

Well, today, the pricing has been improving.

As it was pointed out in Alan's comments, I think it's important -- we have been implementing floors on our interest rate on almost all of our loans.

You can't do it when someone has a commitment for 12 months that we issued six months ago.

We have to wait until that commitment comes due.

But as our lines of credit come due, we're implementing floors on almost all of them, which will help our margin dramatically and prevent another crush if the Fed drops rates in the future.

Okay.

That's good for now.

Thanks.

Gerard Cassidy, RBC.

A question for you.

Gerry, can you share with us what you're hearing about the Federal Home Loan Bank of New York or just the Federal Home Loan Bank system?

It appears that different districts now seem to be having some problems potentially with capital.

In your talks with different members of the Federal Home Loan Bank of New York, are they concerned about the conditions of some of their members?

I'm sure they're concerned about some of the condition of their members.

However, we deal with the Federal Reserve Bank -- not the Federal, the Federal Home Loan Bank of New York, and from the information that I've read in the press just last week, they are among the strongest.

They do meet all of their ratios.

They are well-run.

I know Al DelliBovi quite well.

He has always impressed me as a conservative individual.

Our understanding, I think, Gerard, is that you also own a lot less securities that are of concern from a write-down standpoint than many of the other home loan banks.

Okay.

And also, there was a good article in the paper yesterday about the application of the OTTI to them.

And they point out that they had good performing assets that they're being forced to write down under OTTI.

Right.

You know, the Home Loan Bank of New York had a problem a couple of years ago, when all the capital issues were being raised for them.

And New York came out of it very, very quickly.

They had some, I don't know, manufactured housing homes of some kind and they had to take some write-downs.

And they reduced their dividend at that time as well.

But they worked through that pretty quickly and built their capital back up quickly as well, and returned to full paying dividend.

Okay, good.

Can you also, Gerry, give us your views on this legislation that has been introduced to Congress to allow bankruptcy judges to modify mortgages?

What your thinking is there.

And then what kind of impact, if it does go through, what kind of impact this could have on -- not just your first mortgages but the fear of more people filing bankruptcy and what it could do to just consumer lending in general.

I'm obviously not happy to see this type of legislation take place, because I never like to see contract law altered.

I think it only makes it more difficult for people to get home loans in the future, because banks are going to be much more reluctant to lend, not being certain that their contract between themselves and the borrower is going to prevail.

That all being said, it has very little impact, at least at this time, on us.

I mean, our delinquency levels in our residential mortgage portfolio are still very, very low.

Our borrowers are performing.

We aren't seeing a lot of foreclosures.

So, I don't know that it'd have that much of an impact on us.

How about an indirect impact where you may not have the mortgage but you have the auto loan of somebody that -- my fear for all of you guys is this may encourage more people to file bankruptcy that would not normally -- you know, they're [teaching] (multiple speakers) --

Of course, I agree with that.

Okay.

All right.

Thank you very much.

I'm showing no further questions.

All right.

Well, thank you all for joining in.

We'll look forward to speaking to you at the end of the next quarter and hopefully, we'll have a lot brighter picture.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation and for using ATT executive teleconferencing.

You may now disconnect.