Valley National Bancorp (VLY) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the First Quarter 2009 Earnings Presentation on the 23rd of April, 2009.

(Operator Instructions) I would now like to hand the conference over to Dianne Grenz.

Please go ahead, madam.

Thank you, Holly, good morning.

I'd like to take -- thank everyone for participating in Valley's First Quarter 2009 Earnings Conference Call, both by the telephone and through our webcast.

If you have not read the earnings release we issued early 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.

And 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 forms on the forms 8-k, 10-k and 10-Q for a complete discussion of forward-looking statements.

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

Thank you, Dianne.

And good morning and welcome to our First Quarter 2009 Earnings Conference Call.

During the quarter, Valley generated earnings of $37.4 million, an increase of over 120% from the prior quarter, and over 18% from the same period one year ago.

With these results Valley continues to differentiate itself from many of its peers within the banking industry.

Our proven track record of delivering consistent results in a multitude of operating environments is evidenced by our strong performance this quarter.

The economic environment continues to be challenging for many within the banking industry.

Years of lax credit underwriting combined with excessive emphasis on short-term results, have in part established a difficult hurdle for many financial institutions and will take a significant amount of time to work through the system.

Rising unemployment, coupled with the stagnant economy, created an added air of uncertainty surrounding the general economic growth of our marketplace.

Thus far, Valley's loan portfolio has performed in an exemplary manner and the Bank has been able to consistently generate significant operating income.

Nevertheless, management must continue to remain vigilant in loan underwriting and be careful not to ignore the potential impact that a prolonged recession may have on our local economy.

Recklessly attempting to accelerate loan growth, which exceeds that of our marketplace, could lead to financial suicide.

As an alternative, to operate soundly in this environment and expand net income and shareholder valley, Valley has laid out four core operating focuses.

Attempt to gain -- number one, attempt to gain market share by taking strong credits from banks weakened by the economy.

Two, remain steadfast in our conservative approach to underwriting.

Three, implement actions to reduce operating expenses.

And four, reevaluate pricing on all loan and deposit relationships.

Building the most profitable organization, not the largest, is Valley's operating mantra.

With that being said, during the quarter, Valley's loan portfolio declined.

Although we originated over $300 million of loans, Valley's strict adherence to credit quality, maintaining our interest rate risk profile and declining sales within the automobile industry were the catalysts for the linked quarter decline in loans.

Through both monetary and fiscal policy, the government has artificially reduced the level of market interest rates and initiated an escalation of mortgage refinancing.

Accordingly, during the quarter, Valley processed over $375 million of residential mortgage applications.

However, due to the relatively low yields on many of these fixed- rate, long-term loans, most have either been originated and sold, or are in the process of being sold.

Although we have ample liquidity to portfolio these originations and expand net interest income, management believes that the long-term interest rate risk outweighs the short-term benefits.

The bank's automobile portfolio declined nearly $120 million, or 9%, in just three months.

The net portfolio decline is attributable to a general slow down in new and used car sales coupled with Valley's strict underwriting standards.

About 18 months ago we implemented stricter underwriting criteria, which required larger down payments for auto originations.

True to prior experience, Valley's loan write offs peaked in the 15 month to 18 month periods following those changes and losses recently have begun to decrease significantly.

Auto loans now comprise fewer than 20% of Valley's loan portfolio, compared to over 24% just one year ago.

Valley's automobile portfolio is largely comprised of indirect originations.

Future growth or contraction within this portfolio will be highly dependent on the overall level of auto sales.

Valley continues to originate new auto loans, although it is not our intention to fish deeper to offset the declining portfolio.

We continue to see opportunities in both commercial lending and commercial mortgage activities.

The first quarter historically reflects a dip in line activity as many of our customers have seasonal line cleanups.

There remains significant opportunities to expand commercial relationships, capitalizing on the dislocation in the marketplace as many of our peers are preoccupied with other internal issues.

Our lenders and credit underwriters review sizable numbers of new potential lending relationships.

Often potential borrowers are dissatisfied with their current financial institution, while others are eager to find a local bank, which provide a more personal approach.

Unfortunately, however, many do not pass our strict underwriting criteria.

Valley's core operating focus through 2009 will be to remain firm in our conservative lending approach.

In spite of the current economic conditions, Valley's credit quality has remained stable and stellar compared to our peers.

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

Our commercial loan and commercial real estate portfolios each reported year end 30 day plus delinquency rates of approximately 1.25%.

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

Although linked quarter, non-accrual loans increased by $14.3 million to $47.3 million, in relation to the overall portfolio the absolute size is relatively small and Valley's allowance for loan losses to non-performing loan coverage ratio stood at over 200% at quarter end, far greater than most within the industry.

Since issuing $300 million of preferred stock to the Federal Government under the TARP program, Valley has meticulously evaluated both its loan and investment portfolio under a litany of economic scenarios.

We have stressed our balance sheet, although not asked by the regulators, with the same vigor under extreme worst-case scenarios, keeping in mind that many of our senior executives and I have considerable regulatory experience.

Prior to receiving TARP, Valley's capital ratios were sound and the Company was not in need of additional capital.

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

Now as liquidity and economic concerns become clearer, management has been able to proactively stress Valley's balance sheet and categorically determine under dire economic conditions whether Valley needs $300 million of additional capital.

As to the level of detailed -- of detail performed in our internal stress test, we analyzed every commercial mortgage on an individual loan basis, stressing our collateral value.

Currently the current portfolio's loan-to-original appraised value is 51% and only six of Valley's nearly 200 commercial real estate loans have loan-to-value ratios in excess of 90%.

Hypothetically, by decreasing property values by 20% from current levels, less than 200 loans would have a current loan-to-value in excess of 90%.

That represents less than 10% of the entire commercial real estate portfolio.

However, the collateral value is only one factor to consider in determining the potential for default.

Our analysis did not take into account the strength of the borrower, the strong cash flow provided by tenants, guarantors on the credit facility and the fact that in some cases, the original loan may have been made many years ago, all of which further reduce Valley's exposure to future problems.

To further identify the potential risks within the portfolio, we have already expanded the analysis on the largest of our commercial real estate loans to review the current debt service ratio, level of personal guarantees and an updated net worth analysis on all the borrowers.

As you expect, our confidence in this portfolio was justified.

We've also performed stress tests in other key areas of the Bank's loan portfolio.

For example, we have some loan concentration in the jewelry industry.

To date, in conjunction with our normal risk assessed -- assessment of our largest relationships, we have specifically reviewed over 80% of the current credit exposures including unused commitments.

Within the analysis, we reviewed both traditional criteria, such as the borrower's net worth, collateral value and business operations, as well as non-traditional dynamics such as an entity's staying power and the reputation and quality of each borrower's financial statements.

As a result of this review, exclusive of loans already criticized, we have identified less than $5 million of principal in what we would internally designate as having a medium to high risk of potential default, and even less with a potential for loss.

We are reassured with the ongoing results of our stress analysis and considering requesting permission from our regulators to repay a portion of our TARP funds in an amount both consistent with the underlying credit risk of Valley and the level of uncertainty in the economic environment.

Excess capital dilutes the return to shareholders, yet as an organization, we must remain cognizant of the potential pitfalls still unknown in the economy.

The amount of TARP, which Valley begins to repay, and the associated timeframe will be a balance between management's assessments of the expected duration of the economic uncertainty and the potential risks to Valley's balance sheet.

We were well capitalized before we took the TARP and remain so today; however, simply returning capital to make a point defeats the rationale of opting into the program initially.

Currently Valley is flush with cash.

We have over $500 million of overnight liquidity sitting at the Federal Reserve and earning approximately 25 basis points.

Although our net interest margin expanded in the first quarter, Valley's excessive short-term cash position negatively impacted Valley's growth in the margin.

As we begin to deploy these proceeds, the accretion to the margin should be evident.

Throughout 2009 we intend to actively reduce operating expenses and improve our already stellar efficiency ratios.

As evidenced by the closure of two branch locations in the first quarter, we have begun the process of closing under-performing branches and reallocating those resources to de novo branches in more desirable marketplaces.

We have reduced salary expenses throughout the organization in part by discontinuing operations which did not meet or exceed our internal performance thresholds.

Additionally, we continue to review the pricing levels of all of our deposit and lending relationships.

We intend to grow Valley's operating income, irrespective of our operating environment.

Loan generation is in part a result of the economic activity within our marketplace.

However, improving the efficiency of the organization and the spreads at which we conduct business are largely dictated by Valley.

We remain cognizant of our long-term objectives.

Generating outstanding consistent returns for our shareholders is the prize, and we fully expect to deliver both solid and stable results throughout the remainder of 2009.

Alan Eskow will now provide a little more insight into the financial results.

Thank you, Gerry.

My comments this morning in the press release from earlier today reflect the 5% stock dividend declared on April 14, 2009 and to be issued May 22, 2009.

As a result, all per-share data has been adjusted.

During the quarter, Valley early adopted the new fair value and other than temporary impairment guidance.

As a result, the new calculation and subsequent disclosure of OTTI on the financial statements is different from that of prior periods.

In calculating OTTI, both the amount attributable to potential credit losses and the amount attributable to changes in interest rates and other market fluctuations are presented on the income statement.

However, now only the credit portion of OTTI impacts earnings.

In addition, the new guidance requires Valley to judiciously review all broker prices received on its securities portfolio and determine whether an active and liquid market exists for each.

Should management identify an illiquid and distressed market, the valuation of each security must be calculated in accordance with a Level 3 valuation approach as identified in FAS 157.

In addition, as a result of Valley's early adoption of this FSP, Valley's equity section of the balance sheet recognized a cumulative accounting adjustment and the OCI section of the balance sheet was positively impacted.

The first quarter results include a couple of non-core items, which I will discuss.

First, there were OTTI charges recorded in non-interest income during the quarter totaling $2.2 million, net of the portion of loss recognized in OCI.

Three private label mortgage-backed securities, classified as available for sale, comprised the loss.

As of March 31, 2009, the adjusted book value for the three securities was $36.5 million and the market value was $32.8 million.

All three securities are currently performing and meeting all contractual obligations.

Under current industry default scenarios, each security may experience a shortfall in principle, which is why we realized the OTTI.

However, as of today, all cash flow is current.

The after tax impact is $1.4 million, or $0.01 per share.

Also included in non-interest income are net trading gains of $13.2 million, attributable to three items.

Valley's junior subordinated debentures or trust preferred security, which is the largest of the three items and is carried at fair value, reflected market value gains of $13.8 million as Valley's market price declined during the quarter.

Valley adopted a fair value treatment of this instrument under FAS 159 in 2007.

Our intention was to use this as a hedge in a normal interest rate environment and as an asset liability management tool.

Subsequently, as a result of the unforeseen turbulence in the financial markets, we began to pay off the trust preferred and in fact did redeem $40 million through the third quarter of 2008.

When we received the TARP capital in November of 2008, we were prohibited from allowing this to be paid down any further, as it is treated as capital.

We recorded a loss of $5.4 million on this security during the fourth quarter of 2008, as there was an increase in the price of this security from the prior quarter.

We are not happy with the volatility this creates to our earnings each quarter; however, the accounting rules will not allow us to stop fair valuing this debt security, even though we cannot pay it down any further under the TARP program.

The next category will be provision and the allowance; Valley's provision during the quarter was almost $10 million, approximately $2.7 million greater than our net charge offs of $7.2 million.

Our net charge offs increased only $587,000 during the quarter from the prior period.

Our reserve for loan losses totaled $97.4 million, or 0.99% of loans.

Non-accrual loans, currently at $47 million, increased by about $14 million during the quarter so that our coverage ratio of the allowance-to-non-accrual loans declined to 206%, still a very healthy level.

A large portion of our non-accrual loans are well secured by real estate or other collateral, so we do not expect these loans to necessarily develop into large losses.

In fact, one $4 million commercial loan recently put on non-accrual is paying currently, is secured by inventory and real estate collateral and could pay down substantially by year end.

Lastly, a recently -- a recent comparison conducted by the OCC of our reserve coverage ratio to our peer group showed that we were at the top of the list.

On a sequential quarter basis, our net interest income increased by $2.2 million to $109.6 million.

This increase is largely attributable to an expansion of the net interest margin by 5 basis points to 3.35% and additional average interest earning assets of $76 million.

The increase in the margin is mainly a result of a decline in Valley's cost of deposits from 1.76% last quarter to 1.54% in the first quarter.

We anticipate further expansion in the margin as Valley's certificate of deposits continue to re-price at lower deposit rates and Valley's short-term liquid position begins to be employed into higher yielding investment and lending facilities.

In addition, if you recall during October, liquidity within the marketplace was scarce and there was a general concern regarding funding at many financial institutions.

And to hedge ourselves, we borrowed $400 million in short-term funding from the Federal Home Loan Bank at an average cost of 3.35%.

The last of these term borrowings was paid back last week, which will also help the margin in the second quarter.

During the quarter, Valley's cash position, as mentioned by Gerry, negatively impacted the net interest margin by 8 basis points and as this position declines the impact to the margin should be positive.

Non-interest expense declined $3 million from the fourth quarter to $76.9 million.

Operating expenses in the fourth quarter included two non-recurring items totaling $7.6 million.

Exclusive of these non-recurring charges, linked period operating expenses increased $4.6 million.

The increase is attributable to $2.1 million of addition FDIC insurance premiums; $400,000 of rent expense, mainly for new branches; $450,000 of increased pension plan expenses; and a $1.1 million impairment on the fair value of loan servicing rights; and approximately a $2.1 million of seasonable occupancy and benefit expenses, typically realized in the first quarter.

We anticipate continued improvement in Valley's operating expenses as management reviews all areas of operations and continues to focus on improving Valley's efficiency ratio.

As of March 31, 2009, Valley National Bank met the well capitalized minimums and the Bancorp's leverage ratio was 9.17%, Tier I risk-based capital ratio was 12.07% and the total risk-based capital was 13.91%.

Valley's risk-based capital ratios increased significantly from the prior period as the Bank's risk-adjusted assets declined and retained earnings grew, partly as a result of operating income.

The impact of Valley's tangible common equity ratio was significant as well.

The ratio increased 28 basis points to 5.50%.

From management's perspective, the tangible common equity to risk-weighted assets is a better indication of capital adequacy.

As of March 31, '09, Valley's ratio is 7.22%, an increase of 51 basis points from the prior quarter.

As many of our peers look to external sources to raise capital, Valley's first quarter operating results represent -- demonstrate our stable earnings capacity and strong capital position.

This concludes my prepared remarks, and now we'll open the conference to questions.

Holly?

Hello?

Thank you, madam.

(Operator's Instructions) Thank you, the first question comes from Matthew Clark from KBW.

Please go ahead with your question.

Sure, thanks.

Good morning, guys.

Good morning, Matt.

Can you first just touch on the incremental increase in non-performers, I guess maybe in the NPL bucket, relative to what you guys had in the 30 to 90 plus bucket at year end.

It seems like the pull through there was fairly limited, and just curious as to what might be going on in that delinquency bucket.

Are things kind of remaining in there?

Have you seen some turn over?

Are things renewing or being put back on accrual, just curious about the ins and outs?

Well, nothing, first of all, has been put back on accrual, I don't think.

So that's not really an issue at all.

I think our delinquencies remain at levels that they are and we're not seeing any major increase moving through to the non-accrual level.

We saw a few loans come through, as you saw; we went up $14 million during the quarter.

We also see some go out.

If they're not stagnant sitting in there.

We have a lot of them that pay off.

Yes, that was my question.

Okay.

And then the -- another question along the lines of the commercial real estate bucket and just reserving methodology.

Obviously delinquencies there remain very low and manageable and you guys have obviously stress tested the book.

But just curious, you know the reserves there were down 1 basis point; year-over-year they were down more than that, 10 or -- let's say 10 basis points.

Obviously you're concerned about rising vacancies, have -- out in the New York, New Jersey area are of growing concern.

I'm just curious about the reserving methodology there and why that might -- and whether or not that might start to trend back up.

Yes, Matt, the reason it really went down is because we had been originating some loans in new territories, Brooklyn and Queens.

And we had made sure we reserved additional amounts for that.

As loans begin -- as those loans begin to mature, and they have matured by probably about two years now, and we're very comfortable with what we're seeing with the -- with those loans in terms of their performance.

We need less of a reserve against something that we had provided extra for.

So that's the only reason you're seeing any kind of decline, it's not for any other purpose.

Okay.

The quality, to answer the other half of your question, that we've seen, it's held up very strong.

Okay, and should -- I guess the -- could an area of concern be later in the year, maybe along the lines of the smaller retail strips, for example, where you don't have a main anchor, like a grocery store.

But where you might have four or five units in a strip where one goes vacant, or even a big box next door goes vacant, and causes others to struggle.

You know, one going vacant in a four or five tenant strip obviously would result in a 20% or even 25% vacancy.

Just curious about if that's a big area -- a larger area of concern for you all maybe later in the year.

Number one, we don't have that many of that type of situation on our books.

We have some obviously, but not any great concentration in that area, number one.

Number two, as I mentioned in some of our stress testing, we have on that type of a facility, almost universally, strong guarantors.

We have --

Diversified cash flows.

For the guarantors, we have diversified cash flows, external to the small strip.

So we have not yet seen any real deterioration in that portfolio at all.

That was Bob Meyer, the head of our commercial lending area who just spoke, for the benefit of those on the phone.

But we're comfortable with what we've seen so far.

Okay.

Have you -- you haven't seen any of those types of situations, though, where you've been able to work out of those.

None of our non-performing loans are ever in that bucket.

That's correct.

So --

None of our delinquent 30 day loans either.

I think one of the other points, Matt, this is Alan, that in many of our shopping centers, to the extent we have any large amount, there are -- where there are anchors, a lot of them are supermarkets, which are very strong and we're comfortable that those will be able to hold up some of the shopping centers.

Even if there are some decline in tenants beyond that.

One of the hallmarks to Valley's success over the years has been in our underwriting.

Our underwriting criteria is tough.

And we try to make sure that in all circumstances the Bank is protected; so when times get difficult, it's not a guarantee that you are not going to suffer problems, but the probability of problems is diminished significantly.

That's helpful, thank you.

Thank you, sir.

(Operator Instructions) Thank you.

Our next question comes from Travis Anderson from Glider, Gannon and Howe.

Please go ahead with your question

Gilder, Gagnon, Howe.

Morning.

Morning, how are you.

I was wondering, now that we're six months or so into this crash in New York, whether you're seeing any of that spill over at all into the residential real estate?

If you're seeing any change.

I remember you telling us that last year real estate in Northern New Jersey was only down about 10% in price.

Wonder if you've seen any change lately.

We have not seen -- Al Engel, who is sitting next to me, handles our residential area.

Al?

Yes, our past dues, 30 days and up have held relatively constant.

One of the things that we have always done is a lot of the Wall Street employment tends toward the higher priced real estate.

We have always required significant equity in the higher priced real estate and equity is protecting us in this recession, this real estate recession.

While many of the Wall Street crowd, when they did lose employment, left with benefit packages that they are presently living on, the real stress in that marketplace may soon -- may still come later this year.

But thus far we're not seeing any significant signs of stress in that portfolio.

Thanks.

Thank you, sir.

The next question comes from Tom Kaplan from Jackson Securities.

Please go ahead with your question.

Hi, good morning, thank you for taking the question.

Two things, I probably just missed them.

Did you give a commercial real estate mortgage bucket delinquency number?

And if not, what is it?

And the second --

Roughly 1.25%.

What was the number?

1.25%.

1.25%.

And the other question was you --

That's 30 days delinquent.

Yes, not --

Not 90 or non-accrual.

That's everything in the bucket.

I understand, thank you.

And the other thing is -- I missed it.

When you talked about the stress test on the commercial mortgage side, you mentioned a number six out of x number of mortgages have loan-to-value greater than 90%.

What was in total?

Yes, it was 2,000; I think it came out as 200.

It was actually -- there were 2,000 loans.

Right, so you said if a 20% decline in value would take that number up to 10%, so that's why my math wasn't working because it was 200.

Alright.

Okay, thank you very much for the clarification.

Thank you, sir.

(Operator Instructions) Thank you, there appears to be no further questions.

Please continue with any other points you wish to raise.

We just want to thank everybody for listening in, and we'll be speaking to you in three months.