Valley National Bancorp (VLY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2009 earnings.

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

Later we'll conduct a question-and-answer session.

(Operator instructions).

As a reminder this conference is being recorded.

I would now like to turn the call over to your host, Dianne Grenz.

Please go go ahead.

Thank you, Lisa.

Good morning.

I'd like to thank everyone for participating in Valley's second quarter 2009 earnings conference call, both by telephone and through the webcast.

it if you've not read earnings release we issued this morning, you may access it along with our financial tables and schedules from our website at valleynationalbank.com and by clicking on the shareholder release (inaudible).

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

Valley encourages participants to refer 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 Chairman, President and CEO, Gerald Lipkin.

Thank you, Dianne, and good morning and welcome to our second quarter 2009 earnings conference call.

For the quarter, Valley reported net income of $15 million, or $0.06 per share, which included two specific charges.

The first, a non-cash charge attributable to the change in fair value of Valley's issued junior subordinated debentures of $24.4 million pretax, or $0.11 per share after tax.

Secondly, the quarter includes an industrywide special assessment charge imposed by the FDIC of of $6.5 million pretax, or $0.03 after tax.

In total, these items impacted earnings per share by $0.14 per share after tax.

Last quarter we conveyed four operating strategies at Valley, which are expected to enable us to expand operating income and enhance shareholder value in the current economic environment.

They were: An attempt to gain market share by taking strong credits from banks weakened by the economy; to remain steadfast in our underwriting approach; to implement actions to reduce operating expenses; and to reevaluate pricing on all loan and deposit relationships.

Our operating results in the second quarter reflect many of the plans implemented by management to achieve these strategies.

Valley National's efficiency ratio for the second quarter, adjusted for the two charges mentioned earlier, was 51% compared to 54% in the prior period.

We have reduced staff, where appropriate, and renegotiated many of our existing vendor contracts.

Additionally, we have actively adjusted the pricing on many of our lending relationships to better reflect the current economic and credit environment in which we operate.

Complementing the lender's focus on loan pricing, our branches have made a concerted effort to attract lower-cost core deposits while simultaneously placing less emphasis on higher-cost rate-sensitive certificates of deposit.

Combined these efforts helped to improve our efficiency and expand our net interest margin on a tax-equivalent basis by 17 basis points on a linked-quarter basis.

While these tactics to improve the operating results of the Bank are important the true jewel of organization remains our consistent and conservative approach to underwriting credits.

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

Current period delinquencies and loan losses remain relative to the industry.

Our commercial loan and commercial real estate portfolios, delinquency rates of only 1.25%.

Our residential real estate and home equity loan portfolios continue to perform better than the industry by huge margins, with combined delinquency levels on average ending the quarter under 1.2%.

The strong credit performance of the loan portfolio is rooted in the conservative underwriting standards historically employed by management at inception and continuously throughout the lending relationship.

Valley's prototypical borrowers philosophies are similar to that of the Bank.

As a result, most are not excessively leveraged and have ample cash flow to meet their financial obligations.

On the commercial side the strength of our borrowers is reflected by the fact that on average line usage is only 38.7% of the total amount committed and available.

This compares to usage of just over 40% in the prior quarter.

Traditionally Valley's commercial real estate loan portfolio is comprised of credits with large equity positions.

The entire portfolio averages a loan-to-value ratio of approximately 52% as calculated by present loan balance to the original appraisal.

Further strength comes from the fact that most loans are supported by meaningful personal guarantees and strong cash flow from the occupants.

These characteristics are largely the reason our commercial mortgage 30-day delinquencies were only 1.24% at quarter end, based on internal loan classifications.

We remain fortunate in the fact that we operate in a very affluent and densely populated market.

Speculative levels of real estate development were kept at relatively low levels during the past decade within the geographic markets we lend.

In part, these factors afforded us the opportunity to generate loans, which are generally more conservative than what we observed to have been underwritten in other parts of the country.

The vast majority of our loan portfolio is geographically situated within 100 miles of our headquarters.

While this is not a guarantee that the credits will not deteriorate we do not anticipate commercial real estate and construction problems to reach the levels that are being reported in other markets.

On the consumer side, the majority of our borrowers display similar strengths to that of our commercial customers.

Our home equity customers line usage equals only 40.5% of that which is available and our home equity 30-day delinquency figure is only 0.24%.

We continue to originate home equity and residential mortgages, typically catering to customers who meet traditional loan criteria.

During the second quarter the weighted average loan-to-value for new residential mortgage originations was approximately 50%.

For the same period home equity originations comprised loan-to-value ratios on average under 45% when combined with the first mortgage.

Valley's credit card portfo -- program is not a strategic focus of the organization and generally only offered as an accommodative product it select customers.

As of June 30th the total balance outstanding was approximately $10 million and 30-day delinquencies were only $250,000, a small fraction of industry results.

For the quarter Valley National Valley's capital ratios remain solid.

Our regulatory capital ratios as of June 30th exceeded all well-capitalized minimum requirements, both inclusive and exclusive of the proceeds from the TARP program.

The Bank's tangible common equity to tangible asset ratio is 5.67% while, more importantly, the ratio of tangible common equity to risk-weighted assets is in excess of 7.1%.

Maintaining a strong capital position has historically and continues to be an essential focal point for the Bank.

Prior to participating in the government's capital purchase program, or 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's board elected to participate in the program as an insurance policy to further assure the long-term viability of Valley should economic conditions worsen.

In the beginning of June we redeemed 75 million of the 300 million preferred stock issued to the government.

The government approved our request, without any stipulations.

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's needs for the funds is still required and at what level.

We will continue to assess the changes in the economic environment, Valley's loan portfolio performance and other factors to determine additional redemption requests.

We are comfortable with this incremental strategy and the potential benefits to our common shareholders by eliminating the cost of this excess capital.

However, simply returning the capital in its entirety to make a point defeats the rationale of opting into the program initially.

Among other variables in determining the appropriate levels and composition of capital, Valley attempts to minimize our total combined cost of capital.

As such, at certain levels, common stock is more appealing than TARP and other forms of capital.

To capitalize on market movements, during the quarter Valley entered into an equity distribution agreement through an at-the-market issuance.

Under the agreement Valley may sell up to 5.67 million shares of common stock at price levels that the board deems opportunistic.

Valley is not a motivated seller, and we have no intention to greatly dilute our shareholders simply to issue common stock.

We have internally set price targets at which level we will be comfortable issuing shares.

If the price of stock does not meet or exceed our internal bogey we will not issue shares via the agreement.

Accordingly, to date we only issued 43,000 shares at an average price of $12.29.

In many ways Valley is subject to the same macroeconomic factors as its peers.

Our loan generation is largely dictated by the competitive environment, coupled with the economic activity in the marketplace in which we operate.

Deposit growth is influenced by consumers' interest rate sensitivity and savings rates.

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

The credit risk we place on our balance sheet is controlled and managed to a large degree by Valley.

All banks maintain significant influence over the operating results.

Building and maintaining a franchise, which delivers consistent positive earnings with the least amount of risk and volatility, remains our objective.

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

Thank you, Gerry.

As Gerry mentioned earlier and we outlined in our press release, the second quarter results included a substantial non-cash charge and an industrywide FDIC special assessment.

Exclusive of these charges we are quite pleased with our financial results.

On a tax-equivalent basis our net interest margin expanded by 17 basis points, but more importantly, on a sequential quarter basis our net interest income increased by $3.6 million.

The increase in the margin and net interest income is mainly attributable to the shift in composition of our funding base.

Due to Valley's liquid cash position we were able to pay down on average approximately $225 million of short-term maturing borrowings with costs in excess of 3%.

While these funds were outstanding, they were yielding Valley roughly 25 basis points of interest income.

In addition the increase in low-cost core deposits of approximately $415 million during the quarter enabled Valley to reduce our emphasis on certain rate-sensitive time deposits.

Our non-interest bearing deposits now comprise 25% of the Bank's deposit base.

However, partially mitigating the full impact on net interest income of the 17 basis point margin expansion was a decline in the average balance of nearly $250 million.

The decline in the loan portfolio is partially attributable to a decline in market activity for automobile lending, coupled with Valley's strict adherence to a credit quality, as our automobile portfolio declined $80 million for the quarter and $366 million from the year-ago period.

During the quarter we declined over $87 million of automobile loan applications with FICO scores in excess of 700.

At Valley the FICO score is not the sole determinant as to whether a customer is granted credit.

We place a much greater emphasis on down payment and the character of each borrower, regardless of what a credit score may imply.

Additionally, during the quarter we originated and sold over over $125 million of residential mortgage loans, as we were concerned about the potential for duration extension and the negative impact this would have on our net interest income in future periods.

Result of refinancings and loan sales the residential portfolio declined $104 million for the quarter and $167 million since June of 2008.

Due to the increase in net interest income, combined with a decline in non-interest expense Valley's linked quarter operating leverage increased over 10%, exclusive of the FDIC's special assessment and the non-cash charge due to the change in the fair value of junior subordinated debentures.

We believe the strategies enacted to reduce the Banks operating expenses and enhance the net interest margin are sustainable for the remainder of 2009 should the economic conditions and interest rate environment remain relatively stable.

Valley's provision during the quarter was $13 million, nearly $5 million greater than our net charge-offs of $8.2 million.

In conjunction with the decline in Valley's loan portfolio the additional provision pushed Valley's allowance for credit losses as a percentage of loans to 1.06% from just under 1% in the first quarter.

The increase in charge -- in net charge-offs from the prior period of approximately $1 million reflects an increase from the commercial loan portfolio, partially mitigated by a decline in consumer net charge-offs.

Our 30-day delinquent and non-performing loans increased from the prior quarter, reflecting the general current economic conditions of the marketplace in which we operate.

Compared to the prior quarter credit quality deteriorated slightly; however the actual dollar figures are extremely low in relation to the size of Valley's loan portfolio.

Our loan portfolio is not immune to the swings in the economy.

However, based on our underwriting criteria, which emphasizes all borrowers have skin in the game in the form of good cash flow, solid collateral and strong personal guarantees, absolute losses on non-performing loans are typically a small portion of the outstanding balance.

Loans delinquent 30 days as a percentage of total loans were 1.49% for the quarter.

However, approximately $9.3 million of the total is subject to guarantee by the SBA, Exclusive of these SBA loans the 30-day delinquent percentage would decline by ten basis points to 1.39%.

As I stated earlier, we were pleased with our operating results for the second quarter.

Our capital ratios are strong and our credit quality remains one of the highest throughout the industry.

And this concludes my prepared remarks and we now open up the conference call to questions.

Thank you.

(Operator instructions).

And our first question will come from the line of Ken Zerby with Morgan Stanley.

Please go ahead.

Good, thanks.

First, on the compensation costs, big decline this quarter, how much of that is sustainable and maybe you could just identify the one-time items in that line that will come out?

We think we can probably sustain the current numbers that we saw in this quarter.

I do not know that you're going to see the declines like you saw in first -- from the first to the second, but we think the second is sustainable.

Okay.

The other question I had, do you have any more flexibility or how much more flexibility do you think you might have in paying down some of the higher-cost borrowings.

We probably don't have a lot of flexibility there; those are all based upon maturity schedules.

Again, the ones that came down were mostly short- term borrowings, not long term, that had shorter term maturity schedules.

We only really had about $37 million during the quarter of long term that came down.

So at the moment I would say there's probably a little amount of that that'll be paid down in the next quarter or two.

Understood.

So then NIM probably is going to stabilize from here going forward, maybe up a little bit as --?

Well, remember, we still have CD's that are repricing themselves so that will continue to help us, so I would say the NIM certainly stays where it is.

We're likely to see some additional increase.

Okay.

All right, great, thank you very much.

You're welcome.

Thank you.

We'll go to the line of Craig Siegenthaler with Credit Suisse.

Please go ahead.

Thanks and good morning.

Good morning.

First just a TDR question.

Can you help us understand the pickup in troubled debt restructuring, and that $22 million base, is that currently accruing interest?

The -- yes, the TDR's -- obviously I think the entire industry is seeing a large increase in TDR's so there's a certain amount of those that we're going through that requires some amount of change.

There is also one larger credit in there that we worked through that we think is probably -- well, it's a TDR at the moment, it probably is not out there long term as a TDR.

It is well secured, also.

And are are those accruing interest right now?

Yes.

Absolutely.

So all of them are?

Okay.

Everything is getting interest.

Got it.

And what is the makeup of the TDR in terms of the loan mix and could you disclose what the credit was?

Was that CRE or C&I?

It was a C&I loan.

Well, that large one --

Yes, the large one.

There's a mix throughout the -- throughout everything so I don't think there's any one particular type of credit that is in as a TDR.

The rules today for TDR's are -- as they have been over the years they've gotten a lot stricter.

If you modify certain terms and conditions under loans it can end up as a TDR, whereas 20 years ago it never would have been considered a TDR.

Got it.

And second question, I'm just wondering, can you provide an update on your New York City portfolio in terms of how delinquencies and NPL's have trended through the first quarter, and also maybe a little bit of expectation here on how this book could mature?

Yes.

I think they're up slightly, I don't think we're seeing any major trend upward though.

Got it.

And do you expect the credit quality to remain pretty strong there the next few quarters?

Yes, I --

So at this point that's the way it looks.

Got it.

All right, great..

Thanks for taking my questions.

Okay..

Thank you.

Our next question comes from line of Sandra Osborne from KBW.

Please go ahead.

Thanks, good morning.

Good morning.

So just to double-check, none of those TDR's are included in non-accrual, correct?

That's correct.

Okay.

And how big is the aviation lending portfolio?

Oh, how much money?

I'd have to -- It's $160 million.

About $160 million or so.

And in general besides the one TDR that's mentioned in there that's performing, how is it performing?

I think portfolio's performing pretty well at this point.

Very well.

Yes, you can talk.

Bob Meyer's --

It's one of the large TDRs in that portfolio.

It's paying, it's doing fine, but it happens to be part of that.

Yes.

And I think her question really was beyond that, and I don't think we're seeing any major deterioration beyond that particular loan.

That's correct.

Okay.

And I was wondering if you could provide an update on how the jeweler portfolio is doing.

We saw a handful of businesses in the industry over the past quarter file for bankruptcy, just curious what you're seeing, any color you could provide on the performance would be great?

We did a study of the jewelry portfolio.

We actually went through the portfolio, looked at all the individual loans, and have come to the conclusion that we expect the vast, vast majority of it to pay according to terms.

We have good equity positions, we have strong personal guarantees, virtually all of the portfolio and to date we haven't seen.

We have the one credit that we talked about last time around which was -- we had experienced a kite.

That credit is paying like clock work although it is being carried as a non-accrual.

Yeah.

It's paid down since -- in the last quarter $0.75 million.

All right.

Other than that, there's --

Yes.

-- minimal delinquency in that -- in the jewelry portfolio at all, nominal.

All right.

And that portfolio is about $150 million, is that right?

That's -- I think that's the outstandings are about $150 million.

Yes.

Yes, of their lines.

Usually between $130 million to $150 million or $160 million depending on line usage.

Okay.

But as I pointed out in my remarks the line usage hasn't jumped up.

It is not like people are having problems so they have to carry -- they rely more heavily on their lines, they're just not.

I think it's reflective of the condition of our borrower and the strength of our borrower.

All right.

That's helpful.

Thanks, guys.

Okay.

Thank you.

(Operator Instructions).

We'll go to the line of Collyn Gilbert from Stifel Nicolaus.

Please go ahead.

Thanks, good morning, guys.

Good morning, Collyn.

Just a little bit more on the NIM discussion, The loan yield improved on a linked-quarter basis, which I was surprised by.

Can you just talk a little bit about what's driving that and maybe what you're seeing there and if that's sustainable?

Better negotiation on the part of our lenders, that's the bottom line.

Good answer.

Really?

So --

I really don't want to take it away from them.

They recognize the necessity to negotiate and they're doing a good job.

We've also established a different prime rate.

Well, we've had that.

(inaudible)

Right, but I mean it's held up.

Things have --

Right.

In fact we had some borrowers who -- because we had committed to a lower prime rate a year ago and when their line came due we put them under the new prime rate and so there we have seen improvement.

Yes, I think other thing, Collyn, is that as the consumer side pays down somewhat, the auto and the residential, more and more are in the commercial side, which in many cases are giving us higher returns.

Okay.

Okay, that makes sense.

Okay.

And then, Alan, can you just give a little bit more color, you mentioned that there's still some CD's that are set to reprice, are there big buckets at certain rates that you can quantify for us that are coming up in the next couple of quarters?

Well, I think in general we were writing one year and nine month CD's that were in the mid-3% or higher range that are still paying down.

They're still part of what's rolling over constantly.

That probably -- I don't have an exact timeframe but I would say certainly we'll see some of that continue through the next quarter.

Okay.

And what's the -- your deposit pricing strategy in general?

Obviously you saw quite a reduction in CD's on a linked-quarter basis and maybe just talk a little bit about how you're pricing your deposits in general and where you want to be competitively?

I think for the moment we're -- CD's we're remaining really not all that overly competitive.

We've raised some rates in the last 30 days or so just to be slightly more competitive.

But I think as long as we continue to see lower cost deposits come in, there's no reason for us to go and try and raise high cos -- higher cost, if you will, time deposits, plus the fact that we've been in a relatively liquid position.

With what's going on in our residential and auto portfolios we haven't had the dire need to raise huge amounts of funding at this point in time.

Going back to your last comment, by the way, about the CD's, our average for the quarter was 3.06% and so know that go it was 3.06% and we're pricing substantially below that, we believe that there's still a way to go for that to come down as long as we remain in this kind of an environment.

Collyn --

Yes, where are you pric -- go ahead.

I was just going to say that, as I mentioned in my comments our branches and our lenders combined in an all out push to raise low-cost deposits -- demand deposits, checking accounts, low-cost money market accounts, and they've seen quite a bit of success in that effort.

Okay.

Okay.

Just -- well, I'll look it up, never mind.

On that front, was there any seasonal in the -- I can't remember if you guys said it or if it was somebody else -- if it was muni deposits coming in in the quarter?

No.

No, okay.

So no seasonal trends on that?

They come in and out every quarter, municipal deposits, because as taxes are collected deposits get paid and then as you move through the cycle -- so the next one I guess is August 1st, tax collection period -- we get deposits in on August 1st and they stay for a little while and then they begin to run back out the door again as the townships need the funding.

Okay.

By the end of the quarter they've run through --

Yes, we've run through a substantial amount of it.

Okay, okay.

One more and then maybe I'll just jump back in the queue.

Gerry, you'd mentioned that you declined $87 million in auto loans this quarter, do you know how that compares to either in the first quarter or even the year-ago period?

Yes, we actually -- Al Engel is here, he runs the area.

By absolute dollars it is less, as a percentage it is higher.

The overall activity in the auto segment sector obviously is down with sales down and so the absolute number is lower than we've typically decline but as a percentage of all applications we see it is slightly higher.

Okay.

Okay, that's it for now.

Thanks.

Thank you.

We'll go to the line of David Darst from Financial Equity Capital Markets.

Please go ahead.

Good morning.

Good morning.

Good morning.

Could you comment on the ATM offering and your need or desire to issue capital, or are you being somewhat price sensitive and how does that --?

I think Gerry mentioned that in his comments.

Yes.

I -- we are what would be classified as not a motivated seller.

We're certainly not looking to dilute the common shareholders equity in the Bank by issuing a lot common shares that we don't really need at a price below what we feel would be appropriate.

Okay.

And what's your timeline --and maybe you said this before, I got on a few minutes late.

There is no timeline.

I'm sorry, timeline to repay the TARP.

Oh.

We're constantly reviewing it.

We're looking at a -- at it on a quarter-by-quarter basis.

We're currently doing a review of the -- of this quarter as to whether or not we want to apply for a further redemption.

But we're not -- as I mentioned in my -- in the remarks, we're not going to do something just so we can make a statement.

It's more important that our shareholders be protected and having the extra capital certainly is an insurance policy against further downturns in the economy.

Now that being said, we are starting to see some uplifting in the economy, which gives me some encouragement.

But how far that'll go, I guess is going to take the next few weeks or months to really make a determination.

Okay.

Thanks.

(Operator Instructions).

And we'll go back to the line of Colin Gobert, Please go ahead.

Thank you.

She did a good job with your name.

Right, as usual.

Just a quick follow up, I know that the losses that you guys are seeing on the loan side obviously are minimal, but can you just give a little bit of color as to the characteristics of what's in there?

And specifically in terms of the timing, when these specific loans were put on non-accrual and just talk a little about the timeline that you're seeing in the loss migration.

It's not in one area, Collyn.

It's not like we're seeing a trend in our commercial mortgages or a trend in our commercial loans.

They're one-offs for the most part.

Here, there, they're unique.

They're -- you know --

Yes, I think, Collyn, the other thing is that we have started to see some decline on the consumer side, on the auto side, that seems to be coming down somewhat.

An improvement.

An improvement.

Decline in losses.

Right, I got you, yes.

We also see from time to time a fraud case that unfortunately catches us.

It's not an underwriting issue it's somebody stealing from you, it's as simple as that.

And when those things occur they get our numbers and there's not much that we can do other than to try work ourselves through it.

Okay.

So as you look at the portfolio today there's nothing that's in there that would indicate that you would expect a material increase in the net charge-offs?

No.

I don't see so at this point.

Yes.

Okay.

Okay, all right.

Thanks.

And we have no further questions at this time.

Please continue.

Well, I want to thank everybody, if there are no other questions, for tuning in.

We'll see you next quarter.

Thank you.

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today through July 30th 2009 at midnight.

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