Valley National Bancorp (VLY) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the third quarter 2009 earnings conference call.

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

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

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

I would now like to turn the conference over to Dianne Grenz.

Please go ahead.

Good morning.

I'd like to thank everyone for participating in Valley's third-quarter 2009 earnings conference call, both by telephone and through the 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 by clicking on the shareholder relations link.

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, those included on Forms 8K, 10K and 10-Q for a complete discussion of forward-looking statements.

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

Thank you, Dianne.

Good morning and welcome to our third-quarter 2009 earnings conference call.

For the quarter, Valley reported net income available to common shareholders of $25.6 million or $0.18 per share.

The results for the period include a non-cash charge of $2.8 million due to the change in fair value of Valley's trust preferred and $6 million in dividends and accretion of the preferred stock issued to the government.

These two items negatively impacted our diluted earnings per share by $0.05.

Our strong results for the third quarter are a function of Valley's solid and consistent underwriting philosophy, our stringent focus on operating efficiency and, most importantly, our adherence to a traditional banking model.

Valley is fortunate to enjoy economies of scale similar to many large banks as a result of its size.

However, due to its concentrated footprint, we are still able to recognize benefits usually only available to smaller community banks.

At Valley, our senior management -- in addition to lenders and branch employees -- are heavily involved in the activities of our communities.

This approach, combined with the population density, affluent nature of our market and hands-on approach to lending at all levels of management provides a distinct competitive advantage with banks much larger than Valley.

During the quarter, we repurchased an additional $125 million of preferred stock issued to the government, following our $75 million repurchase in the second quarter.

This reduces our current outstanding balance under the TARP program to $100 million, and furthers our previously announced strategy of reducing the bank's excess capital position and involvement in the government's capital purchase program as economic conditions improve, partially mitigating the negative impact on our capital ratios resulting from the $125 million repurchase of TARP with the sale of 5.67 million shares of newly issued common stock through the completion of our previously announced at the market equity offering.

Net proceeds from the program totaled nearly $72 million.

Due to the capital raise combined with Valley's strong operating performance for the quarter and a strategic decision to reduce risk weighted assets, Valley's tangible common equity to risk-weighted asset ratio now exceeds 8% compared to the 7.15% reported last quarter.

Our capital ratios, both inclusive and exclusive of TARP, remains strong and further exceed the regulatory guidelines for a well-capitalized bank.

Additionally, the strength within our capital position affords Valley the ability to seize opportunities as they present themselves either through expanding current customer relationships or through opportunities which present themselves, as many of our competitors continue to be preoccupied with internal issues caused by the economic recession or poor past lending practices.

In determining the optimal capital position of the bank, many factors impact our analysis.

Perhaps none more significant than our macro and micro economic expectations and the associated impact of each of the performance of Valley's low portfolio.

We are somewhat heartened to hear a number of our builders beginning to report a significant increase in floor traffic and increased sale in rental activity.

Although unemployment trends, both on a he national and local level remain elevated, consumers who are gainfully employed appear more confident in the likelihood of sustained employment.

Many restaurants within our marketplace are showing increased activity.

The malls are once again becoming crowded and although the increased floor traffic may not immediately translate to expanded purchasing activity, we believe this will come.

As we continue to experience increased economic activity in our marketplace, the black hole which once engulfed every facet of the economy has begun to shrink.

As a result, we continue to access Valley's future capital -- assess Valley's future capital need in determining whether the benefits of participating in the government's capital purchase program are outweighed by the cost of the excess capital and the resulting impact on earnings.

However, as I've said on many occasions, simply returning the capital in its entirety to "make a point" defeats the rationale of opting into the program initially.

Our credit quality metrics for the quarter are once again excellent, both on an absolute basis and relative to our peers.

Recently, [John Dugan], the Comptroller of the currency testified to Congress that noncurrent loans as a percentage of total loans outstanding as of June 30, 2009, for the national banking system, were nearly 4.5% and that existing nonperforming delinquency rates were higher than any period in the last 25 years, including the recession in the early 1990s.

However at Valley, its credit performance in relation to its peers reflects much better results.

During the recession in the 1990s, our delinquencies were roughly 2/3 of the industry average.

During this recession, Valley's delinquencies are less than 1/4 of the industry's average.

That being said, we are not immune to losses.

Net chargeoffs increased by nearly $2 million from the prior quarter and our non-accrual loans increased by $17 million to just over $74 million.

However, as Alan will discuss shortly, categorizing a loan as non-accrual does not automatically imply an ultimate principal loss here at Valley.

Our approach to underwriting -- which emphasizes high levels of borrower equity, strong global cash flows, and personal guarantees -- help mitigate losses from nonperforming loans.

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

Further, having learned a lesson from the late 1980s, speculative levels of real estate development were kept at relatively low levels during the past two decades within our markets.

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

While this is not a guarantee that credits will not deteriorate, we do not anticipate problems to reach the levels that are being reported in other markets across the nation.

Valley's solid earnings generated during the quarter are not an anomaly.

The bank has never posted a loss for a quarter, let alone in a year.

Earlier this year, most banks were preoccupied with generating capital via the reduction or for some -- or some complete elimination of their common cash dividend.

Valley once again differentiated itself by maintaining its common cash dividend unchanged.

While future dividends will be determined by our Board on a quarterly basis, we are proud of the fact that to date we have not been forced to reduce the dividend.

Our focus has always been on the long-term viability of the organization and delivering consistent positive returns for our shareholders.

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

Thank you, Gerry.

As Gerry indicated earlier, we are pleased with Valley's third quarter of 2009 operating results.

However, our GAAP reported earnings continue to be negatively impacted by the non-cash volatility associated with the change in fair value of Valley's issued trust preferred securities and the bank's continued involvement in the government's capital purchase program.

These two items negatively impacted our reported diluted earnings per share by $0.05.

As the volatility of the market price of Valley's issued trust preferred securities subsides and the extent of our involvement in TARP declines, our reported GAAP results should improve.

Total sequential quarter loan balances declined $107 million, although we originated roughly $500 million of new loans of which nearly $100 million of residential mortgage originations were sold into the secondary market as Valley deemed the long-term interest rate and credit risk to be greater than the immediate benefit.

Additionally, $54 million of the contraction and the loan portfolio is attributable to reduced commercial line activity in both our New Jersey and New York portfolios.

Line usage declined approximately 1% from the second quarter.

Although the decline in commercial line activity negatively impacted loan balances and interest income for the quarter, the reduction in usage further demonstrates the credit quality of our customers.

Due to the continued dislocation within our marketplace, we continue to attract many new lending relationships.

Although each may not immediately provide marginal new outstanding loan balances, as the economy begins to improve, the additional relationships will incrementally provide a larger base for the commercial portfolio to expand.

Consumer lending declined approximately $65 million from the prior period as auto origination's lagged portfolio amortization.

During the quarter we originated over $85 million of new auto loans.

However we declined $310 million, nearly $90 million of which had FICO scores in excess of 700.

Unlike many of our peers, our auto underwriting criteria is not solely based on FICO score, but rather heavily weighted towards the customer's down payment.

On a linked quarter basis, deposits grew by $122 million or approximately 5% annualized.

More importantly, the growth was in the lower cost savings and money market accounts and not just certificates of deposit.

While end of period demand deposits declined, on average they have continued to grow throughout the year and have helped to increase the net interest margin and net interest income.

The net interest margin grew 9 basis points from the second quarter as Valley's cost of funds continued to decline, based on the composition of deposits and maturing CDs.

The growth in Valley's margin offset the decline in earning asset balances as our net interest income was $115 million compared to $113 million in the prior period.

Operating revenues exclusive of OTTI and trading income continued to expand for the fourth consecutive quarter.

Operating expenses for the period declined in large part due to the FDIC's insurance special assessment, which was realized in the second quarter of 2009.

However, exclusive of the FDIC's charge, operating expenses increased slightly due to additional de novo brand extensions coupled with increased residential mortgage expenses attributable to the increase in loan sale activity.

Credit quality for the quarter deteriorated slightly, yet our metrics remained solid compared to many of our peers.

Nonperforming assets increased $16.4 million for the most part, due to five commercial lending relationships totaling $14.4 million.

Within the provision for the quarter of $12.7 million, we have included approximately $3 million of specific reserves on one new impaired commercial lending relationship.

As Gerry indicated earlier, not every performing loan implies future loss principle.

The loss severity of each nonperforming loan is subject to the amount of collateral, as well as the degree of personal guarantees included at the time the loan was originally underwritten.

For many of our loans in which conservative loan to value ratios were underwritten at inception and customer guarantees exist, the magnitude of actual losses should be far less than industry averages.

Valley's allowance for credit losses as a percentage of total loans increased to 110%.

Additionally, our coverage ratio to nonperforming loans was 142%.

Net chargeoffs increased on a linked quarter basis by approximately $1.7 million, largely attributable to an increase in residential mortgage loan and commercial loans.

On an annualized basis, net chargeoffs as a percentage of loans was a modest 0.35%.

As I stated earlier, we are pleased with our operating results for the third quarter.

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

This concludes my prepared remarks and now I will open the conference call to questions.

(Operator Instructions).

Craig Siegenthaler with Credit Suisse.

Thanks and good morning.

Gerry, can you comment on loan growth in your core New Jersey footprint?

We have seen modest declines now over the last year not unlike many of your peers in other regions, but can you provide an outlook for the C&I and CRE commercial real estate markets, specifically?

Well loan growth is impacted in several ways.

For one thing it is impacted by line usage.

Our borrowers, as Alan pointed out, have utilized their lines of credit less this year than they have in past periods.

In fact, considering the time of year that we are in now, the amount of line usage is extremely low.

We would expect our line usage at this time of year to be peaking somewhere in the high 40 percentile and it is actually coming in in the mid to high 30 percentile.

So that's down significantly.

The second area that Alan commented on was the fact that we are selling a sizable portion of our residential mortgage reduction.

In fact, if we would have retained just the mortgages that we sold, we would not have gone down on our loan growth.

In fact the loans would've been flat.

But as Alan correctly pointed out, we feel that holding loans with an interest rate of 75% long term is not advisable.

We also have very strict credit criteria for what we want to hold.

Of course, this [holds] always uncertainty as to the future of the marketplace on appraised values, so we make sure that if we're going to hold it we have to have a very substantial equity position.

That all being said, we are seeing very strong loan activity application in the commercial side.

Not all, in fact most of which, doesn't end up passing our credit criteria muster.

Our people are out making record number of calls.

Our branches, for example, did over 55,000 calls so far this year to date on prospecting for loan business and that is just in our branches.

That doesn't count the commercial lenders who obviously make a lot of calls and a lot of referrals that we get from our Professionals groups.

So I am really not concerned with the decrease in loans because I think we are actually getting our fair share.

I would be happy, obviously, if we saw growth in our loans, but considering the state of the economy, the fact that we are relatively flat is I think something to be expected.

I think once the economy turns around, as Alan correctly pointed out, we are going to see a big rise in our loans because a lot of the borrowers that we share with other banks are quite displeased with how they have been treated at other banks at this time.

And I think that in the future as they look to do increased borrowing they are going to come to Valley first.

Great color.

Just one more question.

A follow-up on reserves.

We all know how strong your credit quality has been, but your reserves are still quite low versus peers.

We can look at a ratio of loans -- loan coverage.

I'm wondering is there any pressure to build this further here?

Maybe any regulatory pressure or what are your thoughts on that?

We have not had any regulatory pressure.

We have to not only satisfy our regulators, but we also have to satisfy the accountants.

Yes, let me just say we go through a rigorous review of our portfolio and of the requirements and our methodology for purposes of determining from what kind of allowance as we think we need and what kind of provision we need to provide for.

You know, including 114, which has been a much higher priority for most banks in the last six months to a year.

And at this point in time, we are comfortable with our methodology and how we are building our reserves in relationship to what we're seeing in terms of potential losses in the portfolio.

Great.

Steven Alexopoulos with JPMorgan.

Good morning.

Alan, how much more room do you think you have to bring down the average cost of time deposits which is around 2.5 this quarter?

I wonder if they could fall another 50 basis points or so (multiple speakers).

I don't know about 50 basis points.

A lot is going to have to do with where the economy continues and interest rates go and competition.

But for the moment, I think we will continue to see some decline in those deposit rates.

Okay but much less magnitude than we saw this quarter?

Yes, I think so.

Can you guys give some color on the commercial real estate loans you booked in the quarter?

Maybe which geography, size, loan to values, stuff like that?

The loans that we booked in the quarter from a geography standpoint are -- the vast majority of them are in our footprint.

Mostly in the northern New Jersey, New York City location.

That is where -- as most of our portfolio is, where most of our portfolio is located.

We are looking for larger down payments, obviously, with larger equity positions in the real estate.

If it's -- it's probably I'd say probably on average probably around 1/3 down.

We actually push for 40% down if we can get it and that is with personal guarantees.

Without personal guarantees, we would expect a larger down payment.

And we are talking about current appraised values not past appraised values.

Maybe just one final question.

Should we expect you guys at some point to join some of your peer banks that are also in a stronger position in terms of doing some of these FDIC deals?

So far, there haven't been any real FDIC deals in our marketplace.

As I said in the past, our first desire is obviously to fill in within our footprint acquisitions or, secondarily, on the periphera of our market of our footprints.

So while there may be a lot of things coming available in the Southeast, that is just not something we would be looking to do.

I think there was a small one in New Jersey in the last couple of months.

Nothing you're interested in though?

We looked at it but as you say it was relatively small.

Great.

Thank you.

Ken Zerbe with Morgan Stanley.

I know you guys mentioned that you were in a rush to repay TARP, but just maybe a little more color in terms of the timing.

I mean, is this something that you would like to slowly do over the rest of this year or hold into the next year?

And I guess as part of that and with credit losses fairly low, your capital is not really an issue at all, but would you consider raising additional equity as you refund the rest of the TARP?

Those are all good questions and they will all be considered at the time we -- our Board makes a decision as to repaying the TARP.

You know, we would like to pay it back as quickly as possible.

We are looking at giving consideration to paying it back before the end of the year.

But as I said before, they really have to -- everybody has got to satisfy our Board.

At least, management has to satisfy the Board that the economy is really turning around or it's at a point where we don't believe it is going to get any worse before we pay it back.

The impact of the TARP, obviously, at $100 million has much less of a hit to our earnings on a quarterly basis than it did when it was $300 million.

If we feel we really don't need it, believe me, we will pay it back as quickly as possible.

Great.

Thank you.

Matthew Clark with KBW.

Good morning.

First, just a couple of housekeeping items.

Can -- would you happen to have the 30 plus delinquencies on C&I?

And even auto if you had it for this quarter and last?

We probably have it, I think the total is [150] on everything.

Let's see.

C&I is 179 compared to 183 so it is actually down slightly.

What was -- I'm sorry your second --?

Okay.

I think you have historically offered up auto from time to time.

Yes.

190.

(multiple speakers).

186.

No, it's 188 compared to 179 last quarter.

Slightly up.

Okay and in the uptick in resi, mortgage and home equity.

I think one from 118 to 157.

I assume part of that is from just lower balance on the mortgage side, but can you give us some more color underneath the hood there as to what is driving the incremental increase?

I'm sorry.

Which one did you say again?

Home equity?

Resi, mortgage and home equity.

I think they are lumped together at 157 up from 118.

Home equity is up to about 43 basis points and residential, we have at -- 189 from 182.

Also you have to keep in mind that the residential mortgage portfolio has shrunk.

Well, they are all declining to some extent and, therefore, the actual percentages are going to continue to rise even though the dollars may not be dramatically growing.

Yes.

I figured that would contribute to it I was just wondering if there was anything else that was driving the increase?

(inaudible) went down on the residential side (inaudible) $2 million.

And the home equity delinquencies the prior quarter?

(multiple speakers)

43 this quarter versus 24.

Okay, thank you.

And then the incremental, the couple -- the few additions that we saw this quarter in non-accrual, really just honing in on the two commercial real estate credits.

Can you give us a better sense of what types of properties those are and the situations?

Yes.

All we can say is they are residential properties and we have reviewed them and reviewed the status of where they are and at this point based on our impairment analysis, we are comfortable with the collateral behind it.

Okay.

Residential properties, meaning that they were previously construction loans and cash?

Yes, they were construction loans.

Okay.

Thank you.

Collyn Gilbert with Stifel Nicolaus.

Good morning.

Could you just walk through a little bit more color on the large, the three large -- actually I guess it was five MPLs that came on this quarter?

Maybe just the location of them and then in terms of the CRE, what types of CRE properties they were?

Yes.

They are all basically New Jersey properties.

You know, once again those properties are for the most part are construction loans and, again, we've gone through an evaluation of those.

We are very comfortable with where we are collateral-wise.

In fact, it wouldn't surprise me if one of them probably moves out of this category down the road.

So for the moment it is in nonaccrual but again we are pretty comfortable with what they are and the future of those particular credits.

Okay.

So even -- so within the CRE bucket it was mostly still construction-related?

Yes.

And have these loans been previously on the watch list?

Probably.

Yes, watch or more.

Okay.

Yes watch or further down.

It could've been special.

And Alan, you had said the expectation is you might be able to lower deposit rates slightly, but maybe could you just give us a little bit of guidance on the outlook for the NIM?

And then in terms of -- you slowly have been seeing a migration and a higher loan yield.

If we could continue to see that, what that is going to mean also for the NIM as we look forward?

Yes, I think you are going to see some continued increase in it going forward.

I think in general across the industry, deposit rates are way down.

That being said, that's continuing to impact our deposit cost.

So I would expect that to continue to come down to some extent.

On the loan side, I don't think you are going to see anything major, but we probably -- you'll see some small increase on loan yield.

Okay.

So all of that should inure towards some increase in the margin as we continue to move forward.

That's helpful.

And then Alan, can you just give us if you have it there what the dividend expense is going to be in the fourth quarter?

I can probably back into it but I (multiple speakers).

Dividend expense for the preferred -- (multiple speakers)

The preferred.

Yes.

The preferred runs 5% on 2.1 million.

2.1 for the full quarter.

Thank you.

That's helpful.

And then lastly, Gerry, I just have to ask the question are you still feeling optimistic about this holiday's shopping season, the way you were earlier in the year?

I am.

You know the local market area.

Sunday, I tried to get into the parking lot at Willowbrook.

I mean they were overflowing.

They were outside the -- onto the roadway.

Now the weather wasn't the best, so I guess a lot of some people might want to go into the mall, but they were jammed.

And on Saturday I was in the Short Hills Mall.

I haven't seen as many people in there walking around the mall in a long time and these are places in your backyard.

So you have to see it also.

Whether the stores are ringing it up in our cash register yet, I don't know.

But they are certainly seeing the floor traffic.

And then just having that translate into your bigger economic views.

I mean do you think -- I mean, maybe give us an insight as to what you see in the New York metro area in commercial real estate and kind of the whole gamut of concerns people have?

I've had conversations with several of our larger builders recently.

Across the board, they all tell me that foot traffic is way up.

That they are seeing a lot more people kicking the tires, coming around, looking at the models.

They haven't been pulling the trigger yet, but they have been looking.

Although I heard from one of our builders yesterday that increased sales he was seeing on Sunday.

Another builder told me that he is seeing higher levels of sales in the last month than they have seen in the last year.

So that gives me some encouragement.

All right?

I also think New York City, which was helped dramatically last year by the euro versus the dollar, should be helped even more this year because the euro against the dollar is a lot richer this year than it was last year.

Significantly.

So that makes people who want to shop come to this country.

So foreign traffic in the Manhattan should be up and if foreign traffic is up, that means the hotels are doing better.

That they are giving -- you know, it runs through the whole system.

So I am heartened at least in this part of the country as to both retail sales, residential sales, rentals.

I know of a project, you know the area, that one of our developers put up in Bergen County, an apartment building, and he told me yesterday it was 100% rented.

And he just finished completion of the project in the last month or two.

So that indicates to me that there is activity again out there, and remember the population in this part of the country is growing also.

Okay and so tying that back into your comments that you guys have made and Alan, you said on the line usage was in your commercial customer base.

Is it truly reflective of just their conservative nature and just waiting, maybe that won't be a leading indicator.

If we start to see that line usage increase, it may be more of a lagging indicator?

I think it is a lagging indicator.

Could be, no, that's all right.

Yes it could certainly be a lagging indicator.

I mean, I guess we just have to wait and see what is going to happen with those inventory builds and how they envision sales to take place.

I mean that is what it is really all about for them.

Yes there is not only among our customers, I think it is across the country, in everything you [read] inventory control is much tighter today than it has been in prior years.

Okay.

That's helpful.

Thanks.

David Darst with FTN Equity Capital.

Good morning.

Could you comment on the appraisal values for commercial real estate properties that you are seeing in both New Jersey and New York?

And then what impact is that having on your renewals?

Well, I think for the most part from a real standpoint, I think Gerry has talked about this before.

A lot of our loans are not balloon loans.

They are for the most part fully or mostly advertising loans and therefore from -- we are not necessarily as concerned about the appraised value of those properties as we are about the borrower's ability to make payments and continue to keep his loan current.

From the standpoint of impairment, we are using that for -- appraisals and other methods to come up with valuations so that we are comfortable that we are recording the appropriate collateral values.

Yes.

We have not seen the level of value drop in northern New Jersey, and New York City, that I am hearing in other parts of the country and seeing its statistics.

I saw for example, in Los Angeles, that the housing prices were down 43%.

I just saw that statistic this week.

The housing prices high to present in our marketplace is down approximately 18%.

So we are not experiencing that dramatic a price drop in appraisals.

And that's the same for your commercial real estate properties (multiple speakers) --?

Pretty much so.

Pretty much so.

As Alan pointed out very correctly, we underwrite differently here than many other banks.

We don't do -- or we rarely, rarely do interest-only commercial mortgages.

All right?

Most of our -- almost the entire commercial mortgage portfolio is self amortizing.

While we may write the loan for 20 years on an amortizing basis, the only thing that we -- how we protect ourselves is we write it like an ARM, so that the interest rate adjusts every five years or seven years.

But the loan itself from inception has been amortizing.

So if we wrote alone six years ago while the value may have gone up or came down doesn't really matter.

Our loan keeps coming down in value, in outstanding principal.

It protects us.

Okay.

Thank you.

(Operator Instructions).

Please continue.

There are no further questions.

Thank you all for coming.

We will see you in three months.

Ladies and gentlemen, this conference will be available for replay beginning today at 1 PM Eastern and running through Thursday, October 29 at midnight Eastern time.

You may access the AT&T Executive Playback service by dialing 1-800-475-6701 and entering the access code of 116046.

Those numbers again for the replay are 1-800-475-6701 with the access code of 116046.

That does con --.

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