Valley National Bancorp (VLY) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Valley National Bank 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 follow at that time period.

(Operator instructions).

I would like to introduce your host for today's conference, Ms.

Dianne Grenz.

You may begin.

Good morning and I'd like to thank everyone for participating in Valley's first quarter 2010 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 clicking on the shareholder relations link.

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

Valley encourages participants to refer to our SEC filings, including those found in Forms 8-K, 10-K 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 first quarter of 2010 earnings conference call.

We're pleased to report our operating results for the first quarter.

Economic conditions, although improving, continue to create a challenging environment for banks.

Weak industry-wide loan demand, both on consumer and business levels, have impacted earnings negatively.

Although improving, the unemployment rate remains at an unhealthy level and consumer spending continues to be guarded.

Until the improvement in the American consumers' comfort level improves significantly, business investment and spending on automobiles and discretionary items will remain muted.

That said, loan demand in the first quarter of 2010 did increase compared to most of 2009, and we anticipate further growth throughout the remainder of 2010.

Exclusive of the loans acquired in Valley's two FDIC-assisted transactions, total loans declined to $225 million or approximately 2.4% from the prior quarter.

Approximately 75% of the decline was attributable to consumer-based products including residential and automobile lending.

Although total loans contracted within these lending segments, during the first quarter new originations improved compared to recent prior quarters.

Automobile lending originations, which are generally light in our part of the country during the first quarter, increased 21% compared to the same period one year ago, despite the poor weather conditions that existed in our area.

[Although] the volume is still significantly less than levels realized in 2007 and 2008, the direction is encouraging.

As further evidence of an improving auto market, the per-vehicle loss we recognized on each repossessed loan declined over 35% from the same period one year ago and nearly 15% from just the prior quarter.

The increasing consumer demand coupled with the decreased production of new vehicles is directly attributable to this trend.

The US automobile fleet on the road today is the oldest in decades.

As consumer confidence continues to improve, we anticipate increasing demand and ultimately a reversal of the portfolio decline we have experienced since the third quarter of 2008.

Residential mortgage activity at the bank continues to be brisk as many consumers are taking advantage of the low interest rate environment to refinance existing mortgages.

However, more than the refinance volume, we are pleased with the number of new purchase applications received in the first quarter of 2010.

Purchase volume was up 45% compared to this time last year and 30% compared to just the prior quarter.

Housing prices within our marketplace appear to have begun to stabilize, and the consumer appears less reluctant to purchase a home than in prior quarters.

Nevertheless, we do not anticipate a significant increase in the outstandings of our residential mortgage loan portfolio, as a significant portion of our production is sold into the secondary market due to long-term asset liability concerns.

Commercial Lending is highly dependent upon consumer spending activity.

For most of 2009 and now into the first quarter of 2010, Valley has largely been able to mitigate scheduled amortization and maturities with either new loans through expanding existing customer relationships or through opportunities which presented themselves as a result of a fact that some of our competitors continue to be preoccupied with internal issues caused by the economic recession or their poor past lending practices.

Still, demand for commercial and industrial loans remains tepid, as we see a few creditworthy borrowers seeking to expand or leverage their companies in our marketplace at this time.

Also, commercial line usage remains at approximately 36% versus a normalized usage of approximately 40% for this time of the year.

We are extremely excited about both the LibertyPointe and Park Avenue Bank acquisitions, which closed in mid-March.

Valley's strong balance sheet and conservative credit culture enabled us the opportunity to put forth a strong competitive bid to the FDIC.

Both banks have been immediately accretive to earnings, and we anticipate generating additional income as we improve the operating efficiencies of each institution.

Although both banks have credit problems, the FDIC loss-sharing arrangements mitigate Valley's exposure and provide a catalyst with which to grow loans.

For most of 2009 and into the first quarter of 2010, Valley has maintained a significant short-term liquidity position, in part as a result of declining loan demand, but more because of our concern regarding the likelihood of rising interest rates.

This added liquidity has negatively impacted Valley's net interest income as higher yielding loans were being replaced with short-term instruments, which in most cases were yielding less than 1%.

As a result of both the LibertyPointe and Park Ave.

acquisitions, Valley has been able to redeploy much of this liquidity into higher-yielding loans.

The rates LibertyPointe and Park Ave.

were paying on certificates of deposit were immediately lowered following the transactions, which further improved our net interest margin.

Those customers who chose to withdraw their funds rather than accept our lower rates were replaced with Valley's low-cost core deposits.

During my tenure as CEO of Valley, we have acquired 23 banks via both traditional and government-assisted means.

We have an experienced staff and a low-cost operating platform which enhances the value of each deal and provides a competitive advantage to Valley for both bid and negotiated transactions.

We intend to aggressively pursue other FDIC-assisted transactions within our operating footprint.

That said, we have no desire to expand our geographic footprint outside of the New Jersey and New York marketplace.

As the economy continues to improve, Valley's concerns regarding traditional M&A transactions is reduced as the potential black holes surrounding a potential acquiree's loan portfolio is mollified.

Valley's [parent] success with integrating back acquisitions, expanding customer relationships and maximizing earnings has added significant value to our shareholders over the years.

With the regulators increasing their emphasis on tangible common equity, we do not anticipate the premiums to book for traditional M&A to reach the levels of 2006 and 2007, again making this type of acquisition more attractive.

As the economy begins to emerge from the recession, increased capital requirements and regulatory expenditures will prove an increasing obstacle for many banks.

We anticipate increased M&A transactions within the industry, and Valley intends to be an active participant, assuming each potential transaction makes long-term strategic sense and does not denigrate our shareholders' net worth.

That said, we do not intend to overpay for any acquisition.

When multiples to tangible book and earnings were at lofty levels a few years ago, Valley deployed a de novo branching strategy to expand the franchise while avoiding the dilution associated with traditional M&A.

While we have slowed our de novo branch expansion at the end of 2008 due to economic uncertainty, this still remains a viable manner in which to expand our franchise.

With the falling prices of retail real estate, we are keeping a close eye on potential opportunity.

Valley's strong balance sheet and consistent approach to traditional community banking provided the foundation for a profitable quarter.

We operate in one of the most densely populated and wealthiest geographies in the entire country.

This, coupled with our focus on the long-term viability of the organization, affords Valley many exciting opportunities unavailable to many of our peers.

We look forward to continued positive returns for our shareholders throughout 2010.

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

Thank you, Gerry.

My comments this morning and the press release from earlier today reflect the 5% stock dividend declared on April 14, 2010 to be issued May 21, 2010.

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

For the first quarter Valley reported net income available to common shareholders of $27.4 million or $0.17 per share.

Included in this figure was approximately $5.9 million or $0.02 per share in combined mark-to-market losses on our junior subordinated debentures, more commonly known as trust preferred securities, and net impairment on securities losses.

Both items are non-cash charges as the net impairment on securities is calculated based on potential estimates of future credit losses and the mark-to-market loss on trust preferred securities does not take into account Valley's ultimate liability for the instrument.

As Gerry mentioned earlier, we are pleased with our financial results for the quarter.

Revenues exclusive of OTTI, net security gains and trading income or loss were up significantly from the prior quarter, reflecting Valley's improved net interest margin and linked-quarter increases in insurance revenue and gains on sale of loans income.

Operating expenses were up slightly on a linked-quarter basis, reflecting mainly typical first quarter seasonality in occupancy and employee benefit expenses.

In addition, approximately $500,000 of the increase in direct salary expense is attributable to the LibertyPointe and Park Avenue Bank transactions.

We anticipate slightly higher non-interest expense in the second quarter related to the FDIC-assisted transactions, only to decline in the latter half of the year as both institutions' data processing systems are converted to Valley's operating system and the branch consolidation is achieved.

Valley's linked-quarter net interest income increased $3.3 million or almost 12% on an annualized basis.

The increase is mainly attributable to reduced interest expense on deposits, a one-time interest recovery of $955,000 on a commercial loan which was previously charged off, and revenue from the LibertyPointe and Park Avenue acquisitions.

Partially as a result of the aforementioned, the net interest margin increased 18 basis points from the sequential quarter.

Additionally, the average short-term interest-bearing balances at corresponding banks declined approximately $230 million and improved the ratio of loans to total earning assets, thus increasing the net interest margin.

We anticipate continued reduction in the cost of funds as higher cost certificate of deposits are either renewed at our lower rates or leave the bank due to Valley's current excess liquidity position.

The credit quality metrics reported with our press release and for which I'm about to discuss for the most part do not reflect the loans acquired via the LibertyPointe and Park Avenue acquisitions.

These loans are reported as covered loans on our financial statements, as we have entered into a loss sharing agreement with the FDIC.

We have taken an initial credit mark on this portfolio through purchase accounting, and the performance or non-performance of this portfolio will only impact Valley's credit quality metrics should the performance differ materially from management's original cash flow projections.

The loans are accounted for on a pool basis, and the pools are considered to be performing loans unless cash flow projections dictate otherwise.

Credit quality for the quarter remained relatively in line with the results reported in the fourth quarter as our metrics remained solid compared to many of our peers.

Valley's allowance for credit losses as a percentage of covered loans increased to 1.15% from 0.99% just one year ago.

The increase in Valley's coverage ratio is mainly attributable to macroeconomic concerns as opposed to allocations for specific loans.

The bank's total delinquent loans that are still accruing did increase from the prior quarter.

However, many of the loans are in the early stages of delinquency, and most are secured by real estate and personal guarantees.

Linked-quarter net charge-offs contracted $2.6 million as net losses on automobile loans declined for the fourth consecutive quarter, coupled with a recovery of nearly $2 million on a commercial loan which was originally charged off in 2002.

As we have stated on numerous occasions, the collection of principal at Valley is of the utmost importance.

For some loans, the process may take longer than others, but for the most part we get paid back.

Valley's capital ratios for the quarter remained strong.

We recognized approximately $12.3 million of new goodwill and core deposit intangibles as a result of the LibertyPointe and Park Avenue Bank acquisitions.

However, based on our internal forecast, we believe the capital will be earned back multiple times over in short order.

For the period, our tangible common equity to tangible asset ratio was 6.55%, a significant increase from the 5.50% ratio reported just 12 months earlier.

Valley's risk-based regulatory capital ratios significantly exceed the minimum levels required to be considered well-capitalized under current guidance.

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

(Operator instructions) Craig Siegenthaler, Credit Suisse.

First, just following on the LibertyPointe and Park Ave.

acquisitions this quarter, how was your capacity to make deals today?

And then, maybe you can comment on how the environment has changed over the last six months when you think about number of potential targets, big competition and how the FDIC loss share arrangement has changed?

Well, first of all -- this is Gerry Lipkin -- we have capital to acquire moderate-sized institutions without raising any additional capital.

In the case of a larger institution, we probably would have to go to the Street to raise additional capital.

However, based on our experiences last year when we went to raise capital, we had no difficulty, came in relatively quickly.

We seemed to have investors who were happy to invest in Valley.

So I think we have the potential capital, should a larger institution come along.

Right now, as far as we can tell, the FDIC doesn't have very much on its plate in our footprint.

And as I mentioned in my remarks, we are not looking to run all over the country simply to do an FDIC deal.

There are some opportunities, I believe, that will be presenting themselves over the next 12 months of non-problem institutions or institutions with only very modest problem situations, and we are alert to those.

We pretty much speak to all the banks in our area on a regular basis.

We are active in our bankers' associations where we come in contact with them.

So, should somebody decide they want to sell, we'd be a very interested acquirer.

One cannot do hostile bank acquisitions; they rarely work out.

So we like to do things where it's a friendly situation.

Is that something else you like about that, Craig?

That's good, I just have, actually, one additional follow up on something different.

Looking at your deposit growth this quarter will, we understand the desire to reduce costs and the seasonal impacts.

But is this a trend you think we should continue?

Do you expect stronger non-interest deposit growth trends over the next few quarters?

Well, one of the things our bank has been focusing on is the growing of our non-interest deposits.

Our branches are focused on that.

Certificate of deposit money in our marketplace is extremely sensitive to rate, and if we are willing to pay 0.25% or whatever it takes, and it doesn't take very much above the marketplace, the funds seem to flow in rather quickly.

So the challenge is really to bring in the non-interest deposits.

And they are tied closely, of course, to commercial loans.

A lot of our commercial borrowers are awash with cash today.

They like a strong home, so I think they park more of it here today than they normally would.

It's interesting; our strongest customers, clients, are really not doing very much in the way of borrowing right now because they are not doing very much in the way of expanding their business.

So when times change, as I mentioned in my remarks -- and I think they are starting to -- I think we're going to see a lot more activity from those individuals.

Jason O'Donnell, Boenning & Scattergood.

Just a couple of quick questions on credit.

I noticed that the TDR balance decreased pretty significantly this quarter.

Can you just talk a little bit about where those loans migrated to and what types of concessions you have been making?

Actually, the decrease was mainly caused by one large loan which paid off.

What was the nature of that loan?

It was an airplane loan.

But it paid off.

Okay.

And then, on the operating expenses, how much is in the other expense that's tied to OREO in the first quarter versus the fourth quarter?

Last quarter had a fair amount in it for a particular piece of OREO that was a little larger than normal.

There's very little in there this quarter of any significance.

Okay, great, that's helpful.

And then finally, I guess, excluding the impact of the acquisitions, were there any material one-time items in the expense base this quarter?

I can't think of anything, other than we indicated, for example, occupancy had some higher cost in it.

The first quarter has a lot of seasonality in it, so we have things like snowplow bills and things like that that hit us, typically, in the first quarter.

Payroll taxes are always up in the first quarter; they all tend to trend down as we move through the year.

Erika Penala, UBS.

This is actually [Elaine McCain] stepping in for Erica.

I know that you guys have talked about your excess liquidity and how you are purchasing securities with yields of less than 1%.

Could you go into a little bit more detail as to what sort of security you are purchasing?

I'm imagining it's a pretty short maturity as well.

If you could talk about that?

We bought some treasuries, shorter-ended it, most of it.

There really isn't very much that we are buying.

We bought some higher-interest, higher-coupon Ginnie Mae's last year, which carried a high coupon.

But we wrote that coupon off very quickly on the belief that, if rates went up, they would stop paying down and we're stuck with a 5.5%-5.75% yield.

But on the short-term right now we're only taking in a 2.5% to 3% yield.

It's an operating strategy that we applied to play on interest rates.

The only other thing we've been doing is we've bought some municipal securities.

Some of them have been short-term municipal bands that are within a one-year term, so you get a very low interest rate on those.

So that's one of the other things.

Could you just provide a little bit more color about deposits?

What sort of volume attrition are you expecting in the upcoming quarters, particularly CDs?

I think the first thing is, during this quarter we saw quite a bit that happened.

I think, as Gerry mentioned and I mentioned as well, a lot of it is based on where you have a place to invest the funds.

So we've seen some decline in municipal CDs, specifically, and those will continue to decline because many times they are high-rate CDs that we don't really always want to bid up for and we certainly don't have an interest in doing that today.

And in addition, we had a large decline in CDs from the acquisitions.

The acquisitions had -- they had very high-rate balance CDs.

We went in and we reduced them down to our level of interest rates very quickly.

And because of that, we saw a couple hundred million of that money leave us during -- from the time we acquired them up until now.

It's probably down about $250 million to $300 million.

But that actually worked to our benefit because we were able then to redeploy the funds that we had sitting earning us 0.25% sitting at the Fed, into the -- to carry those loans.

So the yield on those funds went way up.

And that was really part of our strategy of how we were going to do things if those funds went out the door versus coming down in rate to where we wanted to mark them to.

So, because you guys have now brought them down to your CD rates, I'm assuming that there won't be as many CDs maturing in the next couple of quarters?

Correct.

We don't expect that anywheres near the amount we saw go out in this quarter will happen again.

Got it.

And then, quickly, do you guys provide guidance on what the normalized expense run rate will be, once you take into consideration all the cost base from the merger?

No, we really don't.

Collyn Gilbert, Stifel Nicolaus.

Just a follow-up to the conversation on the deposit attrition.

Were you anticipating that that size of attrition, the $250 million to $300 million, when you took the deal?

Oh, absolutely, absolutely.

In fact, it was engineered by us because we wanted to put to work the money that we had sitting at 0.25%.

So in bidding for the bank, that was taken into consideration right from the get-go.

It's interesting, too, the deposits that have run out are essentially all the CDs.

The non-CD, the core money, has pretty much remained with us.

So we're very pleased with that.

In fact, we're seeing more of that core money staying than we had thought would stay, so all the free money that stays is just that much better for us.

On that line, now that you guys are a month in with those two transactions, where do you see the opportunities or the challenges with those franchises?

Or, what's the strategy there?

Well, the challenge is to separate the loans that you really feel have a long-term potential with Valley and then hold onto those.

Collecting the weaker loans or just letting them pay themselves out -- that's really not much of a challenge.

We have a pretty strong collection department here who know what they are doing.

So I'm not concerned about the collection of the problem situations; I'm more focused on how do we make a long-term benefit out of the acquisition.

So the meaningful accretion came from, obviously, this quarter in shifting the mix of deposits, and then at the year end, once you actually consolidate the branches?

Yes, you will see some more of that taking place, even, like you say, the acquisition is a month old.

But as the quarter end numbers you see were really only two weeks old, so there was still some of the deposit shifting taking place in the first two weeks of April.

In fact, currently, it's still taking place but not at the same pace that it did in the first two weeks.

Maybe I can shift into my question to you, Alan, on an outlook for the margin?

It's going to be an interesting question.

We think we certainly should be able to hold our own on the margin.

I think what you're going to have is what I said earlier.

Number one, you're going to have continued pay-down in rate on a lot of CDs that are still out there that, as they come to due, will go down in rate.

In addition, again, you only saw, as Gerry said, two to 2.5 weeks of the benefit of Liberty and Park.

And we saw a very nice incremental net interest from those acquisitions and we expect that that will continue.

Now that the deposits have been priced down going into this quarter we'll see more benefit.

Plus, as Gerry indicated, we used, in many cases, 25-basis-point money that was just sitting there waiting to be redeployed into something a lot higher.

So going into loans in the 5% range is going to benefit us going forward.

We also, Collyn, I think you will see some significant expense savings in this second quarter that we couldn't demonstrate in the first quarter in the first two weeks.

In the first two weeks we took the bank, 90%-some of their staff were still employed by the bank.

In the next 30 to 60 days, that will be down significantly, as well as will be the fact that we are going to be closing four of their offices and consolidating with our offices.

This was a perfect storm, as far as value was concerned.

The branches that we plan to close are literally within a football throw of our existing branches.

They are directly across the street, they are around the corner.

So there's enormous saves there.

We have no continuing liability as to the leases on those properties; they leased all their properties.

So that expense stops immediately.

So, going forward, I think there's going to be a lot of savings both on the rent, both on the data processing, as well as in the employment side.

That's helpful.

Just one final question -- as credit seems to be stabilizing a bit, do you think you guys could be closer to the point of matching provision to charge-offs in coming quarters?

I think we are getting closer.

But I think -- we have seen some stabilization.

I think, as I indicated, we saw on the auto side.

We've seen a trend now of charge-offs going down over a five-quarter period of time.

That being said, we've still got plenty of customers out there, and anything is possible.

So I don't think we want to project yet where we're going to be; it's just a matter of waiting and seeing what happens as we continue to move through the cycle.

We really were not substantially higher than charge-offs, anyhow.

(Operator instructions) Travis Anderson, Gilder, Gagnon, Howe & Co.

I was wondering if you want to comment at all on your negotiations with the Treasury about your warrants.

I guess doing a favor for the government has a pretty high cost?

Yes, it does.

They are going to be put up for auction, as we understand it, sometime in the month of May.

It's going to be put out for bid.

There will be a registration statement and a prospectus.

They'll be listed on the New York Stock Exchange.

But again, all of that is conducted by the Treasury.

So whatever is going to happen is really in their hands.

I haven't paid a lot of attention to these formerly, but are you allowed to bid?

Yes.

And individuals are going to be allowed to bid, and it's then issued on a pro rata basis, so it's not necessarily going to go to one individual unless that individual was by far the highest bitter.

And they're 10 years, as I understand it?

Well, they were originally 10 years.

It's 8.5 years life left to them.

(Operator instructions).

I am showing no further questions at this time.

You may continue.

Alright, thank you very much.

Have a nice day.

59 PM.

You may access the AT&T teleconference replay system at any time by dialing 800-475-6701 and entering the access code 153504.

International participants may dial 320-365-3844.

(Operator instructions).

Thank you for using AT&T teleconference.

You may disconnect.