Valley National Bancorp (VLY) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the third quarter earnings release conference call.

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

Later, we will conduct a question-and-answer session.

(Operator instructions)

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Theresa.

Good morning.

I'd like to thank everyone for participating in Valley's third quarter 2010 earnings conference call, both by telephone and through the webcast.

If you have not read the earnings release we issued earlier this morning, you may access it, along with the financial tables and schedules, from our website at ValleyNationalBank.com and by clicking on the shareholder relations link.

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

Valley encourages participants to 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.

And now I'd 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 earnings conference call.

In spite of the continued sluggish economy, we are pleased to report favorable operating results for the quarter.

Valley generated net income of $32.6 million, or $0.20 per share, roughly in line with our net income in the prior quarter and favorable versus the same period one year ago when Valley earned $25.6 million, or $0.17 per share, after TARP-preferred dividends.

The positive results are the accumulation of management's efforts to improve top-line revenue growth, namely through net interest margin management, coupled with continued diligence over Valley's operating efficiency.

In addition, the provision for loan losses declined approximately $3.1 million from the linked quarter as credit quality appears to have stabilized.

However, we still provided $3.2 million more than our actual loan losses as we continued to build our reserve, which now represents 1.28% of total noncovered loans.

Both net charge-offs and the level of non-performing loans are relatively in line with the results reported in this second quarter.

Shortly, Alan will provide a more detailed discussion relating to Valley's credit quality.

Although better than most of the country throughout our marketplace, business confidence and consumer sentiment still continue to be guarded, and the unemployment rate remains at a disturbing level.

Until these factors change, business investment and consumer spending on discretionary items will remain subdued.

Businesses of all sizes will continue to be reluctant to expand operations, thus potentially limiting our opportunities for loan growth.

Although unemployment statistics remain recessionary, perception among some borrowers appears slowly to have begun to turn positive.

C&I activity was a bright spot for the quarter as commercial line usage increased to 37.8% from 36.4% in the prior quarter.

Additionally, total commercial line commitments increased for the first time since the fourth quarter of 2008.

The increased line usage during the quarter reflects a combination of new borrowers coupled with increased activity within our New York commercial customer base.

Many of our New Jersey commercial customers continue to postpone borrowing for capital expenditures until their increased optimism is met with either change in the political environment in Washington or until they see a sustainable improvement in the economic environment.

As an outlier, we have begun to witness new interest from the healthcare sector as borrowers who purchased properties in 2007 and 2008 are now beginning to explore financing alternatives to develop those locations.

We continue to actively pursue new lending relationships and focus on expanding our current borrowing base.

Within the larger money center institutions, this intermediation of credit continues to be a popular theme as bank-wide industry concentration limits and capital levels constrain their appetite for certain business lines.

We have numerous conversations with potential borrowers seeking to change their banking relationship.

Unfortunately, in part due to Valley's credit underwriting requirement, many of these potential borrowers do not meet our threshold for obtaining credit.

In today's environment, less than one-half of commercial applicants result in an actual new relationship at Valley.

Commercial lending is highly dependent upon consumer spending activity.

As conditions begin to improve, we believe our commercial portfolio will expand accordingly as our current borrowing base, coupled with new relationships, begin to grow their operations.

We are in a challenging yet potentially very rewarding environment as Valley is well positioned to take advantage of growth opportunities.

Residential mortgage activity for the quarter continued to be brisk as historically low level of interest rates led many consumers to refinance existing residential mortgages.

Our one price refinancing program, as low as $499 including title fees, continues to generate huge volume.

For the quarter, we processed over 3,200 applications, an increase of nearly 75% from the prior quarter.

This program has the added benefit of generating significant cross-sell opportunities as approximately 65% of these applications are to refinance nonexisting Valley loans.

Furthermore, our title agency was recently licensed to do title work in Pennsylvania, enabling us to expand our low-cost refinance program into that market.

We opened our first loan production office in Bethlehem, Pennsylvania and anticipate expanding the model to other geographies should market conditions persist.

Under this program, we are encouraged by the fact that we operate profitably, whether we retain the loans in portfolio or sell the loans into the secondary market.

We actively monitor the borrower's equity in the property, prepayment trends, portfolio amortization, and a multitude of other factors in determining whether to put a loan into portfolio.

During the quarter, we initiated the sale of $83 million in residential mortgage loans transferred from the loan portfolio, maximizing current value as management deemed the prepayment risk to outweigh the potential future interest income.

The gain from this sale of approximately $3.9 million, although negotiated in the third quarter, will not be recognized until settlement in the fourth quarter.

To mitigate future interest rate risk on loans repaying the new portfolio, Valley may utilize interest rate swaps to convert fixed-rate loans to floating-rate instruments.

Focusing on the long-term return, as opposed to maximizing short-term gains, is a hallmark of the organization.

Unlike many of our larger peers, Valley does not have documentation issues relating to residential mortgage foreclosure proceedings, in part due to the absolute low number of foreclosures, coupled with the bank's policy requiring a senior officer both review and approve all foreclosed documents on an individual basis.

Unless an industry-wide moratorium is mandated, we do not anticipate any material impact to our net income similar to the reserves being established at many others throughout the industry.

Our automobile lending volumes, while increasing, are still constrained by the general level of consumer demand.

National auto sales are at levels between 30% and 40% less than just a few years ago.

However, unlike historical periods, demand within our marketplace seems to be shifting toward domestic rather than foreign originations.

Approximately 75% of our larger dealers support domestic manufacturers, which should bode well for us for future production.

Although overall volume is light on an historical absolute basis, activity for the quarter was excellent on a relative basis as we booked over 4,300 new auto loans compared to 2,700 in the prior quarter.

Application volume was strong at over 19,000.

However, many of the borrowers did not meet our credit threshold.

We rejected over $62 million of applications with FICO scores in excess of 700 simply due to unacceptable loan-to-value requests.

It is our philosophy that all borrowers must have skin in the game in order for us to maintain the historical strength of our portfolio and the long-term returns to our shareholders.

Many new regulations and reforms are earmarked for the banking industry in the near term.

While we believe most will have a direct negative impact to earnings for the majority within the industry, we believe that it will have much more of a negative impact upon those institutions that are either much larger or smaller than Valley.

The new regulations should force our competition to behave more like Valley in the future, which should have the positive effect of leveling the playing field and enabling us to generate more business in the future.

The new Basel guidelines will increase the minimal levels of capital throughout the industry.

However, we do not anticipate altering our strategy as Valley's current capital levels already exceed the minimum thresholds being discussed.

We believe Valley's strong balance sheet and capital levels position the bank to expand the organization either through renewed de novo branching activities or potential traditional M&A as opportunities present themselves.

We have a disciplined approach to expand the franchise, both from an operational and financial perspective.

We look for opportunities which culturally fit within Valley's organization, make long-term strategic sense, and the ability to create enhanced shareholder net worth.

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 and beyond.

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

Thank you, Gerry.

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

Revenues including provision and exclusive of OTTI, net security gains, and trading income or loss exceeded $128 million for only the second time in the history of the bank.

The increase from the prior linked quarter was $3.6 million, or nearly 12%, on an annualized basis.

Net interest income increased approximately $700,000.

The linked quarter increase in revenue is largely attributable to the 6-basis-point net interest margin expansion on a tax-equivalent basis, coupled with the decline in provision for credit losses of $3.1 million.

The decline in average interest earning assets was more than mitigated on a sequential quarter basis as a result of the margin expansion.

Loan yields expanded 10 basis points, in part due to accretion recognized on the two FDIC-assisted transactions, a shift in the composition of loans, and an increase in loan fees.

Investment yields declined as yields on new purchases are less than amortizing investment yields due to the macro level of market interest rates.

Deposit costs continue to decline, although at a slower rate than prior periods.

Valley's cost of deposits for the period was 0.76% compared to 0.81% in the second quarter.

Until earning asset demand returns to pre-recessionary levels, we are able to price our time deposits slightly below market levels.

However, when the absolute cost declines to levels closer to our current offering rates, the benefit to the net interest margin will likely be muted.

We anticipate the net interest margin will remain relatively stable for the remainder of the year assuming the level and slope of market interest rates do not change materially.

However, as levels of interest rates hover near historic lows, we do anticipate some margin contraction in 2011 should economic conditions remain stagnant.

Operating expenses declined approximately $1 million from the prior quarter as many expenses associated with the two FDIC-assisted transactions were eliminated.

We believe overall fourth quarter expenses may rise slightly from those reported in the third quarter as normal seasonal expenses are recognized.

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

These loans are reported as covered loans in our financial statements as we have entered into loss-sharing agreements with the FDIC on both transactions.

Credit quality for the quarter remained relatively in line with the prior two quarters as total delinquencies, 30 days or more past due, were approximately $160 million, or 1.70% of total loans.

Early-stage delinquencies, those less than 90 days, continued to decline and now account for only 0.56% of total noncovered loans.

Nonaccrual loans increased just over $2 million, largely attributable to an increase in the construction and residential mortgage portfolios.

Of the $105.6 million in non-accrual loans, over $86 million, or nearly 82%, of these nonperforming loans is comprised of construction, residential mortgage, and commercial mortgage loans, categories in which Valley has historically had very low loss rates.

For all of 2010, gross charge-offs within this category were approximately $5 million.

Although we are not happy with the absolute level of nonperforming loans, for the most part, we are comfortable with our collateral position and the prospect of collection.

Accruing troubled debt restructured loans for the quarter represent 17 loans, or $48 million, in total outstanding principal balance, roughly equal to the balance in the prior quarter.

We did not add any additional loans to this category during the period.

The weighted average modified interest rate for the 17 loans is 4.6%, and only one of the 17 loans currently has a rate below prime.

We believe the modifications are appropriate in light of the current economic conditions, and we expect collections of most principal owed.

In conjunction with our quarterly impairment analysis, we analyze our nonaccrual and troubled debt restructured loans in determining the appropriate required reserve.

Based on this analysis, we have established a reserve of $14 million against principal balances of $115.3 million comprising the majority of our nonaccrual loans and troubled debt restructured C&I and CRE loans.

The $14 million reserve has been allocated to each loan category on the allocation table within our press release.

In the third quarter, Valley's provision for credit losses was $9.3 million, roughly $3.2 million greater than net charge-offs.

As a result of this variance, combined with the decline in Valley's non-covered loan portfolio, Valley's allowance for credit losses as a percentage of noncovered loans increased to 1.28% from 1.24% in the prior period.

For the first nine months of 2010, Valley recognized $34.4 million in provision expense versus net charge-offs of only $22.3 million.

During the same period, non-covered loans declined in balance by $315.4 million, while the reserve for credit losses increased approximately $12 million.

Valley's reserve calculation encompasses multiple variables, including loss history and management's general economic outlook.

Changes in our allocation of the reserve by loan category from quarter to quarter is also in part dependent upon our internal risk ratings.

The quarterly provision expense is largely a result of the reserve analysis less the prior-period reserve balance.

As the level of net charge-offs and total delinquent loans, including non-accrual loans, begins to stabilize, we anticipate the future provision expense to be less than the levels witnessed in the first half of 2010.

Valley's capital ratios for the quarter remained strong.

For the period, our tangible common equity to tangible asset ratio was 6.84%.

We are comfortable with our capital ratios and believe they provide a solid base with which to grow the organization.

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

Thank you.

(Operator instructions)

And our first question comes from Craig Siegenthaler from Credit Suisse.

Mr.

Siegenthaler, if you are muted, please take your line off mute.

If you would, please try to queue up again.

Our next question comes from Matthew Clark with WBWKP (sic).

Please go ahead.

Guess I work for a radio station; KBW.

Good morning, Matt.

Morning.

Morning, guys.

Just on the margin, I think coming out of last quarter, you had said that you had expected a relatively stable margin assuming the curve remained relatively stable the way it was, and we all know that the curve changed dramatically in the quarter, I think for the worse, but yet you still were up.

I can see your yields on deposits or on the earning asset side and so forth, but just trying to get a better sense for how much of the margin improvement came from the FDIC, the impact from the FDIC deals, and whether or not that was washed out in the change in the indemnification asset.

No, it was not.

About half of the margin increase came from the FDIC deal.

Okay.

And then with very little change in non-performers and delinquencies and TDRs, can you give us a better sense for maybe what the migration looks maybe before that stage, how the migration of risk ratings may have tracked in the quarter?

Well, I think, as I said, the risk ratings helped, I think, in the movement of the allocation, so obviously we saw some decline in some areas in those risk ratings.

So we were not surprised, but we were happy by the movement in some of those risk ratings.

Okay.

And then with no TDRs being added in the quarter, is that just a function of things getting better, or is that a change in your stance internally?

No, I don't think it's a change in our stance.

No.

I think it's strictly a matter of where we see any issues coming up, and at the moment, we saw some stabilization during the quarter.

Okay.

That's all for me.

Thank you.

Well, just a point on that, all of the TDRs are performing loans at this point.

Great.

Next question comes from Craig Siegenthaler.

Please go ahead -- with Credit Suisse.

Hi.

Good morning.

Sorry, I don't know what happened earlier.

This is actually Vaibhav Bajpai filling in for Craig.

Okay, good morning.

Good morning.

So, Gerry, just see the commercial balances increase this quarter.

Could you just talk about is this going to become more of a focus for the bank going forward, or is it just a function of the current environment?

It's a focus for the bank to build our commercial.

We are a commercial bank.

We're not a thrift, although we take advantage of the residential mortgage market opportunities at the present time, so our central focus is and has always been commercial loans.

Unfortunately, the economy is such that the demand on the part of a lot of our commercial borrowers is somewhat muted.

A lot of our commercial borrowers, as you're seeing across the country, they've moved to cash.

They're sitting on a large amount of cash at this point.

They're not moving forward.

And if they have cash, they're certainly not looking to borrow.

But we are concentrating our business development efforts on the commercial side.

Got it, thanks.

And then, second, in last quarter's call, I believe you mentioned that you're retaining more resi market originations versus selling them off.

Could you just give us an update on whether that thinking has changed?

We continue to retain a large percentage of the originations, but as I mentioned in my comments, there are lots of factors.

We won't retain in portfolio loans that we're not comfortable that the borrower has, based on the current appraisal, a significant equity position in the property.

We look at the balance within our portfolio, and we have begun using more derivatives to offset the interest rate risk long-term.

So we're giving up on current yield, but we feel we're preserving yield for years in the future.

Great.

Thanks for taking my questions.

Sure.

Our next question comes from Gerard Cassidy with RBC.

Please go ahead.

Hi, Gerry.

Hi, Alan.

Good morning.

On the TDRs, if I recall correctly, should they continue to perform as expected and they go through the year end, will they be coming off TDR status in the (inaudible - multiple speakers)?

You know, you're raising the $64,000 question.

FASB just sent out for comment a position paper on TDRs, and they don't address that issue.

One of the things that we plan to write is trying to get somebody to address that issue.

We'll be looking closely at that as we get to year-end.

I don't think we want to make any promises that anything comes out of it.

I think the important thing, Gerard, is that, number one, the interest rate kind of is in the same level as Valley prime, if you will, at the 4.6 rate.

So we view that as a positive, and the fact that we've got performing loans in there and people are performing in accordance with the modifications.

So, yes, we'd like them to come out if they aren't performing, and if they perform over a year-end period or a one-year period, but at the moment, I think it's unclear what if any will come out of there by the end of the year.

Is the current rules -- I was under the impression that they had to perform for six months and go through a calendar year-end, but it sounds like that might be changing?

We can't get anybody to give us a clear definition, Gerard.

The important thing I think to focus on, first of all, when the examiners come along, they don't think anything.

The people are getting too excited over TDRs.

They said, well, it's not necessarily an adverse -- it's not like putting them into a nonperforming category.

However, we try to point out to them that you folks don't necessarily look at it the same way that their thinking people look at it.

The more important thing, though, is that the ones that we've done adjustments on I think were for good business reasons and not necessarily because the way people would interpret a TDR.

You know, a person comes to you and says that they have a loan on a piece of equipment.

They originally did the loan for three years and it's really crushing their cash flow.

Could we make it over a five-year period.

Well, if they would've walked in on day one and said, "Will you do it for five years?" we probably would've said yes.

Now the examiner looks at it and says, "Well, that's probably a TDR." Try to argue that point.

Sure, sure.

It's a tough environment with the rules as they are and as they are changing, Gerard.

I think one of the issues is whether it's a market interest rate, and while they may appear to be a market interest rate because, in fact, at 4.6, they're pretty good rates, we're not unhappy with those, the fact is whether or not -- and I think the definitional issue is going on now with everybody is is it a market rate for that particular credit.

And I think that's going to make a determination as to whether you can pull it out of the TDR category or not.

Sure.

You pointed to your commercial loan growth coming from New York City.

The customers that you were successful with, what types of customers were they, and were they with other banks?

And if so, are you able to win new customers from the larger banks or is it other small banks?

Bob Meyer's here.

He heads up our commercial area.

He's most attuned to answer that.

The customers were predominantly from larger banks, and it was a broad base of New York City-type middle market businesses.

There was no one concentration of any particular kind, but we were fortunate in getting a number of excellent line credits, everything from strong asset-based lending to true unsecured lending.

No concentration at all.

And as I said, they're predominantly from larger banks.

(Inaudible - technical difficulty) did you guys see -- when you won that business (inaudible) internal customers that were expanding their business or they were just refinancing their lines from another bank and you guys picked up the business?

The bulk of it is refinancing.

There is a little expansion beginning to be seen now, but if you look at any of the local area senior lending officer reports that come out from the Fed or anyone else, there's still a very slow growth in terms of new businesses, a lot of trading companies, customers between banks.

Sure.

And then, finally, on the C&I, I think you mentioned here in the press release that you also saw higher existing lines -- credit usage.

Where's the credit usage now on the lines of credit, and how much did they go up by?

They went up --

It went to 37--like--.8% from 36.4% in the prior period.

It's line usage that in the past we would've expected to happen around this time of year, but the soft economy kept that down in recent times, and it's come back, and it is not heavily -- again, not heavily skewed to one industry.

It was an across-the-board kind of situation.

We've seen -- we've been very pleased with the fact that our commercial line usage has continued to perform the way it's supposed to with not just drawdowns but repayments and redraws.

I think, Gerard, one thing that makes it even a little bit more exciting is our concentration in the jewelry trade has come down dramatically over the last couple of years, I guess, as somewhat -- as might be expected when it comes to high-end jewelry purchases.

So it's coming from all other sectors, not where we would've seen in the past, coming heavily out of the jewelry trade this time of year.

And then, finally, on the residential mortgage business, are you guys seeing any follow-through in the -- I know it's only two weeks into the fourth quarter, but are you still seeing strong refinancing or origination volumes (inaudible - multiple speakers)?

No slowdown.

No slowdown.

And as I mentioned, we opened up in Bethlehem, Pennsylvania.

That only occurred the beginning of this month.

Thank you.

Next question comes from Jason O'Donnell, Boenning & Scattergood.

Please go ahead.

Good morning.

Morning, Jason.

Can you just give us an update on the impact of Reg E this quarter and your thoughts about the impact going forward?

It was a small decline in fees that I think we saw at this point, and I don't expect we're going to see any major declines.

So a relatively nominal amount?

Right.

Right.

And what about option rates?

I'm sorry, oh, option rates?

Yes.

I don't know what--

(Inaudible - multiple speakers) the last numbers I saw, we were in the 90-some percentile for those people who used the line more than three times in the past year.

Okay, great.

So it's very heavy, the opt-in on those people who use the line.

If you never used it and you don't care to use it, it doesn't make a difference whether you opt in or out.

Yes, that's the figure that matters.

Can you also tell us whether you settle deposit accounts on a high or low basis and the process you employ?

Neither one.

Neither one.

We pay checks in the order in which they're written.

Okay.

The absolute best approach, I believe.

You can't argue if you wrote the check first.

Every check has its check number microcoded into the check, and we pay them in that order.

Okay, great.

And then I guess the last question is can you just give us an update on the size of your C&I and CRE lending force relative to where it's been, say, a year ago?

It's about the same.

We didn't lay a lot of our C&I lenders off because we do believe that the markets go up and they come down and you don't want to have to retrain the staff.

So that's one area where we carried everybody.

And even in times when there isn't a lot of reduction of new loans, they're quite busy maintaining their existing portfolio, making sure that that's performing.

Okay, great.

Thank you.

That's all I have.

Okay, thanks.

Have a question from Collyn Gilbert, Stifel Nicolaus.

Please go ahead.

Yes, this is actually Travis Lan on for Collyn this morning.

How are you?

Hi, Travis.

Hi, Travis.

Most of our questions have been answered, but just one quick one.

How successful have you been in expanding your relationships with some of the commercial borrowers that you acquired in the FDIC deal?

It's a long, slow process.

I can't give you a specific number percentage although every single one of them has been met by our commercial lenders.

We're trying to build relationships wherever we can.

We have had a number of successes in it so far.

It's really kind of early to quantify that.

The potential still exists, though, to kind of build on those relationships going forward?

Oh, yes.

Oh, yes.

Good.

All right.

Thank you very much, guys.

Okay.

(Operator instructions)

I have no other questions in queue at this time.

Thank you.

Thank you for attending our conference call.

Have a nice day.

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