Valley National Bancorp (VLY) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth quarter earnings conference call.

(Operator Instructions).

I'd now like to turn the conference over to our host, Dianne Grenz.

Please go ahead.

Good morning.

I'd like to thank everyone for participating in Valley's fourth quarter 2010 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 www.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 on 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 fourth quarter earnings conference call.

In spite of a continued sluggish economy, we're please to report favorable operating results for the quarter and year.

Valley generated net income of $38.2 million or $0.24 per diluted share, an increase of 20% from the prior quarter and an increase of approximately 34% from the same period one year ago when Valley earned $28.6 million or $0.18 per diluted share after the repayment of TARP preferred dividends.

For the year Valley earned $131.2 million, continuing the positive trend of having never reported a losing year in the 83 year history of the Company.

The positive results are attributable to management's common sense and highly-focused approach to traditional banking.

As we've stated on many occasions, maintaining Valley's conservative credit underwriting philosophy during varying economic environments provides the foundation for sustainable earnings and highly-favorable returns to our shareholders.

During the quarter, Valley's credit quality metrics remained relatively static compared to the prior quarter.

Non accrual loans as a percentage of total loans were even with the prior quarter at 1.12%.

Net charge offs to average loans on an annualized basis declined from 0.26% in the third quarter to 0.18% in the fourth quarter.

Actual absolute net chargeoffs for the quarter were only $4.3 million versus $13.6 million during the same quarter just one year ago.

One area of credit, which many in the investment community have recently begun to use as a gauge of forecasting future credit issues, performing TDRs, troubled debt restructures, did increase significantly from the prior quarter.

Unfortunately the definition of a TDR loan is very subjective, and without a clear industry standard or bright line test as to what defines a TDR.

It is extremely difficult if not impossible to compare the figures reported at other financial institutions, let alone use these numbers to predict future credit events.

At Valley, loans are classified as TDRs for a multiple of reasons ranging from changes in the interest rate to a modification of amortization.

We do not restructure loans merely to avoid current chargeoff or to manipulate our asset-quality ratios.

We only amend turns and structures for borrowers we believe will meet all modified contractual obligations.

Of the 44 performing TDR borrowers totaling nearly $90 million in outstanding principal, the modified weighted average interest rate payable to Valley is 5.14%, and only two borrowers have effective interest rates below prime.

For many we have restructured the principal amortization period to better correlate with each borrower's current cash flow.

Restructures of this nature are customary, usually do not take into account collateral or guarantor support, and from Valley's perspective does not infer potential future credit impairments.

Economic conditions in our marketplace continue to show signs of improvement, although business confidence and consumer sentiment remain guarded while unemployment remains at a disturbing level.

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

Furthermore, businesses of all sizes remain reluctant to expand operations, thus limiting our opportunities for loan growth.

That being said, many of our borrowers reported stronger financial performance throughout 2010 as earnings began to stabilize.

However, much of this improvement has come from cutting expenses since many of these businesses appear slow to invest in new equipment and inventory and may rather wait to make these purchases until macro economic conditions improve over a sustainable period..

Non covered loans -- those are loans not guaranteed by the FDIC -- declined slightly from the prior periods as the increase in residential mortgage loans was mitigated by a contraction in both consumer auto lending and commercial real estate portfolios.

While overall auto volume is light on a historical absolute basis, activity for the quarter was excellent on a relative basis as we booked over 3,400 new auto loans compared to 2,500 in the same period one year ago.

Application volume was strong at over 17,000.

However, many of the applicants failed to meet our strict credit thresholds.

We rejected over $200 million of auto loan applications during the quarter, a significant portion of which were 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 long term returns to our shareholders.

What we find most disturbing is that in an attempt to build market share, some of the larger lenders have begun to offer rates and terms that are clearly below profitable levels.

We like the automobile business.

Nevertheless, when the competition sometimes creates an environment where we are unable to generate a return above our cost of capital, our volume will remain constrained.

As was proven true repeatedly in our history, the lending discipline we experienced in the short run has been justified in the long run.

Maintaining our conservative credit standards has been the key to Valley's performance and strong returns to its shareholders.

The residential mortgage portfolio increased $35 million from the prior quarter, even after showing nearly $200 million of originations as activity continued to be brisk due to historically low level of interest rates that led many consumers to refinance their existing residential mortgages.

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

For the quarter we processed nearly 2,500 applications at a time when seasonal activity is typically light.

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

In the latter half of 2010 we opened our first residential loan production office in eastern Pennsylvania.

We are pleased with the level of applications and anticipate an increase in activity in 2011 as part of a result of this geographic expansion.

Commercial real estate, including construction, declined over $40 million on a linked quarter basis as many of our larger borrowers continue to pay down lines and accelerate prepaying loans with their own excess liquidity.

While having strong commercial borrowers is advantageous from a credit perspective, during periods of extended low interest rates these same borrowers are more apt to request and receive interest rate concessions as market spreads for these prime customers decline.

Another source of pressure on net interest margins, I might add.

Our commercial real estate lenders are very active in pursuing new relationships.

However, while many of the potential customers have projects which from a cash flow basis support the obligation, based on the property's current appraisal Valley is unable to even match the borrower's current obligation.

As the commercial real estate market continues to evolve based on new economic realities, Valley has increased this new business emphasis on co-ops and multifamily loans in our market place.

Although these loans provide better rate spreads than our historical transactions, they still offer sound credit metrics.

We anticipate significant new opportunities to grow the balance sheet as Valley's commitment to this market expands.

C&I lending continues to be a mixed bag of results as many of our borrowers continue to utilize their own liquidity to fund transactions which in the past would have generated a loan from Valley.

In our New Jersey marketplace, many of our borrowers appear reluctant to expand their business operations, waiting for further confirmation of economic improvement.

While in New York, activity appears more brisk as borrowers have begun to draw down on lines and invest in growing their companies.

Furthermore we are witnessing strong demand in healthcare and owner-occupied lines of businesses.

Separately, many of the larger money center banks in our marketplace continue to be inconsistent in serving the small to middle-market customer, which is our niche business.

Several have gone up in market and have been less aggressive in courting customers in the $2 million to $10 million borrowing range.

We believe as the economy continues to improve and consumer confidence develops coupled with the disintermediation of credit at some of our larger competitors, the operating environment in 2011 may potentially be very rewarding.

Valley is well positioned to take advantage of these growth opportunities.

Our strong balance sheet and consistent approach to traditional community banking should provide the foundation for continued positive returns in 2011 and beyond.

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

Thank you, Gerry.

As mentioned earlier we were pleased with our financial results for the quarter and year during this challenging environment.

The fourth quarter net income of $38.2 million was -- includes a few infrequently-occurring items as well as some volatility attributable to the two FDIC acquisitions that Valley consummated in March of this past year.

Fourth quarter pre-provision net interest income of $113.1 million increased $1.6 million versus the same period one year ago as the decline in average interest-earning assets of $388 million was more than offset by a 16-basis-point improvement in the net interest margin.

However, on a sequential quarter basis, pre-provision net interest income declined nearly $4.6 million, almost entirely attributable to margin compression.

That being said, many variables impacted the margin in the fourth quarter, some of which we do not anticipate carrying into 2011.

Although average interest-earning assets for the period remain flat at approximately $12.6 billion, the composition of assets changed from the prior quarter.

Overnight liquidity, earning Valley 25 basis points, increased approximately $100 million from the third quarter.

The increase in liquidity is mostly attributable to principal amortization in both the investment and loan portfolio, coupled with the sale of residential mortgages and investment securities.

As a result of this temporary increase in liquidity, largely due to the sale of loans and investments, net interest income and the margin were negatively impact by approximately $1.2 million and four basis points respectively.

In addition, fee income recognized in the quarter was slightly less than the prior quarter due to a drop in recovery interest on loans previously charged off and loan fees.

These two items negatively impacted the margin by approximately two basis points.

The two largest variables impacting the margin for the quarter were a reduction in accretion income on covered loans, those that are acquired via the two FDIC transactions of approximately $2 million, or five basis points, and lower loan and investment -- reinvestment rates on portfolio amortization.

While we believe any decline in reinvestment rates could further impact the margin in 2011, we anticipate an increase in the accretion on Valley's covered loans as on an aggregate basis the portfolio is performing better than originally estimated.

However, under GAAP the improvement is not immediately recognized into income but rather on a prospective basis as additional interest income.

It should be noted that in conjunction with any increase in interest income on covered loans, Valley will reduce the FDIC receivable through noninterest income in an amount roughly equal to 80% of the additional amount recorded in interest income.

During the fourth quarter, Valley did not recognize any additional interest income on the covered loans as a result of changes in cash flow estimates.

We anticipate there will be some continued volatility in our net interest margin attributable to the manner in which the accretion on the covered loans is recorded.

Valley's cost of deposits declined four basis points from the third quarter to 0.72% as new certificate of deposits continue to be originated at rates lower than the portfolio average cost.

While the cost of certificate of deposits will likely continue to decline, we see little opportunity to further reduce Valley's other interest-bearing deposit accounts as the absolute rates being paid for many accounts are already quite low.

Additionally, at the end of the first quarter of 2011 approximately $200 million of high-cost borrowings will mature which we anticipate replacing with lower funding costs.

The provision for loan losses on both covered and noncovered loans and unfunded letters of credit increased $5.8 million from the prior quarter, entirely attributable to a provision of $6.4 million for covered loans.

Once again, in accordance with GAAP, for Valley's covered loans, potential credit impairment is recorded on a pool level basis, irrespective of the performance of other pools.

For Valley, a few pools appear to be performing worse than originally estimated, and the cash flows which were originally forecasted may not materialize.

Accordingly, Valley recorded the $6.4 million in provision during the quarter.

As a direct result of this credit impairment, and because the loans are guaranteed by the FDIC, Valley increased the FDIC loss share receivable and recorded approximately $5.1 million of noninterest income.

On a net pretax basis, the credit impairment on covered loans negatively impacted income before income taxes by approximately $1.3 million.

Unless Valley recognizes future credit impairment on covered loans, the negative $1.3 million effect will not be recurring.

Total noninterest income for the quarter of $36.4 million includes the change in the FDIC receivable mentioned earlier, in addition to a few other infrequently-recurring items.

On the face of Valley's consolidated statement of income, which accompanied this morning's press release, the change in the FDIC receivable reflects noninterest income of $6.3 million, which is $1.2 million greater than the amount I previously referenced when discussing the credit impairment on covered loans.

The variance of $1.2 million is attributable to normal accretion of the original FDIC receivable recorded.

The accretion results from the present value of the original forecasted cash flows.

This number will decline in 2011 and beyond as the balance in the receivable is reduced.

Other items worth mentioning include nearly $7 million of gains on security sales which were partly mitigated by trading losses of $2.1 million on the fair value mark to market of $32 million in investments, categorized as trading on the balance sheet.

Gains on the sale of loans of $7.5 million include approximately $3.9 million of gains attributable to an $83 million bulk sale of residential mortgages.

In the future we anticipate continued sales of residential mortgage into the secondary market, yet to a lesser degree than the amount recognized in the fourth quarter.

Excluding the income on the FDIC receivable, gains on securities transactions, trading losses, and $3.9 million on gains on the sale of loans, noninterest income for the quarter would have equaled $21.3 million which compares favorably to the amount recognized in the third quarter.

Operating expenses increased approximately $1.5 million from the prior linked quarter as certain seasonal expenses are recognized combined with an increase of $989,000 in write downs on affordable housing investments and some volatility in expenses attributable to the collection of covered loans.

Many of these expenses will be recovered as they are covered under Valley's loss share agreement with the FDIC.

Partly mitigating the increase was a reduction in the amortization of intangible assets attributable to a $945,000 recovery of previously-recognized impairment on mortgage servicing rights.

We anticipate operating expenses in 2011 will be relatively in line with those reported in the fourth quarter.

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 Liberty Point and Park Avenue Bank FDIC assisted transactions.

These loans are reported as covered loans on 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 three quarters, as from a macro perspective credit appears to have stabilized.

Total non accrual loans as of December 31 were $105 million, approximately equal to the amount reported in the prior period.

Over $88 million or nearly 85% of these nonperforming loans are comprised of construction, residential mortgage and commercial real estate loans, categories in which Valley has historically had very low loss rates.

For all of 2010, total gross chargeoffs within these categories were $7.3 million.

For the most part we are comfortable with our collateral position and the prospect of collection.

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 $15.2 million against principal balances of $154.3 million comprising the majority of our nonaccrual loans and troubled debt restructured C&I and CRE loans.

The $15.2 million reserve has been allocated to each loan category on the allocation table within our press release.

Valley's fourth quarter provision for losses on non covered loans and unfunded letters of credit was $8.7 million, roughly $4.4 million greater than net chargeoffs.

As a result of this variance, combined with the decline in Valley's non covered loan portfolio, Valley's allowance for non covered loan losses as a percentage of non covered loans, increased to 1.31% from 1.26% in the prior period.

For the full year of 2010, Valley recognized $43.1 million in provision expense for noncovered loans and unfunded letters of credit versus net chargeoffs of only $26.6 million.

The total net chargeoffs for all of 2010 were approximately 32% less than the amount reported in the prior year.

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.

If the level of net chargeoffs and total delinquent loans, including non accrual loans, continue to stabilize and potentially improve, we anticipate the future pre-provision expense to decline from the levels witnessed in 2010.

Valley's capital ratios for the quarter remain strong.

For the period our Tier 1 common capital ratio of 9.25%, an increase of 18 basis points from the prior quarter.

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 the line of Steven Alexopoulos from JPMorgan.

Please go ahead.

Morning guys.

Morning.

Gerry, I appreciate the comments on the TDRs, but can maybe you talk about what was unique to the fourth quarter that we saw such a large increase there, and was it more commercial or residential mortgage?

I think it's more of a focus on the accountants wanting us to classify credits as TDRs than we've seen in the past.

A lot of it as I said is very subjective and is argumentative as to whether or not something is or is not a TDR.

They don't have a clear line as to how they define the word "troubled." I think, and I've had some conversations with some of the folks in Washington requesting some of this.

It just doesn't.

And I think everybody wants to make sure that they're covered, so they feel if we're going to err, we should err by calling something a TDR as opposed to not calling it a TDR.

In my personal view on those credits that we have classified as TDRs, I see very little if any losses in those credits; it's just that they've been changed.

If you have a borrower, for example, that was amortizing a loan over a five year, a seven year period, and the borrower comes into the bank and says, "Look, I still make money but business is sluggish, it would help my cash flow if you amortize the loan over a ten or a 12 year period," and we go ahead and modify the loan from a seven year amortization to a 12 year amortization, that's a TDR.

The borrower is making money.

He's never missed a payment.

He would never have missed a payment on his prior categorization.

That's now part of that TDR pile.

And we have loans exactly like what I just said that fall into that category.

So I think unfortunately it's a category that the regulators are over focusing on, and I think it's going to distort analysis by the analysts when they -- if you over-rely upon that category trying to predict it as future losses.

Steve, just to answer the first part of that.

The majority of that is in the commercial area.

That's actually real helpful color.

I just have one other question on the securities book.

Alan, probably for you.

The taxable securities portfolio yield at 4.5% is I think the highest I've seen at any bank so far.

Why are you not seeing more pressure on yields there?

And then once we reset the margin for some of the one-timers you talked about, does that imply the bias is down for the NIM through 2011?

No, I don't think so.

I think one of the things that are causing the yield to look high is probably some of the trust preferreds that we have, so that's probably a lot of the reason.

We have a fair amount of those and they do tend to boost our yield and have done that for years really.

We might point out they are single-name.

They're not --

Yes, most of them are single-name.

We only have three I think pooled trust preferreds, and those are really -- have a book value of under $10 million, so there's really not much there at this point.

Obviously, if there were large payoffs of trust preferreds, we would see a decline in NIM based upon the reinvestment rate of those.

However, that's not what's been really happening.

It's been our normal mortgage backs, et cetera, that have been really prepaying.

I see.

So your gut feel is that maybe you could hold the NIM again once we reset it, maybe flattish at least in the early part of the year?

Well, that's going to be kind of hard in general.

I mean think if rates stay where they are, and I think we told you this last quarter, we kind of anticipated we'd see a decline in NIM during 2011 if rates stay where they are because you have a constant churning of loans that are refinancing or prepaying or whatever.

And in addition to that, as I mentioned in my remarks there's a lot of FDIC volatility going on in this $350 million of FDIC loans and the way the accounting is handling that.

So I think we see some potential increase in the NIM on that side being offset somewhat by reinvestment rates that we're seeing on our normal loan side and investment side.

Okay.

Thanks for the color.

You're welcome.

We have a question from the line of Craig Siegenthaler with Credit Suisse.

Good morning, Craig.

Your line is open.

Good morning, guys.

Good morning.

I really appreciate the detail on the call today.

First question, just on the liability side of the balance sheet, was there anything kind of unusual which you think kind of prevented your deposit costs from going down a little more?

And just given kind of demand and competition here, do you think we're near the end of the cycle in terms of deposit costs going down?

And could we actually see a base and start going higher in a few quarters here?

I would say that the thing about deposit costs is really going to depend largely on what we see on the investment and the loan side.

I mean, if we see a lot more demand on loans then I think people are going to start looking to raise deposits.

That could force rates up on the deposit side.

I don't think we saw anything unusual in our deposit costs this quarter.

We are as I said seeing CD rates continuing to decline.

I mean, you have CDs that were out there for some period of time.

And as they continue to roll over they're rolling over at lower rates.

I think that came down about 10 basis points for the quarter from the prior quarter.

However, we're seeing no real movement in most of the other deposit categories.

Well then, Alan, given your commentary on kind of spotty loan demand pickup here and also kind aggressive, or more aggressive competition sort of markets, would you expect there's actually still room for deposit costs to go down?

Because it doesn't sound like you'll be growing loans by that much in the first half.

They could as I said go down.

I think we saw two things this quarter.

In addition to seeing CD rates go down we did see an increase in our demand deposits.

They were up about $100 million during the quarter which helps drive down our costs.

So if those numbers continue to stay or grow from where they've been and we continue to see CD costs continue to come down, I think there's a possibility of some amount of decline going forward.

I don't think it's going to be anything huge, but you might see some decline.

And maybe just one followup here.

Given kind of the increase in reserves and where reserves are today which is a pretty healthy level versus your chargeoffs, are you expecting a higher or -- for you guys I know it's low but a relatively higher level of chargeoffs in the first half of this year?

No, not at this point in time.

Okay.

All right.

Great, guys.

Thanks for taking my questions.

You're welcome.

We have a question from the line of Travia(sic) Lan with Stifel Nicolaus.

Please go ahead.

Thanks.

Good morning.

Good morning.

Good morning, Travis.

Thank you very much.

I guess first, I might have missed it, but do you have a figure for the credit line usage in the quarter?

37%?

Was it 37%?

About 37%.

Okay.

So down a little bit from the third obviously.

Yes.

Well, you have to look also because the outstanding lines for many borrowers have been reduced.

If they're not using their credit line.

Right.

Right.

And I appreciate the outlook you gave on the margin.

Obviously that's been helpful and answered a lot of our questions.

But maybe just talk a little bit about as we are seeing some smaller bank deals getting done in the Northeast, has your outlook for M&A changed?

Are you seeing more activity?

Are you guys -- maybe has it changed at all from maybe the beginning of the year?

Talk a little bit about that?

We're still anxious to do acquisitions.

They have to be done on appropriate terms and conditions, of course.

I think there's a time break, though, of realization.

I think a lot of the smaller banks still think that things are going to turn around and they are going to see a rise in their bottom line, although I thought yesterday's article in "the American Banker" about how challenged the small banks are feeling with regard to a lot of the government regulation that I'm also hearing a lot of -- and I think that's going to prompt a lot of banks.

I think we're going to see later in the year a lot more merger activity taking place.

All right.

That's helpful.

That's all I have.

Thank you.

(Operator Instructions).

There are no further questions.

You may continue.

Thank you.

Thank you for attending our conference call.

Have a nice day.

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