Valley National Bancorp (VLY) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter earnings conference call.

(Operator Instructions).

I would now like to turn the conference over to your host Ms.

Dianne Grenz.

Please go ahead.

Thank you.

Good morning.

Welcome to Valley's fourth quarter 2011 earnings conference call.

If you have not read the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules for the fourth quarter from our website at ValleyNationalBank.com.

Comments made during this call may contain forward-looking statements relating to the banking industry and Valley National Bancorp and the recently completed acquisition of State Bank Corp.

Valley encourages participants to refer to our SEC filings including those found on our form 8-K, 10-K and 10-Q for a complete discussion.

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 fourth quarter earnings conference call.

Valley's fourth quarter net income of $24.8 million or $0.15 per diluted share was negatively impacted by both non cash impairment charges on investment securities and transactional merger expenses associated with the State Bank acquisition.

In the aggregatedthose two items negatively impacted our diluted earnings per share by $0.08.

For the year Valley earned $133.7 million and had solid earnings for each quarter of 2011.

Valley in its 84 year history has never reported a losing quarter.

The following comments surrounding loan growth and activity for the full year and quarter do not include the impact of the $37 million short-term loan to State Bank Corp.

The loan was used to repay their TARP funds and was eliminated at closing on January 1st upon the acquisition of the Company.

Total loan growth during both the quarter and full year was extremely promising as Valley originated over $685 million of new loans during the quarter and over $2.4 billion of new loans during the 12 months of 2011.

This marks the highest annual volume of new originations ever recorded at the bank.

As a result net new non covered loans at Valley for the year grew by approximately 5.3%.

For the quarter the growth was approximately 7.4% annualized.

New commercial lending originations for the quarter equaled $290 million bringing the full year total to $1.1 billion.

Net non covered loan growth for the year in the commercial C&I and CRE portfolios was nearly $200 million despite the enormous amount of prepayments received, which partially mitigated the new volume.

With the exception of the construction loan portfolio we are experiencing growth in all types of commercial lending.

Commercial real estate excluding commercial loans grew approximately $50 million from the third quarter as originations of $132 million were also impacted by both scheduled and non scheduled principal payments of over $80 million.

On average prepayments in part precipitated by the low interest rate environment during 2011 were approximately 11% greater than the amount recognized in 2010.

The commercial C&I portfolio expanded $8.2 million or nearly 2% annualized from the prior quarter.

Line usage remained at approximately 38.5%, however the total amount of committed lines to lines of credit grew by nearly $70 million.

Activity in Valley's New York and New Jersey marketplace was strong during the fourth quarter as new originations equaled $157 million or 20% greater than the new volume realized in the third quarter.

The current quarter increase in loan activity is promising, yet from our perception does not imply customer sentiment has fully shifted in a positive direction.

Much of our growth has come from taking business away from some of our competitors, and many of our customers continue to be reluctant to expand their businesses until the economic conditions improve and they can anticipate sustainable business profits.

We remain optimistic about growth in Valley's commercial lending portfolio and seek continued opportunities throughout 2012.

However as is customary at Valley loan growth is limited based on management's emphasis on credit quality.

Growing the balance sheet simply for the sake of size has never been the focus at Valley.

Growing the most profitable and long-term sustainable earning stream focusing on credit quality is the hallmark of Valley and ultimately drives the level of portfolio growth.

As previously stated many of Valley's new commercial lending relationships originated throughout 2011 are largely the result of borrowers migrating from other financial institutions as opposed to expanding existing lending relationships due to growth in the economy.

The competition for high-quality low loan to value projects remains intense in our marketplace.

Due to the low level of market interest rates, the origination rates on many of these projects are at rates considerably lower than similar originations in prior periods.

However in growing the balance sheet Valley's management continues to be mindful of the bank's asset liability mix and the bank's aggregate interest rate risk exposure.

As an offset to the lower interest rates we are receiving on our loans Valley's management has been diligently reducing the Company's funding cost.

We have continued to migrate a larger portion of our deposits away from high cost certificate deposits and into non interest bearing and other low cost deposit products.

In addition we actively utilize match funding strategies coupled with interest rate swaps to mitigate the duration risk associated with originating fixed rate loans in the current interest rate environment.

We believe these tactics will continue to help us manage our interest rate risk into the future.

During the fourth quarter we continued to emphasize our fixed cost residential mortgage refinancing program, which allows borrowers to refinance their New Jersey or Pennsylvania home for $499 including all lending fees, title insurance, and recording fees.

For the quarter we processed nearly 4,000 applications and closed approximately $380 million in residential mortgage loans.

For the year we processed over 10,000 applications a record for Valley an increase of 25% from the amount processed just one year earlier.

As a secondary benefit of our aggressive marketing plan our name recognition has soared and we attribute much of our nonresidential loan growth to this fact.

As we enter Long Island, we find that we clearly have strong brand awareness, which should help us accelerate growth at the 16 offices we acquired on January 1st.

With the acquisition of State Bank, we plan on introducing a spirited residential marketing campaign highlighting a fixed-cost residential mortgage refinance program in New York.

State bank was a commercial bank by nature andfor the most part focused predominately on servicing the customer needs.

Now we are able to offer a full suite of both commercial and consumer products via their branch network.

We commenced training of State Branch employees on Valley's products and anticipate significant activity during the course of 2012.

Already we have hosted several meet and greet sessions with the State Bank customer base.

Early indications reinforce our belief that there will be significant opportunity to expand upon many of the existing relationships.

Valley's larger lending limit coupled with enhanced commercial and consumer product offerings such as cash management and our aggressive residential mortgage program provide a stimulus for us to develop a larger market share in Long Island.

From a systems integration perspective we are on target for the full data system conversion to take place during the first quarter.

Once this system conversion is complete both Valley and the former State customers will be able to transact business at any Valley location seamlessly.

This should allow for early recognition of many of the anticipated cost savings.

We are excited about the opportunities State Bank offers and are eager to work with our new staff to provide Valley's relationship focused banking model on Long Island.

Valley now has 50 offices in New York City and Long Island.

In an effort to assure these clients of our commitment to them, Valley will be opening executive offices at 1 Penn Plaza in Manhattan.

Both our senior staff and I will be spending time each week at this location in order to make ourselves readily available to this growing segment of our customer base.

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

Thank you, Gerry.

As reflected in this morning's press release and accompanying financial tables Valley's fully taxable equivalent net interest margin declined 12 basis points to 3.74% from the prior quarter.

The contraction in the margin is due to several factors.

First during the fourth quarter of this year interest income attributable to the recovery interest on non accrual loans and prepayment fees on loans decreased by $1.4 million.

The reduction accounted for four basis points of the fourth quarter decline from the third quarter.

Second increased purchase premium amortization in the investment portfolio attributable to an increase in principal payment cash flows negatively impacted both the yield and interest income in the taxable investment portfolio.

The impact of the increased amortization for the quarter amounted to approximately $1.7 million and negatively impacted the yield on taxable investments by 28 basis points.

Third exclusive of the decline in interest income referenced earlier the yield on the average loan portfolio declined 6 basis points from the prior quarter as the yield on new loans originated during the fourth quarter equaled 4%.

The new volume loan yield was impacted by the large composition of residential mortgage and consumer auto loan.

In addition from the third quarter Valley's cost of deposits declined 5 basis points as Valley's certificates of deposit continued to reprice at lower cost coupled with the increased reliance on non interest bearing deposits as a funding source.

On average for the fourth quarter Valley's non interest bearing deposits now total 28.3% of total deposits compared to 26.7% for the link quarter.

Additionally in the fourth quarter and similar to the third quarter Valley recognized additional cash flows on covered loan pools which Valley accounts for under ASC 320.

During the quarter the net interest margin was positively impacted by approximately 10 basis points by accretion of covered loan pools.

The timing and recognition of this income is subject to a multitude of external factors.

Therefore we cannot predict whether Valley's net interest income will benefit from similar adjustments in future reporting periods.

Separately during the quarter Valley continued to aggressively manage its cost of funds.

We have lowered rates on many of our savings and money market accounts.

We anticipate the preponderance of savings to begin to be recognized in the first quarter as many of the rate reductions did not go into effect until late December.

Additionally during the fourth quarter Valley modified $435 million of long-term borrowings resulting in a decline in rate equal to 92 basis points.

In 2011 Valley recognized approximately $250,000 of the estimated annual $4 million savings.

During January of 2012, Valley further modified an additional $150 million of long-term debt.

The estimated annual interest expense savings on the aggregate $585 million of restructured borrowings is estimated to equal approximately $5.1 million.

We modified the borrowings with no prepayment penalty or fees and extended the maturity dates on each instrument to more closely correlate with the expected duration of Valley's repricing earning assets while also removing multiple call provisions.

During the latter half of the quarter Valley liquidated approximately $140 million of investments.

Valley intends to reinvest much of these proceeds into a combination of Valley originated residential mortgage loans, and investment securities with lower regulatory risk waiting.

Although the sale will slightly negatively impact both net interest and the margin on a go forward basis, the pure economics of the transaction from a total return perspective were very desirable.

During the quarter Valley recognized $12 million of gains on the securities sold.

The gain on the sale of securities was significantly greater than the lost annual interest income net of reinvestment returns.

We believe the returns would likely never have materialized had we held onto the securities due to prepayments and amortization.

In selecting which securities were to be sold Valley analyzed those we believe were at risk of accelerated prepayment speeds in part as a result of the modified government HARP program.

The securities liquidated were largely both Fannie Mae and Freddie Mac securities which although only required a 20% regulatory capital requirement, do not represent an asset class in which Valley is currently interested in maintaining.

In addition to the financial merits of the liquidation the transaction enabled Valley to significantly reduce the bank exposure to both quasi guaranteed government agencies.

In fact we have not purchased any Fannie or Freddie mortgage backed securities since mid 2009 and have only seen our outstandings in these securities decline substantially.

For the full year of 2012 should interest rates remain near the current low levels and reinvestment rate on loans originated and or modified continue to be less than the current yield on our loan portfolio we anticipate continued pressure on the margin exclusive of the potential impact due to infrequent items and the likely market rate yield adjustments required through purchase accounting attributable to the State Bank acquisition.

Asset quality during the quarter deteriorated slightly from the prior period largely the result of three commercial credits totaling $22.5 million.

The linked quarter increase in non accrual loans of $16.6 million was driven in large part by the addition of the three commercial loans.

In conjunction with the movement to non accrual status for these loans Valley recognized approximately $6.5 million in net charge offs during the fourth quarter on two of the three credits as its collateral position on the third facility was deemed sufficient at December 31, 2011.

On an aggregate basis total net charge offs for the quarter were equal to $16.9 million which includes $2.5 million of commercial net charge offs attributable to covered loans.

Exclusive of covered loans net charge offs increased on a link quarter basis from $4.8 million in the third quarter of 2011 to $14.4 million in the fourth quarter.

Valley's provision for losses on non covered loans and unfunded letters of credit during this same period increased from $7.8 million to $11.9 million.

For 2011 Valley's provision for loan losses on non covered loans and unfunded letters of credit equaled $31.8 million.

During the same period Valley's net charge offs attributable to non covered loans equal $29.3 million.

Although total non accrual loans increased from the third quarter early stage delinquencies those defined as loans accruing and past due more than 30 days declined significantly from the same period.

As of December 31, 2011 the balance of $41.6 million is the lowest reported balance at any reporting period since before the financial crisis began in 2008.

Additionally during the quarter Valley recognized a large other than temporary credit impairment of $18.3 million on a trust preferred security issued by one bank holding company.

The issuer has been deferring interest payments since late 2009 as required by an agreement with its regulators.

Valley's analysis and ultimate decision to record the OTTI is largely due to an increased likely time period in which the issuer is expected to defer interest.

The decision to record the impairment in the current period was not a result of financial performance deterioration at the issuer, but rather an increase in uncertainty as to the timeframe over which Valley could reasonably anticipate receiving the expected cash flows.

In conjunction with the credit impairment Valley stopped accruing interest on such securities in accordance with bank regulatory guidelines.

Further annual interest income will be negatively impacted by approximately $3.4 million.

Finally non interest expense on a link quarter basis decreased approximately $925,000 from the prior period.

As current period expense of $2.3 million attributable to merger expenses associated with the State Bank transaction were mitigated by a reduction in the impairment charge on certain loan servicing and a decline in salary and employee benefit expenses.

We anticipate non interest expense to increase in 2012 as a direct result of the acquisition.

As Gerry indicated earlier we are on schedule with our systems integration.

From a cost perspective we anticipate realizing greater than the original estimate of 25% cost savings most of which will be realized by the end of 2012.

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

(Operator Instructions).

Our first question is from the line of Ebrahim Poonawala.

Your line is open.

Please go ahead.

Good morning.

Jay, I have a question for you.

You mention in your opening remarks that most of the loan growth on the commercial side is coming from market share gains.

I am trying to reconcile that with you have increased focus on Manhattan and management with the opening of the new office.

How do you see that loan growth in the absence of a big improvement in the economy given how competitive pricing in that CRE space has been in the New York MSA going forward if you look out the next few quarters?

I think a lot of growth has been taking place across both New York and New Jersey.

A lot of our clients still are reluctant as I said in my remarks to run out and borrow to expand their business.

I think we are seeing more borrowing from some of our clients but on the whole it has been relatively tepid.

We have enjoyed some larger opportunities that came to us by way of transfer from other companies, other banks where they were not happy with the level of service they were receiving.

We did see good growth as I mentioned in my remarks from the residential on that side as well.

I don't know that the economy is really heating up in the New York metropolitan area.

I don't see it.

A question for Alan, do you see additional opportunities to restructure more debt and bring down funding costs this quarter going forward?

Looks like I guess you are being able to do that without any prepayment penalties.

Right.

I don't really see any other major opportunities at this point.

We will always look at it and evaluate it.

I don't see that at the moment.

This is the last question.

You mentioned the tax rate is going to be 32%.

First quarter should it fall off closer to again 29% range going forward after that.

No, we run based on an annual rate.

However there are times when depending on transactions or events that occur during a quarter it could force the tax rate down as it did this quarter to a much lower effective rate.

However for the year it came in about 32% that is what we are expecting.

Okay.

Got you.

Thank you very much.

You are welcome.

Our next question from the line of Craig Siegenthaler from Credit Suisse.

Your line is open.

Please go ahead.

Thanks, guys.

Good morning.

Good morning, Craig.

Just looking here at the forward progression of the NIM and there is a lot of moving pieces as you identified on the call.

How quickly should we really get into your longer term target range of low to mid 360s here?

As you noticed I didn't give you a new target or a changed target at this point.

As you said, there is a lot of moving parts.

I mean I can't predict things like prepayments and how quickly they will occur especially on things like the investment portfolio where the amortization kicks in and causes a reduction in net interest income for the quarter.

There is no way.

The best I can tell you the things I have been telling you in the call today it gives a lot of different pieces to the puzzle moving on a constant basis.

Got it.

Just looking at the growth here in the resi-mortgage portfolio I am wondering if you have internal constraints here in terms of how fast this can grow and if you have a limit in terms of what is the contribution of your total loan portfolio from the resi-mortgage.

This is Gerry.

We do have limits.

One of which, though, is the fact that we look at the resi-mortgages that we hold in mortgage pools in the former Fannie and Freddie and in Jenny Mae.

They are not really much different than the loans on our own books.

If you look at the performance on our own books the residential mortgages on our own books they are unbelievably strong.

As a result if those portfolios pay down and to replace them we would get a yield of 2% or whatever and with the same duration we can put our own product on at 4% or 4.25% it makes more sense to hold our own than to sell ours and go into the marketplace and buy those securities.

We could see some modest increase in the residential mortgage portfolio occurring as those loans pay down.

We do have controls and we don't want to change our complexion from that of a commercial bank to a thrift.

Most of our production we would probably sell in the future.

That being said if we want to replace some mortgage backed securities we will hold those mortgages.

Okay.

Thanks, Gerry.

Our next question is from the line of Steven Alexopoulos with JPMorgan.

Your line is open.

Please go ahead.

Good morning.

Good morning

Maybe I will start with mortgage rates seeming to flatten out here.

Are you starting to see lower fees from your refi plans?

Lower fees?

Or just lower refi activity?

No the activity coming into January is a very strong month.

We have seen activity and application flow for the last several months in the 1,000 to not quite 1500 applications in one month.

The telephones still keep ringing.

I am curious with the Trump Securities being moved to available for sale, do you plan to liquidate these?

Is that what you are thinking in 2012?

Not necessarily.

We did it for a number of reasons.

Number one, once you take an impairment you are allowed to move it in.

That is one.

Two if there is a recovery it gives us the ability to handle the recovery differently than if it is in held to maturity which you would recognize over the life of the instrument.

Maybe, Gerry, looking at the Fed's projections that came out yesterday what is your take on this and what does it mean to you in terms of how you run the bank this year?

We are always cognizant of what the fed says.

The fact they anticipate keeping rates down at the present level until the end of 2014, I don't know, that is a surprise or a shock.

I can't believe inflation has stayed as low as it has for as long as it has.

The fact they see inflation at 2% range they say they are not going to move it.

There is no guarantee that later this year inflation jumps to 3.5% they don't change their mind.

We have to balance what we do as I said in my earlier remarks, constantly keeping an eye on our interest rate exposure and we take certain steps along the way to protect that exposure even if it impacts on our earnings in the short run.

Okay.

Thanks for the color.

Next question is from the line of Collyn Gilbert from the line of Stifel Nicolaus.

Your line is open.

Please go ahead.

This is Aaron Brann calling in for Collyn.

How are you doing?

You didn't sound like Collyn.

I don't?

Not exactly.

My first question is after you get through the acquisition of State now that you have gone through the acquisition of State.do you have a non interest expense run rate that we should be thinking about once you go through any of the restructuring charges or merger related charges that you may be incurring this quarter?

The best way to look at it is whatever ours has been running plus whatever they had minus what they had in merger expenses less 25%.

Okay.

I don't have anything else to give you at the moment.

Okay.

In terms of your loan pipeline, it certainly sounds as though activity was strong in the fourth quarter.

Any early indications how that pipeline is shaping up couple weeks into the new year?

If the rest of the year goes like the first couple of weeks we will be pretty pleased.

It is hard to project 52 weeks based upon a three week experience.

We did start out strong.

Is that trend similar to the trend you saw last year more market share gain as opposed to?

Some of it is coming I think of one particular situation which was somewhat significant which we took away from a much larger institution.

Part is new money going out and part of it they are refinancing their existing outstandings with us.

I appreciate that very much.

Our next question is from the line of Dan Werner with Morningstar.

Your line is open.

Good morning.

Can you comment on the remaining balance of the trust preferred that you have?

Did you acquire any additional trust preferred from State after the new year?

No, we did not acquire anything from State.

When you say the trust preferred are you talking about the one ---?

The one that was impaired what is the total balance of trust preferred?

I think it is $41 million.

$41 million.

Okay.

Then just generally on the commercial loan book, do you see any increase in line usage over the quarter you're your existing customers or was it pretty stable?

No the line usage was pretty stable but we actually as I mentioned new lines coming on increased lines coming on.

The percentage remains constant the dollars go up.

As far as the 499 refi program that will continuing for the foreseeable future?

Absolutely.

Our next question is from the line of Gerard Cassidy from RBC.

Your line is open.

Please go ahead.

Good morning, guys.

Good morning.

Gerry as a follow up on the answer about the increased lines the new lines coming in.

Are the new one coming in being utilized at a greater or lower percentage of your existing lines?

It hasn't changed.

It is pretty much the same.

You talked, Gerry, about opening up the office at 1 Penn Plaza an executive office.

Do you have any plans for new branches on Long Island now that the State deal is done or for that matter for any branches?

It is our intention over the next several years to increase the size of our presence in both Long Island and the rest of New York City and to continue increasing it.

That is where we are focusing most of our new branch activity.

On the three loans that you identified in the commercial book that were non performing, can you give us a little color?

Were they commercial real estate or C&I loans?

If they were commercial real estate were they New Jersey or Long Island?

They were all three unique.

It was a combination of CRE and C&I loans.

And one construction.

It was a CRE, residential construction project and a C&I loan.

I am trying to think they were also I think one was in New Jersey.

One was in Rockland county and one New Jersey in terms of the construction CRE.

Okay.

On the Trump that you moved into available for sale you, I want to make sure I heard you correctly, you felt that the quality of the issuer hasn't really changed, it is just the length of time is going to be longer to receive that money.

What was the cause of the lengthening of the cash flow payments?

They are a regulatory agreement and so we can't be assured as to when they will be allowed to resume payments.

They do have the funds available in their holding company to make the payment, at least that is our understanding.

They haven't paid.

They haven't paid now for a couple of years.

We just decided it was time.

Nothing had changed quarter to quarter?

No, no.

Listen maybe next quarter we will be pleasantly surprised.

Right.

No doubt.

I think you guys indicated your costs of deposits are now around 66 basis points.

In view of what the fed came out with yesterday keeping rates now at these levels through the end of 2014, what is the likelihood that you could take the 66 basis points down to 10 over the next 12 or 18 months?

I don't know about 10 but they are definitely going to come down.

We have indicated we have already made some movements even prior to the fed.

Our expectations were rates were going to be down.

We are seeing loans and investment yields down so part of what we had to do was drop the interest rates on deposits.

As I said, you will start to see more of that as we get into the first quarter in terms of the impact of that movement.

Thank you very much.

Thank you.

(Operator Instructions).

Our next question is from the line of Nancy Bush NAB Research LLC.

Good morning, guys.

Good morning, Nancy.

A question about State Bank.

You said it has been primarily a commercial bank and you are introducing the resi-mortgage product there.

And I am gathering that is the sort of the first wave of retail product that is going to be brought in to the bank.

What, Gerry, is the natural progression in getting an institution like State to a greater mix of business like yours?

I assume this is going to be something you do in the future as well.

In the State situation I think it will come a little bit faster than in most others.

For one thing, and I give all of the credit to the former management, they have a wonderful branch staff and extremely enthusiastic branch staff.

We have been very impressed here by how enthusiastic they are about taking on these additional products.

I have met with just about all of their branch managers and to a person they tell me how excited they are about being able to offer these products to their client base.

So in the past if we bought a thrift it is a total transformation to teach them to sell commercial.

It is easier to have them marketing retail products in a branch.

So I think it is going to be rather quick that we are going to see the results we are hoping for.

Okay.

And I would also ask on the market share gain issue can you sort of roughly quantify what is coming to you from the larger institution versus what is coming to you from community banks in New Jersey particularly that are still pretty troubled?

Most of our activity that comes to us comes from larger institutions.

Most of what comes from the larger institutions comes in some way almost at no fault of the larger institution.

The larger institutions took over the smaller community based banks and the community based banks even if they were relatively large in size they still functioned as a community based bank, weregiving one-on-one service from the CEO of the company, from the president of the company.

The larger banks that have moved into our area because of their size and scope of operations can't deliver that type of service.

That is one of the reasons that prompted us to open up the executive office in Manhattan.

We want to remain close to the client base, and I think that is going to help us in the future with our acquisition.

And I think that we are going to continue to see the flow coming to us.

Remember the mega bank, the crumbs off their plate are a king-sized meal to us.

Okay.

And I have one final question for Alan.

Alan, could you quantify what kind of runoff you see in the CD portfolio, what kind of rotation out of higher rate CDs you see coming this year?

We have been seeing it all year long.

We dropped rates, we continue to keep the rates low and depositors, some of them, are coming off, believe it or not, still some products from three to five years ago that they locked in some fairly significant rates.

I can only assume that based on the lower rates we are offering many of these people are either going to look for other alternatives or leave it there.

It is a little hard to tell you how much is going to run off.

I don't know that I have an answer for you there.

I can tell you we are going to continue to price it down so that it all makes sense.

Nancy, one of the advantages that Valley has is being a commercial bank is that we can push for compensating balances on our loans and that helps build our demand deposit, our non interest bearing base.

Thanks.

There are no further questions at this time.

Please go ahead.

Thank you for attending our fourth quarter conference call and have a nice day.

Ladies and gentlemen this will be able for replay today after 12.30 today.

(Operator Instructions).

That concludes our conference for today.