Valley National Bancorp (VLY) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bancorp first-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Dianne Grenz. Please go ahead.

Thank you, Sandy. Good morning. Welcome to Valley's first-quarter 2014 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 first quarter from our website at valleynationalbank.com.

Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. 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 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 earnings conference call.

For the quarter, Valley generated net income of $33.8 million, the equivalent of $0.17 per diluted common share. The quarter included a few infrequent items related to income tax and noninterest expense, both of which Alan will provide additional color in his prepared remarks.

Total noncovered loan growth of approximately 5% annualized was the highlight for the quarter, as strong origination volume in consumer and commercial real estate lending, offset by the continued slowdown in residential mortgage activity, as reported across most of the industry this quarter. During the quarter, we originated over $600 million of new loans, approximately 30% consumer and 70% commercial.

Commercial lending originations of nearly $450 million for the quarter compares favorably versus the $360 million realized in the same period one year ago. The increase in activity was predominantly in commercial real estate, although C&I volume continues to grow and we anticipate increased activity as the year progresses.

Commercial real estate activity within Valley's footprint continues to largely be a byproduct of refinance activity, although the conditions have begun to thaw for some of our larger commercial developers. The improving economic conditions, coupled with the low interest rate environment, have begun to foster a renewed sense of optimism.

We are beginning to witness an increase in activity across Valley's entire geographic footprint. However, New York and Long Island markets continue to account for a disproportionate percentage of our activity. Nevertheless, our commercial pipeline remains strong and we anticipate continued growth based on current projections.

Competition within the New York metropolitan marketplace continues to remain fierce, as large money center institutions renew their focus on middle market customers, traditional savings and loans look to reinvent themselves, and local community banks attempt to redeploy excess capital. As a result, pricing and, in some instances, credit terms present a formidable challenge.

At Valley, as opposed to relaxing on credit conditions, for the most part we have elected to increase our sales efforts by refocusing branch staff and expanding our commercial lending personnel. While we remain steadfast in upholding our credit quality, we continue to be very competitive when it comes to pricing and have introduced aggressively priced lending products that provide an opportunity for our borrowers to capitalize on the current interest rate environment, while not creating a noose around the bank should interest rates increase.

Of the current-quarter originations, we anticipate over 50% to reprice in the next 36 months. Managing the bank's current and future interest rate risk profile is paramount and actively managed by both on the asset and liability side of the balance sheet.

Commercial lending wasn't the only bright spot for the bank in the quarter, as consumer lending origination activity was brisk. Total noncovered consumer loans expanded nearly 16% on an annualized basis during the quarter, as strong indirect automobile originations were supported by growth in other consumer lending products.

Unfortunately, a large portion of the consumer activity wasn't realized until the latter half of the quarter, as inclement weather conditions negatively impacted auto sales in January and February. That being said, first-quarter consumer origination volume was the strongest Valley has witnessed in over five years, and based on early indications, the second quarter appears promising as well.

Residential mortgage activity continues to decline as the consumer refinance market has slowed to levels not witnessed since before the recession, and purchase activity in our marketplace remains modest. Typically, residential mortgage volume intensifies in the second quarter. However, based on early application volumes, we do not expect a material change from the activity reported in the first quarter.

As a result of the contraction in residential mortgage origination volume, staffing levels in that area was reduced by approximately 25% during the first quarter. Rightsizing the residential mortgage department to reflect current activity levels is just one example of management actions to quickly address the changing landscape within the marketplace.

In the fourth quarter, we announced an aggressive program to modernize Valley's branch network. We continue to evaluate all delivery channels and anticipate continued improvement in both operating efficiency and customer service. We have begun the process of installing new technology in our branches and have established commensurate staff reductions. Where appropriate, we intend to reduce the size of our branches and have established significant occupancy cost reductions for both 2014 and beyond.

In addition to the proactive steps management has announced and undertaken in streamlining the bank's efficiency, we actively seek to manage the balance sheet in the most efficient and profitable manner. During the quarter, we transferred a significant share of Valley's nonaccrual loans to held for sale as improving market conditions, coupled with more favorable internal rate of return goals used by active loan purchasers, have improved the viability of liquidating nonperforming assets at this time.

Further, the incremental reduction in future operating expenses relating both to the carrying costs of the nonperforming asset and the decrease in FDIC insurance assessments provide an added bonus to our sales analysis of the loans' transfer. We expect all of the nonaccrual loans transferred to held for sale in the first quarter to be sold prior to June 30 at levels in the aggregate consistent with the net carrying value. In fact, as of today, substantially all of these credits have either been sold or closed, or are under contract with meaningful nonrefundable deposits.

Total nonperforming assets as of March 31 equaled $114.6 million. Exclusive of the nonperforming loans held for sale of $27.3 million, the adjusted total nonperforming assets as of the current quarter end equaled only $87 million or 0.53% of total assets.

In the same period one year ago, total nonperforming assets exceeded $200 million and equaled 1.25% of total assets. The reduction will not only reduce future period noninterest expense, but diminishes credit volatility and unlocks capital that can be used to leverage the Bank and support loan growth.

In summary, we are guardedly optimistic about the continued opportunities in the coming quarters. Expanding the balance sheet via loan growth, coupled with new initiatives developed to reduce operating expenses should provide the catalyst to both earnings and tangible book value expansion.

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

Thank you, Gerry. Net interest income in the first quarter equaled $114 million, a decline of approximately $2 million from the prior quarter. The margin compressed 7 basis points during the same period as the yield on earning assets contracted greater than the reduction in cost of funds. The decline in the margin and net interest income is largely the result of the current low interest rate environment as the expansion in both Valley's loan and investment portfolios during the first quarter of 2014 benefited these performance measures.

Interest income on loans for the first quarter equaled $131 million, a reduction of approximately $5 million from the prior linked fourth quarter, in spite of an increase in average outstandings of $140 million. During the same period, the yield on loans dropped 24 basis points. The linked-quarter decline is attributable to a multitude of factors including the reduction in day count between the two periods, the decrease in interest accretion on purchased credit-impaired loans, a reduction in loan fee income and the current yield on new originations.

As Gerry referenced earlier, loan origination volume was strong in the quarter exceeding over $600 million. However, the new loan volume yield was approximately 3.4%. The low yield is a function of the interest rate environment, increased market competition, and a reduction of duration on new assets originated, including short-term automobile loans.

Unless market level interest rates begin to rise beyond current levels, and/or competition dissipates, we anticipate continued pressure on the yield on average loan. However, we do not expect the linked-quarter loan portfolio yield contraction in the second quarter to be the same magnitude as seen in the first quarter.

Interest income within the investment portfolio continues to be positively impacted by the reduction in premium amortization, largely within Valley's taxable mortgage-backed securities portfolio. Total principal pay downs within the portfolio declined approximately 19% from the prior linked quarter and over 50% from the same period one year ago. Principally, as a result of the decrease in premium amortization, the yield on mortgage-backed securities has increased 60 basis points during the last 12 months.

However, the increase in both yield and interest income is partly mitigated by the expansion of the portfolio's average duration by approximately two years to around 4.5 years. As of March 31, the net unamortized premiums on mortgage-backed securities were approximately $55.3 million, of which we are scheduled to amortize approximately $13.3 million over the next 12 months based on current projected prepayment speeds. Based on early cash flows received during April, coupled with the level of current market interest rates, we do not anticipate a significant change to the level of premium amortization realized in the second quarter.

Total cost of funds improved on a linked-quarter basis from 1.13% to 1.08%, mostly due to the early redemption of Valley's 7.75% junior subordinated debentures, which occurred on October 25, 2013. Valley's cost of deposits declined 2 basis points from the fourth quarter to 0.38%. The cost of Valley's time deposits declined from 1.23% to 1.21%, as higher costing certificates continue to mature.

During the remaining nine months of 2014, approximately 45% of the certificate of deposit portfolio will mature, of which nearly 15% have current rates in excess of 3%. We anticipate continued contraction in Valley's funding cost as these certificates mature and are either renewed at current market rates or the deposits are replaced with less expensive alternative funding sources.

As previously disclosed in our investor presentation at the end of the fourth quarter, both certificates of deposit and borrowings are much closer to maturity. Besides the certificates mentioned above, approximately another $640 million will reprice beginning in 2015 through 2017, which are currently priced above market. Our high-cost borrowings begin maturing during 2015. The maturities of each and subsequent repricing are expected to reduce funding costs over the next few years.

The linked-quarter decline in noninterest income is principally due to the recognition of two large infrequent items in the fourth quarter. Mortgage banking activity remains relatively lifeless, as refinance activity is quiet due to the absolute level of market interest rates, and purchase volume is seasonally light this time of year. Based on early application volume realized in April, we do not expect a material change in mortgage banking activity from the results recognized in the first quarter.

Noninterest expense for the quarter was $94.9 million, a reduction of $1.2 million from the prior quarter. However, the first quarter included a few items which Valley does not anticipate recognizing to the same degree in the second quarter.

Partly as a result of the inclement weather, occupancy expense increased $1.9 million from the linked quarter. Additionally, employee benefit expenses included seasonal increases to payroll taxes. In the aggregate, we expect second-quarter noninterest expense to decline from the amount realized in the first quarter. Reducing noninterest expense will continue to be a focus of the Bank throughout 2014.

Over the last two years, salary expense has declined by over 6% and actual staffing has been reduced by 8%. We intend to further streamline Valley's delivery channels through the implementation of new technologies and adoption of the branch modernization strategy, as discussed last quarter. We believe this will continue the positive trend of reducing staff expense.

Our effective tax rate for the quarter was only 2.4%, largely due to the reduction in our reserve for unrecognized tax benefits, resulting from the completion of a recent income tax examination. We anticipate the effective tax rate will range between 27% and 29% for the remainder of 2014.

As Gerry indicated earlier, during the first quarter we transferred approximately $27 million in the carrying value of nonaccrual loans to loans held for sale. As a result of this transfer, the Bank recorded charge-offs of $8.3 million, most of which had been previously reserved for within our allowance for loan losses. As such, the current period net charge-offs related to this transfer has an immaterial impact on the current-period provision for loan loss calculation. As of March 31, the allowance for noncovered loans and unfunded letters of credit as a percentage of total noncovered loans, excluding noncovered PCI loans, was equal to 0.93%.

To put this in context, the total allowance for credit losses in absolute dollars is 125% of total adjusted nonperforming assets at March 31, 2014, and 169% of total nonaccrual loans. The total reserve for credit losses balance of $109.3 million is equal to almost four years of trailing noncovered net charge-offs. We are comfortable with the adequacy of the allowance based upon our March 31 reserve analysis and believe it fairly represents the inherent credit risk of loss within the Bank's portfolio.

With regard to the nonaccrual loans transferred to held for sale, we anticipate the actual liquidation of each to occur within the second quarter at levels in the aggregate consistent with reported carrying values. The ancillary benefits of increased liquidity and reduced noninterest expense should materialize in the second quarter, with the majority of the benefit transpiring in the following quarters. We believe the timing to liquidate the portfolio is appropriate based on market demand for assets and the increased opportunities to redeploy the proceeds into alternative earning assets.

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

(Operator Instructions) And your first question will come from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

I wanted to start by following up on Alan's comments regarding the new money loan yields of around 3.40%. How did that compare, Alan, to the fourth quarter and is that level stabilizing? Or do you expect that to continue to decline given the competitive environment?

It's down about 20 basis points, Steve, from where we were in the fourth quarter. And it's really relative to, as I mentioned, automobile lending is at a very low interest rate at the moment. It's in the low 2%s, if you will. And so we did more auto lending now than we did, and so that brings the effective yield down.

Okay. That's helpful. The growth in the commercial real estate loans is still very good, but it's decelerated over the past two quarters. Could you give us color on the types of commercial real estate loans where you're seeing strong volumes and maybe where you're seeing some slowing over the past two quarters at least?

I think we're still seeing a fair amount of co-op lending. We're doing apartment lending and in addition, I think we're seeing a lot of mixed use come through the pipeline and from what we're seeing right now, there's a fair amount of volume still coming through.

They're underlying co-op loans when we say co-op lending, understand.

Got you. And Gerry, maybe just one final one. I've never considered you guys a high efficiency ratio bank, but even in taking out the snow removal cost the efficiency ratio is around 67%. I know you keep speaking of expense initiatives, but any thoughts to maybe more aggressively resize the expense base just given the revenue opportunity here?

Steve, I think based on the calculation of the efficiency ratio -- I mean you saw in the fourth quarter when we had some additional revenue in there, we were down around 60% when you remove that revenue. So I think when I started to talk before about the benefits we see coming down the pipe from reducing our cost of funding, I think you're going to see a lot of the efficiency costs go down as time moves forward.

I don't think it's necessarily the expense base, although as we said, it's been coming down. We've been monitoring our salary costs. We've been monitoring our occupancy expense. And I really think it's a matter of the margin and the net interest income line and what happens there.

Okay. Fair enough. Thanks for all the color.

And your next question will come from the line of Ken Zerbe with Morgan Stanley. Please go ahead.

Great, thanks. Question on mortgage banking. I know it's a really small piece right now. I just wanted to make sure I understand your strategy with that one, because obviously, you kind of had nothing or very little a couple years ago. You built it up to take advantage of the market. That's come back.

Other banks that we hear or talk to mention that they think they can stabilize some of it, they can continue to grow because they're building out a platform. Your strategy on mortgage banking, was it simply to take advantage of that short window that we had of very good originations and refi volumes such that you're set up that this can completely unwind, that you really don't have a lot of sort of embedded or fixed costs in the business? Is that fair?

You're correct. This is Gerry speaking. You're correct. We did expand it to take advantage of the refi boom that took place. It ended like falling off a cliff, not at only at Valley. I've been reading the reports issued across the country by other banks and residential mortgage activity has dropped dramatically. Even the purchase market, particularly in our area, seems extremely slow.

It's a little bit like an accordion the way we have it structured. If it were to pick up again, in very short order we could ramp up to doing the same volume we did at the peak. But that's the way we structured it so that when the volume fell off, we were able to contract the expenses.

Got it, understood. Okay. And then in terms of the lower loan yields, I know you mentioned it was, or Alan mentioned it was due to several different pieces. Was there one or two pieces that actually stood out more versus others or was it pretty spread throughout the --?

It's the automobile volume that picked up. I mean we did a huge automobile volume, but new car financing runs in the 2% range. Well, you average the 2% against the commercial, which could be north of 4%, you're down at 3%. It's simple math.

Got it, okay. All right, thank you very much.

Your next question will come from the line of Dan Werner with Morningstar. Please go ahead.

Could you give us a little bit of color on what the pipeline looks like relative to last quarter given the strong loan growth you had, and maybe comment on the line usage levels?

This is Bob Meyer. The pipeline is rebuilding rapidly. It had come down a bit during the first quarter, but we've seen a rapid pickup in the pipeline and it should be -- it's fairly strong right now. And that's across both the CRE lines and the C&I lines. The second part of the question was?

Line usage levels.

It continues to run in the 40% range, up a little, down a little, but --.

Okay. And then with respect to the loan loss provision and the reserve going forward here, now that you have some loan growth here and I understand what was going on with the charge-offs this quarter with the transfer to the held for sale. But how do you think about the provision and the reserve going forward here for the rest of the year?

We factor in the loan growth all the time. I mean that is in our calculation, so all of that is taken into consideration. I think, as we said, when you start to take into account the fact that we had a fairly significant amount of nonperforming loans in there that are now been removed, we're much more comfortable.

I think the other thing is is when you look at our portfolio, some of the things we have in there -- for example, residential loans have always had a very loan loss rate, and that's about $2 billion of our loans. We have ballpark about $1 billion of co-op loans in there, but have an LTV that's less than 10%. So we're very comfortable with the way we analyze it and what we're seeing, and we will increase and decrease it accordingly based upon what we see in the portfolio.

Okay. Thank you.

Your next question will come from the line of Collyn Gilbert with KBW. Please go ahead.

If I could just start by following up on a couple things. Alan, first on the benefits of the cost of funds that you guys are going to see obviously with the borrowings, repricing starting in 2015, can you just give us quickly the tranches per quarter of those borrowings and what the current costs are, and what you expect to refinance them into?

Well, I don't know that I can tell you exactly what we expect to finance them into. But -- and I don't know that I can go quarter by quarter. I think year by year -- and again, this is out on our investor presentation that we made in probably early February.

So in 2015, we have about $460-odd-million of CDs that are over 2% in terms of cost, probably in the 2.20%, 2.30% range that are going to mature. We have borrowings of about $400 million that are going to mature during that year and those costs range somewhere I would say between 4.5% and 5%. And we also have some derivatives that are going to run off.

So overall, we're expecting to see a change in about $760 million during the course of all of 2015 of an average rate of 3.80% fixed to wherever rates are.

Now, that being said, we've already done some protection of a fair amount of that and what I'm going to tell you for the future years. In 2016, we have about $135 million of CDs that have the same type of costs to them, around 2.30%. We have borrowings of another $325 million or so that has an average rate of about 4.36%. And we have derivatives coming off of another couple hundred million.

So overall, we're going to see a change once again on $660 million that is currently costing us about 4.4%. And in 2017, we have another $240 million of CDs coming off at an average rate of around 2.40%. We have $800 million of borrowings that are coming off at about 3.77% and we have some additional derivatives coming off.

So overall, we have $1.1 billion coming off in 2017 at about an average cost of 3.63%. And as I said, we've already prepared by locking in costs of some of these in the low to mid 2% range, so we're going to see savings on an awful lot of that already. We haven't gone out too far yet, but we are watching it very closely.

Okay. Okay, that's helpful. And then just in terms of your comment on not expecting as much loan yield compression this quarter as you saw in -- or in the second quarter as you saw in the first quarter, I'm just curious as to what would be driving that, why you wouldn't see as much. I guess looking at that 3.40% origination yield versus the portfolio yield of 4.50%.

Right. Well, I think part of it is the fact that we're seeing a very large commercial pipeline and that commercial pipeline is coming in at a higher rate. There's a day count issue relative to first quarter versus the second quarter and also the accretion that hurt us in the first quarter because we're seeing that happen relative to, not investments, but on the loan side. Because of the PCI loans we have, whether they're covered or noncovered, we will be watching that very closely to see about revaluing those.

Okay. Okay, and then just a final question on the expense run rate. I mean you guys have kind of indicated it sounded like that that was going to -- a big focus of the initiative to try to get those expenses down. Can you just give us just a little bit more color as to where you're seeing things at this point for 2014? And then should we assume that you can drop that expense line even more in 2015?

I think that we've already shown that our expense line -- our expense line has been going down and has not escalated at all, other than some items that are what I'll call infrequent items that might occur. But that being said, we see it going down in general. As I said in my remarks, we're continuing to change the branches over one by one, however that works out. That's going to save us expenses.

We're also looking at the physical branches to determine where we want to stay in them, where we want to bring down our size there and bring down our costs. I mean I think what we told you at the end of the fourth quarter just in one branch alone that we got out of, we saved, I want to say, $0.25 million or so on rent expense annually by moving around in the quarter.

Okay. Okay.

You have to remember we have a number of branches that we're looking at like that. It wasn't a one-off situation where it was the only thing in our portfolio that we could do something with. Keep in mind, we own half of the buildings.

Right. But we're also, we don't have a -- we're going to change this branch tomorrow and 100 more right behind it the next day. We're reviewing the entire portfolio to see what we come up with.

Okay.

Again, also, as Alan mentioned earlier in those infrequent events, our snow removal this quarter was a killer.

Right, right. Okay. And then just finally, what should we kind of be thinking about in terms of the expenses attributed to the loans that you'll now be selling in the second quarter? I mean if we back out some of those credit-related expenses, how much should that be on a go-forward basis?

Well, we do know that we expect to save, at least on FDIC insurance, about $1 million a year so that will start beginning in the second quarter. There will be other operating expenses, whether they be salaries or legal costs, et cetera, that are all going to start to go down. I mean they've escalated dramatically with (inaudible) loans; taxes, real estate taxes where we're paying them on some of these properties. So I don't know that I can give you the exact amount of savings, I just do know, at least on the FDIC, you're going to see $1 million a year.

Okay. All right, thanks. I'll stop there. Thanks.

Okay.

(Operator Instructions) And you have a question from the line of David Darst with Guggenheim Securities. Please go ahead.

Thank you. Good morning.

Good morning, David.

I'm going to ask a number of these things on the cost of funds side will begin to kick in later this year. You're still getting the benefit of the purchase accounting. Is there kind of a trough quarter that you're thinking about for the margin this year and kind of at what level do you think it could be?

We don't like to predict where that margin is going to go, David. It's very difficult, I think, number one, knowing what loans are going to pay off tomorrow or not, what that new rate is going to be. Again, as we said before, the competition is very, very tough out there on new credit. So that's impacting us. The volume of automobile loans is very low. So depending on the mix of loans coming in and loans going out, so it's a little bit difficult to tell you where I think it's going to go. But I don't see it being an upside at the moment.

Okay. And then I guess at the end of your comments you were referencing I guess liquidating your trust preferreds. Is that correct?

I'm sorry, can you say that again?

No, no, we repaid most of them in October of last year.

Right. There's a small amount remaining that we didn't have the ability to liquidate at this time that came from some of the acquisitions.

So that's what you will be repaying, not liquidating your trust preferred assets.

Right.

That's correct.

Okay. And then one of your competitors I think took some employees or teams in Long Island. How are you thinking about deposit growth for this year and do you see any risk in that?

I guess we have a reputation for doing things right so everybody runs after our staff. We have had people taken away from us historically over the years. It's not something new.

We've survived when that's happened in the past. We always seem to be able to replace them with people who do a job, in our opinion, every bit as good as the ones who left. That's always going to happen.

Okay, good. Thank you. Nice progress.

Thank you.

(Operator Instructions) And I have no further questions in queue.

Okay. Thank you for joining us on our first-quarter conference call and have a great day.

Ladies and gentlemen, this conference will be available for replay after 1 p.m. Eastern today through Thursday, May 1, at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 322944. That number, again, is 1-800-475-6701 and entering the access code 322944.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.