Valley National Bancorp (VLY) 2015 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by and welcome to the Valley national Bancorp first-quarter earnings conference. (Operator Instructions) As a reminder, this conference is being recorded.

At this time I would like to turn the conference over to Dianne Grenz. Please go ahead.

Thank you, Nick. Good morning. Welcome to Valley's first-quarter 2015 earnings conference call. If you have not read the first-quarter 2015 earnings release that we issued earlier this morning, you may access it 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 in Forms 8-K, 10-Q and 10-K, for a complete discussion of forward-looking statements.

And now we'd like turn the call over to Valley's Chairmen, President and CEO, Gerald Lipkin.

Thank you, Dianne. Good morning and welcome to our first-quarter earnings conference call.

For the quarter Valley reported net income of $30.3 million or $0.13 per diluted common share. Reflecting an increase of $5.2 million in net income from the prior quarter. In what is historically one of Valley's most challenging quarters, largely due to seasonality within the loan portfolio and increased link quarter core noninterest expenses, we were pleased with the reported results. And believe the bank is on solid footing for an increased net income as the full year materializes.

Loan growth for the quarter was a bright spot throughout all categories and geographies. The total non-covered loan portfolio grew nearly $300 million during the quarter reflecting an annualized linked quarter growth rate of 8.7%. Total commercial lending gross originations including both CNI and commercial real estate exceeded $400 million for the quarter as the non-covered loan portfolio grew over 9% annualized on a sequential quarter basis.

Specifically, the growth within this portfolio was largely weighted towards CNI as increased origination volume was buoyed by expanded line usage. Similar to last quarter, the growth in CNI activity was consistent across all of Valley's geographies as each of the pipelines in New Jersey, New York, and Florida continue to expand.

Commercial real estate volume was subdued in comparison to CNI. Nevertheless, this portfolio expanded over 4% from the prior quarter. Competition within this asset class remains fierce. From our perspective, there continues to be an excessive amount of money chasing a limited supply of qualified borrowers. A majority of activity within this space continues to be skewed towards refinances. Which we believe to be the result of the low interest rate environment rather than economic expansion.

We continue to believe that maintaining Valley's diverse balance sheet comprised of both consumer and commercial loans remains the prudent approach for the long-term success of Valley. Similar to my comments regarding commercial loan activity, Valley's consumer lending portfolio mirrors that of the commercial portfolio.

For the quarter, Valley originated over $100 million of consumer loans, largely automobile. Activity was less than that of the fourth quarter but typical of the first quarter of last year. Volume was largely influenced by weather conditions as opposed to consumer demand.

As we expand our Florida footprint we believe some of the seasonality within Valley's automobile portfolio should dissipate as the winter months are traditionally stronger volume periods in Florida. With the growth of automobile loan business in Florida as a goal, we built a staff focused on this challenge. As a result, we have taken on nearly 50 new automobile dealerships in Florida. And expect activity to continue to grow in the second quarter.

Residential mortgage volume was brisk for the quarter as organic closings exceeded $120 million. Nearly double the activity from the same period one year ago. Origination volume continues to be heavily skewed towards refinance activity. However, we are guardedly optimistic of increased purchase activity in the coming months based in part on increases in household formation. Coupled with the commencement of the spring buying season in the Northeast.

Origination volume in Florida continues to expand as we have begun to aggressively promote our $499 residential mortgage refinance program. In early April, the advertising campaign reached the Miami market and included our first bilingual television promotion.

For the quarter, Florida residential mortgage applications exceeded $27 million or nearly 10% of the entire bank's application volume. We anticipate continued growth both within Florida, and the New Jersey, New York residential mortgage portfolio. During the quarter, we sold approximately $31 million of residential mortgage volume we originated while simultaneously purchasing approximately $43 million of third-party originated floating rate mortgages.

As residential mortgage volume continues to expand our decision to portfolio or sell the loans will be largely dependent on the banks desired asset liability mix, duration, rate in terms of the loans originated or the collective size of the portfolio in relation to other loan categories. As stated earlier, maintaining a well-diversified balance sheet is critical to the long term success of the bank in varying interest rate environments and economic cycles.

Another highlight for the quarter was the successful operations and systems integration of First United onto our internal data platform. Since February 23rd every former First United customer has been able to seamlessly access their accounts at any Valley Branch while all of our Northeast customers are similarly able to transact banking business at any of Valley's 20 Florida locations.

The integration was an important milestone in both accelerating the growth of the Florida franchise as well as recognizing a large portion of the cost saves we projected in connection with the acquisitions. While we hesitate to provide forward guidance as to future earnings, we are enthusiastic as we enter the second quarter.

We anticipate continued contraction in our non-interest expense as the cost saves expected with the First United begin to materialize. In addition, the expiration of the commercial portion of our loss share agreement with the FDIC attributable to the failed banks acquired in 2010 should result in a significant reduction in the loss share indemnification asset amortization expense.

We expect the combined sequential quarterly savings of just these two variables to exceed $7 million pre-tax per quarter. Further, in both our New Jersey and New York footprints we are beginning to clearly witness increased signs of growth across all of our lending categories. Our Florida franchise, while presently smaller in scale compared to New Jersey or New York, continues to generate annualized loan growth in excess of 10%. And I might add, at average interest rates 50 to 75 basis points higher than we are getting in the New Jersey and New York markets.

Since we merged, the front line commercial lending staff in Florida has increased by 25%. And we have added eight consumer lending officers. As commercial lending synergies continue to materialize and our consumer lending advertising campaigns are implemented throughout the Florida footprint. We expect to see continued growth prospects.

Obviously, our outlook for Florida remains very positive, and we are focused on supporting growth in that footprint through the aforementioned marketing and increased lending staff, as well as other acquisitions for [denoble] opportunities. Alan Eskow will now provide some more insight into the financial results.

Thank you, Jerry. Valley's first quarter 2015 financial results reflect a full quarter of First United. Compared to the prior linked quarter which included only two months. As a result, certain sequential quarter metrics may be skewed from a comparison perspective.

As Jerry indicated in his prepared remarks, non-covered loan growth was a highlight for Valley in the quarter increasing by 8.7% annualized. On average, the linked quarter increase was over 4%, 16% annualized, of which approximately $350 million was attributable to the extra month of First United's loan balances.

Our expectations that organic loan growth during the quarter will have a greater benefit to interest income in the second quarter. We anticipate continued strong loan growth into the second quarter.

Valley's first quarter net interest income increased nearly $3.5 million from the fourth quarter in spite of a reduction of two calendar days. The growth in net interest income was largely the result of an extra month of First United's balance sheet coupled with a reduction in interest expense on long-term borrowings.

The link quarter decline in interest expense was mainly the product of the prepayment of $275 million in higher cost long-term borrowings which occurred late in the prior quarter. As we move forward and contemplate our funding strategies, both in composition and duration, we intend to continuously reassess our opportunities in managing the long-term borrowing portfolio.

Our decision to possibly prepay a portion of the remaining debt will be conditioned on a multitude of variables including the timeframe and post-dated maturity and whether the negative impact to equity is linear with the prepayment penalty imposed.

The net interest margin for the quarter was 3.20% in line with both the prior quarter and the same period one year ago. We anticipate continued margin pressure as we originate loans at yields lower than the blended average rate of 4.44% for the first quarter. Our focus continues to be on expanding net interest income in a manner that doesn't adversely impact the banks duration and asset liability mix.

During the quarter we originated over $600 million of new loans. Of which approximately 20% are floating and we'll re-price with the movement of interest rates. And just over 40% with cash flow within the first 24 months.

Our emphasis on maintaining a well-diversified balance sheet with a value on recurring consistent cash flow is not only prudent from an interest rate risk profile, but further provides the bank with consistent alternatives during various economic cycles.

We anticipate continued expansion in net interest income in spite of the likely margin compression due to market interest rates. The growth will be a function of expanded loan volume, the reallocation of cash flows from the investment portfolio into loan growth and the reduction in cash liquidity.

Non-interest income in the quarter was $18.6 million, a contraction of $10.9 million from the prior quarter. The reduction is mostly the result of a decrease in the gain on sale of assets partly mitigated by a lower reduction in the FDIC loss share receivable, and an increase on gains on securities transactions.

The gains recorded on security sales was the result of restructuring a portion of the investment portfolio to account for changes in the risk weighting and regulatory capital requirements of certain securities. Further, we anticipate the change in the FDIC loss share receivable to continue to contract into the second quarter as certain commercial loss share agreements with the FDIC terminated in March 2015 for select pools of loans.

Non-interest expense declined to $108.1 million in the first quarter from $121.3 million. Mainly attributable to the prepayment penalty paid in the fourth quarter on the extinguishment of debt, as well as lower amortization expense of tax credits. Mitigating some of the decline was the additional month of expenses captured with the First United merger. With the successful systems integration having occurred the end of February, we expect second quarter non-interest expense to reflect many of the cost saves originally identified.

Further, the first quarter expense figure includes incremental seasonal expenses associated with snow plowing and payroll taxes equal to approximately $3 million. In the aggregate, we anticipate continued contraction in the non-interest expense base.

Credit quality for the quarter was solid as nonperforming assets continued to decline. Reaching $73.2 million or 0.39% of total assets as of March 31st. Further, during the quarter the bank recognized 1.67 million of gross charge offs on loans. Which was more than offset by $1.94 million in gross recovery.

Over the trailing 12 months, Valley's annualized non-covered net charge off ratio was on average less than 0.01% of total non-covered loans as total net losses equaled only $1.6 million.

The first quarter of 2015 net recoveries continued the positive trend in loan loss experience seen in 2014. Where annual net loan charge offs were at the lowest level reported since 2007. As a result of this loss history and taking into account our loan growth as well as a myriad of other factors. The provision for losses was zero for the quarter. The aforementioned variables will principally influence the future quarterly provision expense.

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

Thank you. (Operator Instructions) Our first question today comes from the line of Steven Alexopoulos from JP Morgan. Please go ahead.

Hi, Good morning everyone.

Good morning, Steve.

Good morning

I would like to start, can you talk about any plans to purchase additional multi-family loans in the second quarter? And maybe talk about the yields that you're adding these into portfolio.

We're going to continue to look at all opportunities to get involved in acquiring loans, originating loans. Again I indicated that we're going to reallocate some of our cash flow coming out of our investment portfolio.

We look at duration. And as you know duration on some of the investments can be quite substantial. So we're looking at shorter duration assets, and a higher yield than we can get on the investment portfolio. So that being said we're going to look at all opportunities to take advantage of loans in the marketplace.

Alan, could you give us a sense of the yield that these came in the quarter, the multi-family loans?

Yes, probably in the about 340 range.

Okay.

The duration was shorter.

Yes, but they had shorter durations so again I think that's part of what I was trying to tell you guys is that duration is a very key item for us.

Okay, and then?

They're under four years, Steve, or four years approximately.

Okay, and, Alan, relative to the 4.44 portfolio loan yield you talked about where is that new money loan yield in terms of new originations? Where's it coming into the portfolio at this stage?

It's coming in about 3.5%. Remember, there's a big mix because of the auto loans that come on at such a very low rate which we've been talking about for a while. So that tends to drive down the average yield that's coming in on the entire portfolio during the quarter. But they have a much shorter, as I indicated, duration. And the cash flows on those are very substantial. So they tend to flow through the system very quickly.

Right, okay. And then maybe a question for Jerry on M&A. With this deal now closed, are you now officially looking for additional deals? You were talk about how the opportunities in Florida compare to maybe metro New York area.

I'm restricted obviously. I can't talk about anything specific, but we're always looking. Rudy Schupp, who is president of our Florida operations, has been very active in trying to meet with a number of the individuals, banks in the Florida market. Trying to see if any of them are interested in joining with Valley. So we have been active in the marketplace.

Okay. Thanks for all the color.

Thank you, we'll now go to the line of Frank Schiraldi with Sandler O'Neill. Please go ahead.

Good morning Frank.

Good morning.

Good morning.

The first question, on the nature of the CNI growth, and I guess you talked a little about at least a portion of it being driven by some larger sized credits, I think. And I think that was in the New York area. Could you just talk maybe a little bit about what's driving that demand specifically?

Part of it -- this is Jerry Lipkin. Part of that is coming from increased line usage. Line usage falls off starting in the November/December period particularly in New York. And it doesn't usually start to come back again in the end of January. That's a historical/cyclical item with us. So we have seen some of that coming back as well as some new credit venturing. And of course we're being supported as well by the growth in Florida.

I just wonder when you talk about the new demand and I guess new customers and you talk about maybe some of the larger sized credits. I mean in terms of size, maybe what were some of the larger sized relationships put on the books in 1Q?

There were a couple of larger credits, a few. I mean it was a mixed bag of credits as we always see. But there were a couple of larger credits that flowed through.

Yes, $10.

$10 million or what?

$10 million would be--

Okay.

$10 million actually I'm being told.

Okay, great. And then just on the Florida pipeline that you quantify actually in the release, how does that compare to the sequential quarter?

So, Frank, it's Rudy Schupp. I guess a couple things to say. The pipeline has been growing steadily just to reach back a little bit. So at merger time ? at planning time last year for example we were running at a $80, $90 million pipeline which has stretched itself now today to $180 to $200 million depending on the day. About $120 of which for example would be approved pending closing over a period of say up to 60 days.

That's been pretty helpful. I think the mix of loans that we tend to see are in the 50+ percentile for CRE. Although this last quarter as much of a third it was categorized in CNI comprised largely of revolvers if you will to all form of professional practices, businesses. Also we support a property management industry when we make loans to their clients. They tend to be booked ? they are booked as CNI loans.

Okay, and then just ?

Just one last to the point too, we do a reasonably fair amount of medical practice lending as well. And that would also fall in this BNI category.

And that would be in Florida or New York or both?

Both.

Okay. And then just finally on Alan, you mentioned 3.5% I think yield in terms of new origination, in terms of the mix. So is that in terms of what we saw in 1Q? And then as auto picks up would we expect to come that in further. Is that sort of the number?

No, I don't think so. I think that's probably the right number for the moment, and I don't expect that to decline below that.

Got you. Okay, great thanks.

Thank you, we'll go now to the line of David Darst with Guggenheim Security.

Hi, good morning.

Good morning.

Good morning, Dave

Okay, so just on your comment with the two considerations that'll improve earnings by about $7 million. So I guess that implies that there's about $3 million of cost saves that come out from the acquisitions in the second quarter?

Approximately right.

Okay, and then the remaining FDIC indemnification asset that's $7 million that's consumer and that would be with you for a while, right?

Yes, that's correct.

Okay, and then just as you look at your service charge income I understand the seasonal decline. But what's the context of service charges being down year over year? And then just do you have any kind of industry level thoughts on the consumer and your ability to grow deposit charges in the future?

A lot of that is customer behavior. People used to overdraw their account and got charged, and then all of a sudden everybody woke up to that. So they stopped overdrawing their accounts. That goes down. That doesn't come back when people realize it's going to cost them money.

The advent of service charges on checking accounts has been decreasing industry wide for some time now. I don't see that turning around as much as we all would like to see it turn around. It's just not going to happen.

Okay, do you think you're reaching a stable level, or is there further decline?

It's hard to predict at this point. Yes.

Okay. And then one more question. So you said on the $97 million participation, did you say your yield was 3.4%

Yes, about 3.4%.

Okay.

Those are short duration loans though. They reset. Interest resets at relatively short intervals.

Are they typically the five year with a five year reset?

Yes.

Yes.

Okay.

But the ?

The only reason I?

They were seasoned already, David.

Understand. They're seasoned, okay. Because then another bank purchased a similar sized participation that I guess would have been new issue that was at 3% only.

These were better.

Okay, thank you.

(Operator Instructions) And we'll go to the line of Collyn Gilbert with KBW.

Thanks, good morning gentleman.

Good morning, Collyn.

Good morning, Collyn.

Just, Alan, to your comments you had mentioned of the $600 million of loans that were originated this quarter you said 20% was floating. What was the profile of the other 80%?

Well, remember you have auto loans that came in that represented, that's the 40%. So the rest of them are fixed of various types that came on. So they would be residential mortgage that came on. You'd have other commercial mortgages that came on. So we had a whole mix of loans that came on.

Okay, I apologize. I thought the 40% was within the 20% of floating.

No, no, no.

So it's 60% essentially that was more or less floating.

Exactly.

Got it, okay. And then I'm just curious, what do you guys see or how are you managing sort of the CD portfolio? It looks like it grew this quarter. Just what's the rate that you're seeing on there, and how are you thinking about pricing of deposits right now?

That's pretty much market driven, Collyn. You know we tend to go out and offer market rates. We may be a couple basis points higher than the competition if we're really looking to grow that portion of our portfolio. But we don't go out crazy. We're not going to pay 2% over the market to bring in money.

I mean there wasn't really much growth in timed deposits this quarter. It was pretty small, Collyn. And actually on average, and maybe part of that was due to the fact that we combined with First United. I mean the yield if you look at the margin analysis actually came down from 122 to 116 during the course of the quarter.

Yes, I just was trying to think how you're thinking about that funding. I mean funding in general, which kind of ties me into my next question. Is what your view is right now on interest rates, and how you're sort of managing the balance sheet in this current rate environment?

Well, I think the one thing is that as loan growth continues we're obviously going to have to continue to raise deposits. Some of those are going to come in as you see noninterest bearings grew very nicely during the quarter. But we're going to also have also go out and look at money markets, time, and see what we can do to raise those to fund the loan growth as it comes on.

The big benefit, Collyn, that we have of course, as we've told you in the past, is the borrowings that are over the next 30 months. And they don't all come due in 30 months, they come due at different periods are going to be able to be replaced at a considerably lower cost in our estimate. And that should help our net interest margin going forward.

Yes, okay. And, Alan, just as you go through your budget process, I mean what are you guys assuming for interest rates through this process this year and then in the next year as you're thinking about the way these borrowings are going to reprice?

I think right now we're looking at the Fed just met yesterday. I don't think we're looking at any major moves during the course of this year. I think the Fed will only move slowly whenever they do begin to move even if it is 25 basis points. We're not going to see a lot of movement here.

I think they're going to test the waters at best to see what happens if they decide to move it. In the long end, it's been pretty flat and we don't see it really going any place for the moment. So we are still looking though to keep our duration short so that we don't get beat up if rates do happen to go up.

Okay, that's helpful. Thank you.

(Operator Instructions) Thank you, there are no further questions in queue at this time.

Okay, well thank you for joining us on our first quarter conference call and have a great day.

With that, that does conclude our conference for today. And we thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.