Valley National Bancorp
Q1 2008 Earnings Call Transcript

Published: 24 Apr 2008

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Valley National Bancorp first quarter 2008 earnings release conference call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. I'll now turn the conference over to your host, Gerald Lipkin, Chairman, President and CEO. Please go ahead, sir.

[Gerald Lipkin:]

Thank you. And good morning and welcome to our first quarter 2008 earnings conference call. I'd like to turn the call over to Dianne Grenz now to read our forward-looking statements.

[Dianne Grenz:]

Today's presentation may contain forward-looking statements regarding the financial condition, results of operation and business of Valley. Those statements are not historical facts, and may include expressions about Valley's confidence, strategies, and management's expectations about earnings. These forward-looking statements involve certain risks and uncertainties that may cause the actual results to differ materially from the results the forward-looking statements contemplate includes, but are not limited to, unanticipated changes in the direction of interest rates; effective tax rate; new and existing programs and products, relationships, opportunities, technology, the economy, market conditions, the impact of management's adoption, interpretation and implementation of new or pre-existing accounting pronouncements, and failure to obtain shareholder or regulatory approval for the merger of Greater Community with Valley or to satisfy other conditions to the merger on the proposed terms and within the proposed timeframe. Written information concerning factors that could cause results to differ materially from the results the forward-looking statements contemplate can be found in Valley's press release for today's conference call, Valley's Form 10-K for the year ending December 31, 2007, as well as in Valley's other recent SEC filings. Valley assumes no obligation for updating these forward-looking statements.

[Gerald Lipkin:]

Thank you, Dianne. Net income for the first quarter was $31.6 million compared to 49.4 million in the same period one year ago. Current period earnings were negatively impacted by approximately $3.7 million of pretax mark-to-market losses of financial instruments carried at fair value. Also, the first quarter of 2007 net income included aftertax mark-to-market gains of nearly $5.3 million. Additionally, in 2007, Valley recorded a $10.3 million aftertax gain on the sale of a building in Manhattan. Alan Eskow will discuss the financial results in more detail shortly. I am most pleased to report that credit quality continues to remain strong at Valley. While not totally immune to the widespread credit deterioration unfolding throughout the economy, the balance sheet, management strategies and constraints in asset generation employed by Valley over the past few years continues to pay immense dividends. The matter in which an institution underwrites each credit should be uniform irrespective of the credit cycle. If you recall, during the third quarter of 2006, nearly one-and-a-half years ago, we announced Valley's aggressive actions to encourage over $50 million of commercial borrowers to move their banking relationship elsewhere, although at the time each credit facility was current and performing. At Valley, credit underwriting is not conducted to meet market competition. As a result, subprime residential mortgages never made their way into either our loan or investment portfolios. For the quarter, Valley's annualized net charge-offs was 0.18% of average loans, while for the same period the non-performing asset to total loan ratio remained flat from the prior period at 0.38%. Total loans past due 30 days decreased from the prior period from 1% to 0.93%. A recent study conducted by the International Monetary Fund identified potential losses of nearly 565 to $1 billion within residential mortgage, home equity, and related security portfolios in the United States. At Valley, as I noted a few moments ago, the quality within these lending areas remains pristine. Within Valley's residential mortgage portfolio of over 9,200 loans and $2.1 billion in outstandings, only 38 loans were delinquent more than 30 days resulting in a delinquency rate of 0.37%. To put this number in perspective, the Mortgage Bankers Association reported an industry average of nearly 8% delinquencies including foreclosures. Similarly, within Valley's home equity portfolio of over 14,500 loans and $540 million outstanding, only 16 loans were delinquent more than 30 days. Credit quality within Valley's other lending portfolios remain strong as well. Exclusive of our $48 million SBA loan portfolio, which is largely guaranteed by the US government are commercial lending portfolio, which has approximately $4.4 billion in outstanding balances had a 30 day plus delinquency rate of only 0.99%. The credit quality within our consumer lending portfolio consisting mainly of indirect dealer originated loans remains exceptional. 30 day plus delinquencies at quarter-end averaged 1.11%, down from 1.17% the prior quarter and significantly below the industry average. During the quarter, Valley originated over $175 million of new indirect auto loans. However, more importantly, Valley declined over $400 million of auto applications due to credit quality, of which 14% had FICO scores greater than 700. Although Valley's portfolio has increased, our IM quality remains consistent. In generating the growth in auto lending, Valley is active in five states, all of which we had generated large volumes of loans in the past. Today we have 18 auto loan representatives in the field, up from 11 the same time last year. Valley sources its loans from over 950 approved dealers, an increase of 168 from March 2007. But most importantly, all credit decisions are made here in Wayne, utilizing the same staff at underwriting criteria we have used for decades. We believe our prudent lending strategy focusing only on strong credits coupled with our experience in this market will continue to generate low loan losses, good returns, and distinct long-term growth opportunities. Valley's consistent and conservative underwriting standards remain the hallmark of the institution and have enabled us to be opportunistic at a time when many of our competitors' attention lie elsewhere. During the quarter, we announced a merger agreement with Greater Community Bancorp. Greater Community is a commercial bank with nearly $1 billion in total assets and 16 full-service branches within Valley's northern New Jersey footprint. Partly as a result of the in-market location of Greater Community, Valley anticipates realizing over 30% of non-interest expense cost saves. We anticipate the deal to be accretive to earnings per share within one year from the closing, which is expected to occur in the third quarter subject to receiving the necessary regulatory approvals. Our S-4 Registration Statement was filed with the SEC this past Tuesday. The impact to Valley's capital ratios as a result of the acquisition will be largely neutral. At quarter-end, Valley National Bancorp's regulatory capital increased from the prior quarter, largely the result of earnings retention despite mark-to-market adjustments in our investment portfolio and other financial instruments carried at fair value. At March 31, 2008, Valley National Bancorp's Tier 1 risk-based capital ratio of 9.63 and total risk-based capital ratio of 11.42 are well above the Federal Reserves guidelines for a well capitalized bank. Valley has no plans to raise additional capital or reduce its current dividend of $0.80 per share as adjusted to the 5% stock dividend declared at Valley's Annual Directors' meeting on April 7. We continue to focus on expanding the Valley franchise into Brooklyn and Queens. Within the past 24 months, we have opened nearly 20 branches, of which nine were located in New York City. For the remainder of 2008, we attempt to open additional nine branches, of which five will be located in Brooklyn and Queens and one in Manhattan. As of last week, the five branches we currently have opened in Brooklyn and Queens has generated new deposits of $178 million and more importantly added over 17,000 new households to the Valley family. Although in the short-term the expansion costs are dilutive to current period earnings, we expect the long-term benefits of Valley’ franchise to be significant. Today's operating environment remains challenging as the economy appears on the fringe of a recession and dislocation within the capital markets persist. The manner in which Valley has operated and continues to operate becomes even more paramount to our future success. At the end of 2006 and prior to the subprime meltdown, I stated on our earnings conference call that "that although the shape of the yield curve remains a challenge to many bankers, the relaxed loan structures and credit quality prevalent in the marketplace today will be the driving factor affecting bank profitability in the near future." Fast forward a year-and-a-half and many banks are realizing record losses and seriously attempting to bolster their capital positions at the expense of their current shareholders. The actions we have taken and more importantly the opportunities we have forgone continue to prove themselves to be the right approach for the long-term well being of Valley National Bank and most importantly our shareholders. Alan Eskow will now provide a little more insight into the financial results.

[Alan Eskow:]

Thank you, Gerry. My comments this morning reflect the 5% stock dividend declared on April 7, 2008. This May 23, 2008 as all of our share and per share amounts has been adjusted. Reported net income for the quarter of 31.6 million or $0.25 per share included approximately $0.02 of aftertax non-recurring charges. The quarter was negatively impacted by mark-to-market adjustments on various financial instruments carried at fair value, net of gain realized from the mandatory partial redemption of Visa stock. Valley's mark-to-market fair value adjustments reflect a loss within the investment portfolio of 900,000 reported in non-interest income and a loss of 2.8 million on long-term borrowings and junior subordinated debentures reported in other expense. Additionally, the linked quarter increase in salary and benefit expense is partially attributable to higher payroll taxes during the period of 1.2 million as the annual limits for FICA and 401(NYSE

[Gerald Lipkin:]

Thank you, Alan. Does anybody have any questions?

[Operator:]

(Operator instructions). And our first question is from Sandy Osborn with KBW. Please go ahead.

[Sandy Osborn:]

Good morning guys.

[Gerald Lipkin:]

Good morning Sandy.

[Sandy Osborn:]

Quickly first, are you still projecting a 28% effective tax rate for the year?

[Gerald Lipkin:]

It should be in that general range. Yes.

[Sandy Osborn:]

Okay. Thanks. An could you please go on to the factors influencing the net interest margin in future quarter in terms of the rates on deposits and any change in asset you anticipate?

[Alan Eskow:]

I think going back over what I started to say before we saw the Fed drop dramatically between the end of '07 and early into 2008. We expected deposit of course will continue to decline as a result of that, but as I said it takes time for certainly the certificates of deposit to decline. They have begun to do so, but as they adjust downwards, it just takes a matter of time. Obviously, there is still some pricing pressure on the loan side relative to our competition. So depending on where competition goes that will really tend to direct to some extent where our yields go. We have seen an increase in the yield curve, so to that extent we are seeing some increase in some of our longer-term assets.

[Sandy Osborn:]

Okay. And the 80% of the CDs that you are expecting to be priced in the next 12 months, can you discuss what kind of spread improvement you are expecting there, what do you think those are going to be?

[Alan Eskow:]

Yeah, they are going to be tied to mostly shorter-term CDs. I mean, CDs were pricing up to as high as 5% early on what were back in 2007 and those are pricing down into the 3% level and some even lower. So depending on how long it takes, where the Fed’s next action is, what competition does, we expect to see that to continue to price downwards.

[Sandy Osborn:]

Okay. But generally you expect the margin to see some improvement in the next few quarters, is that correct?

[Alan Eskow:]

Some improvement, yes.

[Sandy Osborn:]

Okay. And on the expense side, I am trying to get to an appropriate run rate for the second quarter. I guess the stock grants to retirement eligible employees are going to drop off and also obviously the mark-to-market after adding that, does that look appropriate for 2Q?

[Alan Eskow:]

Well, those are certainly two of the major items and we also talked about the FICA and 401(K) expense that is also going to begin to drop off quarterly as we move through the year. So, the highest expense is in the first quarter. Each quarter from there on will continue to drop off.

[Sandy Osborn:]

Okay. And for full year expense growth with your branch plans, what are you looking at there. Is there any of offsetting initiatives such as cost saves from Greater Community?

[Alan Eskow:]

Yeah, but even so, we don't expect the closing of Greater Community to occur until probably in the middle or early part of the third quarter. That being the case, the cost saves can't begin to occur until after that time. Those cost saves will impact theoretically their numbers, not our numbers, so it will really help in any reduction in immediate dilution and help on the accretiveness of the transaction going forward, but you can't count that in our numbers in the next quarter or so.

[Sandy Osborn:]

Okay. Alright. Thank you guys.

[Alan Eskow:]

You are welcome.

[Operator:]

Our next question is from Peyton Green with FTN Midwest Securities. Go ahead please.

[Peyton Green:]

Yes. Good morning. I was wondering if you could comment, one, on the branch outlook… Endo …on the branch outlook, do you expect to open nine more or total of nine in the balance of ’08?

[Gerald Lipkin:]

It will be a total of 10 for the year.

[Peyton Green:]

Okay. And so five are already opened.

[Gerald Lipkin:]

No, nine more

[Peyton Green:]

Okay, nine more, okay. Alright, great. And then in terms of the indirect auto business, Gerry, I was wondering if you can talk kind of about the ROE and the ROA of the business and how it's doing versus what you would expect to do over the long run?

[Gerald Lipkin:]

Let's put it this way, Peyton. At the moment rates are still holding up fairly decent and loan losses had not been dramatically impacted as we've seen in many other institutions. So the ROA is obviously dropping to some extent as the margin drops, so to that extent it's going to negatively impact our margin and our return on equity as the rest of the industry. You are speaking specifically about the overall?

[Peyton Green:]

Just the indirect auto book, yeah.

[Gerald Lipkin:]

The indirect auto book at Valley has a relatively consistent in its returns to Valley over the last several years. It has grown in volume and I am sitting next to Al Engel, who I will call out in a second to discus a little bit of that, but we have been very tight on our credit quality and I think that’s the key to this business. You hear about other people who get into the business and they try to buy their way into it. We try to void that approach. Maybe Al, why don’t you make some make comment on it?

[Al Engel:]

Sure. What we have seen over the last years is a lot of a rational competition in the indirect auto segment and we have forgone a lot of volume attempting to compete on rate or compete on credit terms that we felt would be problematic in the future. As a result of some of the dysfunction that has arisen in the capital markets lenders who originate these loans and need to access the capital markets to sell that have had to pull back in some cases retreat from the market, allowing us more opportunities to see our kind of credit and be able to decision that; meaning, the kind of quality that we like to see at rate and terms that assist us in meeting our yield objectives. So we see this as opportunistic for us what has been going on, but this is the time to receive some paybacks with the investment we have made over the years in quality and in credit restrain.

[Peyton Green:]

Okay. And I guess what I am to trying to get out is this the ROA higher than the overall ROA say in’07 of one in a quarter, are you doing better than the indirect book or a little lower than that?

[Alan Eskow:]

Well, we might be doing about one in a quarter. We expect it to be going off, I mean if anything it would level out.

[Peyton Green:]

Okay, but it's not going to diffract from the overall ROA?

[Alan Eskow:]

No.

[Peyton Green:]

Okay, great. Thank you very much

[Gerald Lipkin:]

Okay.

[Operator:]

Thank you. (Operator Instructions). Mr. Lipkin, we have no further questions.

[Gerald Lipkin:]

Well, we thank everybody for tuning in. We will speak to you in three months. Everybody have a nice day.

[Operator:]

Thank you. And ladies and gentlemen, this conference will be available for replay after 1 pm today through midnight Tuesday, May 1st. You may access the AT&T Executive Playback Service at any time by dialing 1800-475-6701 and entering the access code 915229. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.