Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Valley National Bancorp (NYSE:VLY)

Q3 2009 Earnings Call Transcript

October 22, 2009 11:00 am ET

Executives

Dianne Grenz - First SVP, Director of Marketing, Shareholder, and Public Relations

Gerald Lipkin - Chairman, President, and CEO

Alan Eskow - EVP and CFO

Analysts

Craig Siegenthaler - Credit Suisse

Steven Alexopoulos - J.P. Morgan

Ken Zerbe - Morgan Stanley

Matthew Clark - KBW

Collyn Gilbert - Stifel Nicolaus

David Darst - FTN Equity Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Dianne Grenz. Please go ahead.

Dianne Grenz

Good morning. I’d like to thank everyone for participating in Valley’s third quarter 2009 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued earlier this morning, you may access it, along with the financial tables and schedules, from our Web site at valleynationalbank.com by clicking on the Shareholder Relations link.

Before we start, I’d like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to Valley National Bancorp. Valley encourages participants to refer to our SEC filings, those included on forms 8-K, 10-K, and 10-Q, for complete discussions of forward-looking statements. Now, I would like to turn the call over to Valley's Chairman, President, and CEO, Gerald Lipkin.

Gerald Lipkin

Thank you, Dianne. Good morning, and welcome to our third quarter 2009 earnings conference call.

For the quarter, Valley reported net income available to common shareholders of $25.6 million or $0.18 per share. The results for the period, including a non-cash charge of $2.8 million due to the change in fair value of Valley's trust preferred and $6 million in dividends and accretion on the preferred stock issued to the government. These two items negatively impacted our diluted earnings per share by $0.05.

Our strong results for the third quarter are a function of Valley’s solid and consistent underwriting philosophy; our stringent focus on operating efficiency; and, most importantly, our adherence to a traditional banking model. Valley is fortunate to enjoy economies of scales similar to many large banks as a result of its size. However, due to its concentrated footprint, we are still able to recognize benefits usually only available to smaller community banks.

At Valley, our senior management, in addition to lenders and branch employees, are heavily involved in the activities of our communities. This approach, combined with the population density, a fluid nature of our market, and hands-on approach to lending at all levels of management, provides a distinct competitive advantage with banks much larger than Valley.

During the quarter, we repurchased an additional $125 million of preferred stock issued to the government, following our $75 million repurchase in the second quarter. This reduces our current outstanding balance under the TARP program to $100 million and furthers our previously announced strategy of reducing the bank's excess capital position and involvement in the government's capital purchase program as economic conditions improve, partially mitigating the negative impact on our capital ratios resulting from the $125 million repurchase of TARP with the sale of $5.67 million shares of newly issued common stock through the completion of our previously announced at-the-market equity offering.

Net proceeds from the program totaled nearly $72 million. Due to the capital rates, combined with Valley's strong operating performance for the quarter, and a strategic position to reduce risk-weighted assets, Valley's tangible common equity to risk-weighted asset ratio now exceeds 8% compared to the 7.15% reported last quarter.

Our capital ratios, both inclusive and exclusive of TARP, remain strong and further exceed the regulatory guidelines for a well capitalized bank. Additionally, the strength within our capital position affords Valley the ability to seize opportunities as they present themselves, either through expanding current customer relationships or through opportunities which present themselves as many of our competitors continue to be preoccupied with internal issues caused by the economic recession or poor past lending practices.

In determining the optimal capital position of the bank, many factors impact our analysis. Perhaps none more significant than our macro and microeconomic expectations, and the associated impact of each of the performance of Valley's loan performance -- portfolio. We are somewhat heartened to hear a number of our builders beginning to report a significant increase in floor traffic and increased sale and rental activities.

Although unemployment trends, both on a national and local level, remain elevated, consumers who are gainfully employed appear more confident in the likelihood of sustained employment. Many restaurants within our marketplace are showing increased activity. The malls are once again becoming crowded. And although the increased floor traffic may not immediately translate to expanded purchasing activity, we believe this will come.

As we continue to experience increased economic activity in our marketplace, the black hole which once engulfed every facet of the economy, has began to shrink. As a result, we continue to access Valley's future cap -- asses Valley's future capital needs in determining whether the benefits of participating in the government's capital purchase program are outweighed by cost of the excess capital and the resulting impact on earnings. However, as I said on many occasions, simply returning the capital in its entirety to quote, make a point, defeats the rationale of opting into the program initially.

Our credit quality metrics for the quarter are once again excellent, both on an actual basis and relative to our peers. Recently, John Dugan, the Comptroller of the Currency testified to Congress that non-current loans, as a percentage of total loans outstanding as of June 30th, 2009 for the national banking system, were nearly 4.5%. And that existing non-performing delinquency rates were higher than any period in the last 25 years, including the recession in the early 1990s.

However, at Valley, its credit performance in relation to its peers reflects much better results. During the recession in the 1990s, our delinquencies were roughly two-thirds of the industry average. During this recession, Valley's delinquencies are less than one quarter of the industry’s average.

That being said, we are not immune to losses. Net charge offs increased by nearly $2 million from the prior quarter, and our non-accrual loans increased by $70 million to just over $74 million. However, as Alan will discuss shortly, categorizing a loan as non-accrual does not automatically imply an ultimate principal loss here at Valley. Our approach to underwriting, which emphasizes high levels of borrower equity, strong global cash flows, and personal guarantees, helped mitigate losses from non-performing loans.

We are also fortunate in the fact that we operate in a very affluent and densely populated market. Further, having learned a lesson from the late 1980s, speculative levels of real estate developments were kept at relatively low levels during the past two decades within our markets. The vast majority of our loan portfolio is geographically situated within 100 miles of our headquarters. While this is not a guarantee that credits will not deteriorate, we do not anticipate problems to reach the levels that are being reported in other markets across the nation.

Valley's solid earnings generated during the quarter are not an anomaly. The bank has never posted a loss for a good quarter, let alone in a year. Earlier this year, most banks were preoccupied with generating capital via the reduction or for some comp -- or some complete elimination of the common cash dividend. Valley once again differentiated itself by maintaining its common cash dividend unchanged. While future dividends will be determined by our Board on a quarterly basis, we are proud of the fact that to date, we have not been forced to reduce the dividend. Our focus has always been on the long term viability of the organization and delivering consistent positive returns for our shareholders.

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

Alan Eskow

Thank you, Gerry. As Gerry indicated earlier, we are pleased with Valley's third quarter of 2009 operating results. However, our GAAP reported earnings continue to be negatively impacted by the non-cash volatility associated with the change in fair value of Valley's issued trust preferred securities, and the bank's continued involvement in the government's capital purchase program. These two items negatively impacted our reported diluted earnings per share by $0.05. As the volatility of the market price of Valley's issued trust preferred securities subsides and the extent of our involvement in TARP declines, our reported GAAP results should improve.

Total sequential quarter loan balances declined $107 million, although we originated roughly $500 million of new loans, of which nearly $100 million of residential mortgage originations were sold into the secondary market as Valley deemed the long term interest rate and credit risk to be greater than the immediate benefit. Additionally, $54 million of the contraction in the loan portfolio is attributable to reduced commercial line activity in both our New Jersey and New York portfolios. Line usage declined approximately 1% from the second quarter.

Although the declining commercial line activity negatively impacted loan balances and interest income for the quarter, the reduction in usage further demonstrates the credit quality of our customers. Due to the continued dislocation within our marketplace, we continue to attract many new lending relationships. Although each may not immediately provide marginal new outstanding loan balances, as the economy begins to improve, the additional relationships will incrementally provide a larger base for the commercial portfolio to expand.

Consumer lending declined approximately $65 million from the prior period as auto originations lagged portfolio amortization. During the quarter we originated over $85 million of new auto loans. However, we declined $310 million, nearly $90 million of which had FICO scores in excess of 700. Unlike many of our peers, our auto underwriting criteria is not solely based on FICO score, but rather heavily weighted towards the customer's down payment.

On a linked quarter basis, deposits grew by $122 million or approximately 5% annualized. More importantly, the growth was in lower cost savings and money market accounts and not just certificates of deposit. While end-of-period demand deposits declined, on average they have continued to grow throughout the year and have helped to increase the net interest margin and net interest income. The net interest margin grew 9 basis points from the second quarter as Valley's cost of funds continue to decline based on the composition of deposits and maturing CDs. The growth in Valley's margin offset the decline in earning asset balances, as our net interest income was $115 million compared to $113 million in the prior period.

Operating revenues, exclusive of OTI -- OTTI and trading income, continued to expand for the fourth quart -- consecutive quarter. Operating expenses for the period declined in large part due to the FDIC's insurance special assessment, which was realized in the second quarter 2009. However, exclusive of the FDIC charge, operating expenses increased slightly due to additional de novo branch expenses, coupled with increased residential mortgage expenses, attributable to the increase in loan sale activity.

Credit quality for the quarter deteriorated slightly. Yet our metrics remain solid compared to many of our peers. Non-performing assets increased $16.4 million for the most part due to five commercial lending relationships totaling $14.4 million. Within the provision for the quarter of $12.7 million, we have included approximately $3 million of specific reserves on one new impaired commercial lending relationship.

As Gerry indicated earlier, not every performing loan implies future loss principal. The loss severity of each non-performing loan is subject to the amount of collateral, as well as the degree of personal guarantees included at the time the loan was originally underwritten. For many of our loans, in which conservative loan-to-value ratios were underwritten at inception, and customer guarantees exist, the magnitude of the -- of actual losses should be far less than industry averages. Valley's allowance for credit losses as a percentage of total loans increased to 110%. Additionally, our coverage ratio to non-performing loans was 142%.

Net charge-off increased on a linked quarter basis by approximately $1.7 million, largely attributable to an increase in residential mortgage loan and commercial loan. On an annualized basis, net charge off as a percentage of loans was a modest 0.35%. As I stated earlier, we are pleased with our operating results for the third quarter. Our capital ratios are strong and our credit quality remains one of the highest throughout the industry.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead

Craig Siegenthaler - Credit Suisse

Thanks and good morning.

Gerald Lipkin

Good morning, Craig.

Craig Siegenthaler - Credit Suisse

Gerry, can you comment on loan growth in your core New Jersey footprint? We’ve seen modest declines now over the last year, not unlike many year periods in other regions, but can you provide an outlook for the C&I and CRE commercial real estate market specifically?

Gerald Lipkin

Well, loan growth is impacted in several net ways. For one thing, it’s impacted by line usage. Our borrowers, as Alan pointed out, have utilized their lines of credit less this year than they have in past periods. In fact, considering the time of the year that we’re in now, the amount of line usage is extremely low. We would expect our line usage at this time of the year to be peaking with somewhere in the high 40 percentile and it’s actually coming in the mid to high 30 percentile. So that’s down significantly.

The second area that Alan commented on was the fact that we are selling a sizeable portion of our residential mortgage production. In fact, if we would have retained just the mortgages that we sold, we would not have gone down on our loan growth. The effect on the loans would have been flat. But as Alan correctly pointed out, we feel that holding loans with an interest rate of sub-5% long term is not advisable. We also have very strict credit criteria for what we want to hold. Of course there's always uncertainties of the future of the marketplace on appraised values, so we make sure that if we’re going to hold it we have to have a very substantial equity position.

That all being said, we are seeing very strong loan activity application in the commercial side. Not all, in fact most of which, doesn’t end up passing our credit criteria muster. Our people are out making record number of calls. Our branches, for example, did over 55,000 calls so far this year-to-date on prospecting for loan business. And that’s just in our branches. That doesn’t count the commercial lenders who obviously make a lot of calls and a lot of referrals that we get from our professionals groups.

So I’m really not concerned with the decrease in loans because I think we are actually getting our fair share. I would be happy, obviously, we saw a growth in our loans. But considering the state of the economy, the fact that we’re relatively flat is actually something to be expected. I think once the economy turns around, as Alan correctly pointed out, we’re going to see a big rise in our loans because a lot of the borrowers that we share with other banks are quite displeased with how they’ve been treated at other banks at this time. And I think that in the future, as they look to do increased borrowing, they’re going to come to Valley first.

Craig Siegenthaler - Credit Suisse

Gerry, great color. Just one more question, a follow-up on reserves. We all know how strong your credit quality has been, but the reserves are still quite low versus peers. If you’d look at the ratio of loans, loan coverage, I'm wondering, is there any pressure to build this further here? Any regulatory pressure or what are your thoughts on that?

Gerald Lipkin

We have not had any regulatory pressure. We have to not only satisfy our regulators, but we also have to satisfy the accountants.

Alan Eskow

You know, let me just say, Craig, we go through a rigorous review of our portfolio and of the requirements, and our methodology, for purposes of determining from what kind of allowance we think we need and what kind of provision we need to provide for, including 114 which is a much higher priority for most banks in the last six months to a year. And at this point in time, we are comfortable with our methodology and how we’re building our reserves in relationship to what we’re seeing in terms of potential losses in the portfolio.

Craig Siegenthaler - Credit Suisse

Great. Thanks for taking my questions.

Gerry Lipkin

Okay.

Operator

The next question comes from the line of Steven Alexopoulos with J.P. Morgan.

Steven Alexopoulos - J.P. Morgan

Good morning, guys.

Gerald Lipkin

Good morning.

Alan Eskow

Good morning.

Steven Alexopoulos - J.P. Morgan

Alan, how much more room do you think you have to bring down the average cost of time deposits which is around 2.5 this quarter? I wonder if it could fall another 50 basis points or so next quarter?

Alan Eskow

I don’t know about 50 basis points. A lot’s going to have to do with where the economy continues and interest rates go, and competition. But for the moment, I think we will continue to see some decline in those deposit rates.

Steven Alexopoulos - J.P. Morgan

Okay. But much less magnitude than we saw this quarter?

Alan Eskow

Yes, I think so.

Steven Alexopoulos - J.P. Morgan

Okay. Can you guys give some color on the commercial real estate loans you booked in the quarter? Maybe which geography, size, loan-to-values, stuff like that?

Gerald Lipkin

Well, the loans that we booked in the quarter from a geography stand point are -- the vast majority of them are in our footprint, mostly in the New Orleans and New Jersey, New York City location. That's where most of our portfolios -- where most of our portfolio is located. We are looking for larger down payments, obviously with larger equity positions in the real estate. It's probably, I’d say probably at an average, probably around a third down. We actually pushed for 40% down if we can get it. And that’s with personal guarantees. Without personal guarantees, we would expect a larger down payment. And we’re talking about current appraised values, not past appraised values.

Steven Alexopoulos - J.P. Morgan

Maybe just one final question. Should we expect you guys at some point to join some of your peer banks that are also at a stronger position in terms of doing some of these FDIC deals?

Gerald Lipkin

Well, so far there haven’t been any real FDIC deals in our marketplace. As I said in the past, our first desire is obviously to fill in within our footprint, acquisitions, or secondarily on the peripheral of our market -- of our footprints. So while there may be a lot of banks coming available in the Southeast, that’s just not something we’ve been looking to do.

Steven Alexopoulos - J.P. Morgan

I think there was a small one in New Jersey--

Gerald Lipkin

Yes, there--

Steven Alexopoulos - J.P. Morgan

--in the last couple of months. It was nothing you were interested though?

Gerald Lipkin

Well, we looked at it. But as you say, it was relatively small.

Steven Alexopoulos - J.P. Morgan

Okay. Great. Thank you.

Operator

The next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

Great. Thanks. I know you guys (inaudible) rush to repay TARP, just maybe a little more color in terms the timing. And this is something that you'd like to slowly do over the rest of this year or hold into next year? And I guess as part of that, I know with credit losses fairly low, your capital's not really an issue at all. But would you consider rating additional equity as you refund the rest of the TARP?

Gerald Lipkin

Those are all good questions, and they will all be considered at the time we -- our Board makes the decision as to repaying the TARP. We would like to pay it back as quickly as possible. We are looking and giving consideration to paying it back before the end of the year. But as I said before, they really have to -- everybody's got to satisfy our Board, at least management has to satisfy the Board, that the economy is really turning around or it's at a point where we don't believe it's going to get any worse before we pay it back.

The impact of the TARP, obviously, at $100 million has much less of a hit to our earnings on a quarterly basis than it did when it was $300 million. If we feel we really don't need it, believe me, we'll pay it back as quickly as possible.

Ken Zerbe - Morgan Stanley

Okay. Great. Thank you.

Operator

The next question comes from the line of Matthew Clark of KBW.

Matthew Clark - KBW

Hey, good morning, guys.

Gerald Lipkin

Good morning.

Matthew Clark - KBW

First, just a couple of housekeeping items. Would you happen to have the 30-plus delinquencies on C&I and even auto if you had it for this quarter and last?

Gerald Lipkin

We probably have it. I think the total is 160 in everything [ph].

Matthew Clark - KBW

Yes.

Gerald Lipkin

Let's see. C&I is $179 million, compared to $183 million. So it's actually down slightly.

Matthew Clark - KBW

Okay.

Gerald Lipkin

What was that? I'm sorry.

Matthew Clark - KBW

And I think you have historically offered up auto from time to time.

Gerald Lipkin

Yes. $186 million.

Alan Eskow

Oh, wait a minute. It's $188 million, compared to $179 million, slightly up.

Matthew Clark - KBW

Okay. And then, the up tick in resi mortgage and home equity, I think from $118 million to $157 million. I assume part of that's from just having a lower balance on the mortgage side. But can you give us some more color underneath the hood there as to what's driving the incremental increase?

Alan Eskow

I'm sorry, which one did you say again? Home equity?

Matthew Clark - KBW

Resi mortgage and home equity. I think they're lumped together at $157 million, up from $118 million.

Alan Eskow

Yes. Home equity is up to about 43 basis points. And residential, we have it, I'll tell you in one second, $189 million from $182 million.

Matthew Clark - KBW

Yes. Also, you have to keep in mind that the residential mortgage portfolio has shrunk.

Alan Eskow

Well, they're all declining to some extent. And therefore, the actual percentages are going to continue to rise, even though the dollars may not be dramatically growing.

Matthew Clark - KBW

Yes. I figured it out. (inaudible) to it. I just wanted to see if there was anything else that was driving the increase.

Gerald Lipkin

(inaudible) went down on the residential side. Okay. (inaudible) $2 million.

Matthew Clark - KBW

And the home equity delinquency as the prior quarter.

Alan Eskow

Yes. No, home equity, 43 this quarter versus 24.

Matthew Clark - KBW

Okay. Thank you. And then, the incremental -- the (inaudible) editions that we saw this quarter in non-accrual, really, just honing in on these two commercial real estate credits. Can you give us a better sense of what types of properties those are and the situation?

Gerald Lipkin

Yes. All I can say is they are residential properties. And we have reviewed them, and reviewed the status of where they are. And at this point, based on interim analysis, we're comfortable with the collateral behind it.

Matthew Clark - KBW

Okay. Residential properties meaning that they were previously construction loans and--?

Gerald Lipkin

Yes. They are construction loans.

Matthew Clark - KBW

Okay. Okay, thank you.

Operator

Our next question comes from the line of Collyn Gilbert with Stifel Nicolaus. Please go ahead.

Collyn Gilbert - Stifel Nicolaus

Thanks. Good morning, guys.

Gerald Lipkin

Good morning, Collyn.

Alan Eskow

Good morning, Collyn.

Collyn Gilbert - Stifel Nicolaus

Could you just walk through a little bit more color on the large -- the three large -- or actually, I think it was five MPLs that came on this quarter, maybe just the location of them? And then, in terms of the CRE, what types of CRE properties they were?

Alan Eskow

Yes. They're all basically New Jersey properties. Once again, those properties are to the most part construction loans. And again, we've gone through an evaluation of those. We're very comfortable with where we are collateral wise. And in fact, it wouldn't surprise me if one of them probably moves out of this category down the road. So for the moment, it's in non-accrual. But again, we're pretty comfortable with what they are and the future of those particular credits.

Collyn Gilbert - Stifel Nicolaus

Okay. So even within the CRE bucket, it was mostly still construction related?

Alan Eskow

Yes.

Collyn Gilbert - Stifel Nicolaus

Okay, okay. And have these loans been previously in the watch list?

Alan Eskow

Probably.

Gerald Lipkin

Yes (inaudible).

Collyn Gilbert - Stifel Nicolaus

Okay, okay.

Alan Eskow

Once you referred it down, it wasn't special.

Collyn Gilbert - Stifel Nicolaus

Okay. And Allan, you had said that the expectation is you might be able to lower deposit rates slightly. But maybe, could you just give us a little bit of guidance on the outlooks for NIM? And then in terms of -- you slowly have been seeing a migration in a higher loan yield, if we continue to see that, what that's going to mean, and also the NIM as we look forward.

Alan Eskow

I mean, I think you're going to see some continued increase. And it going forward, I think -- in general, across the industry, deposit rates are way down. That being said, that's continuing to impact our deposit costs. So I would expect that to continue to come down to some extent. On the loans side, I don't think you're going to see anything major. But we probably will see some small increase on the loan yield.

Collyn Gilbert - Stifel Nicolaus

Okay.

Alan Eskow

So all of that should (inaudible) to some increase in the margin as we continue to move forward.

Collyn Gilbert - Stifel Nicolaus

Okay, okay. That's helpful. And then, Alan, can you just give us, if you have it there, what the dividend expense is going to be in the fourth quarter? And you can probably back into it.

Alan Eskow

You mean the expense for the preferred?

Collyn Gilbert - Stifel Nicolaus

The preferred. Yes, yes.

Alan Eskow

The preferred runs at 5% on $2.1 million. $2.1 million for the full quarter.

Collyn Gilbert - Stifel Nicolaus

Okay. Thank you, that's helpful. And then lastly, Gerry, I just have to ask the question. Are you still feeling optimistic about this holiday shopping season the way you were earlier in--?

Gerald Lipkin

I am. You know the local market area. Sunday I tried to get into the parking lot at Willowbrook. They were overflowing. They were outside onto the roadway. Now the weather wasn’t the best. So I guess a lot or some people may want to go into the mall. But they were jammed. And on Saturday, I wasn't sure. Well, I haven't seen as many people walking around that mall in a long time. And these are places in your backyard, so you have to see it also.

Collyn Gilbert - Stifel Nicolaus

Yes.

Gerald Lipkin

So whether the stores are ringing it up in their cash register yet, I don't know. But they’re certainly seeing the floor traffic.

Collyn Gilbert - Stifel Nicolaus

Okay. And then just having that translate into counting your bigger economic views, do you think -- maybe give us an insight as to what you see in the New York metro areas.

Gerald Lipkin

Okay.

Collyn Gilbert - Stifel Nicolaus

In commercial real estate and the whole gamut of concerns people have.

Gerald Lipkin

I’ve had conversations with several of our larger builders recently. Across the board, they all tell me that foot traffic is way up. That they’re seeing a lot more people kicking the tires, coming around, looking at the models. They haven’t been pulling the trigger yet but they’ve been looking. Although, I heard from one of our builders yesterday that increased sale that he was seeing. And on Sunday, another builder told me that they’d seen higher levels of sales in the last month, than they’ve seen in the last year. So that gives me some encouragement. All right?

I also think that New York City, which was helped dramatically last year by the Euro versus the dollar should be helped even more this year, because the Euro against the dollar is a lot richer this year than it was last year, significantly. So that makes people who come to this country. So foreign traffic in Manhattan should be up. And if foreign traffic is up, that means the hotels are doing better. That they are getting -- it runs through the whole system.

So I am heartened that at least in this part of the country, as to both retail sales, residential sales, rentals -- I know of a project -- you know the area that one of our developers put up in Bergen County in apartment building. And he told me yesterday it was 100% rented. And he just finished completion of the project in the last month or two. So that indicates to me that there is activity again out there.

Collyn Gilbert - Stifel Nicolaus

Okay.

Gerald Lipkin

And we better remember the population in this part of the country is growing also.

Collyn Gilbert - Stifel Nicolaus

Okay. And so, tying that back into your comments that you guys have made, and Alan you said on the line usage was within your commercial customer base. Is it just -- is it truly reflective of just their conservative nature and just waiting? Maybe that won’t be a leading indicator. If we start to see that line usage increased, that may be more of a lagging indicator?

Gerald Lipkin

I think it could be.

Alan Eskow

No. That's all right. Yes, it could certainly be a lagging indicator. We just have to wait and see what’s going to happen to those inventories though and how they envision sales to take place. That’s what it’s really all about for them.

Collyn Gilbert - Stifel Nicolaus

Okay.

Gerald Lipkin

Yes, there isn't -- not only among our customers. I think it’s across the country, they're reviewing the REIT. Inventory control is much tighter today than it has been in prior years.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay, that’s helpful. Thanks.

Gerald Lipkin

Good. Thanks.

Operator

The next question comes from the line of David Darst with FTN Equity Capital.

David Darst - FTN Equity Capital

Good morning.

Gerald Lipkin

Good morning, Dave.

Alan Eskow

Good morning.

David Darst - FTN Equity Capital

Could you comment on the appraisal values for commercial real estate properties that you’re seeing in both New Jersey and New York, and then what impact does that having on your renewals?

Alan Eskow

I think for the most part, from a renewal standpoint, I think Gerry has talked about this before, a lot of our loans are not balloon loans. They are for the most part, fully or mostly amortizing loans. And therefore from -- we’re not necessarily as concerned about the appraised value of those properties as we are about the borrower’s ability to make payments and continue to keep his loan current. From the standpoint of impairment, we’re using that for purpose of appraisals and other methods to come up with valuation so that we’re comfortable that we are recording the appropriate collateral values on it.

Gerald Lipkin

We have not seen the level of value drop in Northern New Jersey and New York City that I’m hearing in other parts of the country and seeing in statistics. I saw, for example, in Los Angeles that the housing prices were down 43%. I just saw that statistic this week, the housing prices high to present in our marketplace is down approximately 18%. So we’re not experiencing that dramatic a price drop in appraisals.

David Darst - FTN Equity Capital

And that’s the same for your commercial real estate property for the--

Gerald Lipkin

Pretty much so. Pretty much so. As Alan pointed out very correctly, we underwrite differently here than many other banks. We don't do -- we rarely, rarely do interest-only commercial mortgages, all right?. Most of our -- almost the entire commercial mortgage portfolio is self-amortizing While we may write the loan for 20 years on an amortizing basis, the only thing that we protect -- how we protect ourselves is we write it like in arms so that the interest rate adjusts every five years or seven years.

But the loan itself, from inception, has been amortizing. So if we wrote the loan six years ago, while the value may have gone up or came down, it doesn’t really matter. Our loan keeps coming down in value -- in outstanding principle, protects us.

David Darst - FTN Equity Capital

Okay. Thank you.

Operator

(Operator instructions) Please continue, there are no further questions.

Gerald Lipkin

All right. Well, thank you all for coming. We’ll see you in three months.

Operator

Ladies and gentlemen, this conference will be available for replay beginning today at 1:00 p.m. Eastern, and running through Thursday, October 29th, at midnight Eastern Time. You may access the AT&T executive playback service by dialing 1-800-475-6701, and entering the access code of 116046. Those numbers again for the replay are 1-800-475-6701, with the access code of 116046.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Valley National Bancorp Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts