Hudson Valley Holding's (HVB) CEO Stephen Brown On Q2 2014 Results - Earnings Call Transcript

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 |  About: Hudson Valley Holding Corp. (HVB)
by: SA Transcripts

Operator

Good morning. Welcome to the Hudson Valley Holding Corp. Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Wendy Croker, First Vice President, Shareholder Relations. Please go ahead.

Wendy Croker

Thank you, Emily. Good morning, everyone. I’d like to thank you for participating in Hudson Valley Holding Corp. second quarter earnings conference call both by phone and through the webcast. If you have not read the earnings release we issued after market close Friday night, you may access it along with financial tables and schedules through our website at www.hudsonvalleybank.com using the Investor Relations’ link at the top right of the screen.

Before we begin, I would like to remind you that during this presentation, we may make comments which include forward-looking statements relating to the banking industry and to Hudson Valley Holding Corp. In this regard, you should be mindful of the risks and uncertainties that can cause future results to vary materially from expectations. We encourage participants to refer to the company’s SEC filings including those found on the 10-K and 10-Q for a complete description of risk factors.

Presenting today are Steve Brown, President and Chief Executive Officer; and Mike Indiveri, Executive Vice President and Chief Financial Officer. Also joining us today will be our new Chief Banking Officer, Scott Skorobohaty.

At this time, I would like to turn the conference over to Steve.

Stephen R. Brown

Thank you, Wendy. Thanks everybody for joining us this morning. We’re very pleased with the significant asset and deposit growth we achieved in the second quarter along with continued strength in our asset quality.

Reflecting carefully on our recent performance and our outlook, our Board approved the 33% increase in the quarterly dividend from $0.06 per share to $0.08 per share. This marks the first increase in our quarterly cash dividend since 2011, underscoring our progress and executing our business plan and our confidence in Hudson Valley’s prospects and potential.

In terms of lending in the second quarter, we increased loans by 6.7% with balances up by $110 million. Commercial real estate was up 6%, multifamily lending increased 8% during the second quarter. These continued to be areas of strength and expertise for Hudson Valley and they reflect our confidence in the metro New York area and our commitment to remain competitive in our marketplace.

We’re taking advantage of prudent lending opportunities with very high quality credits in neighborhoods our teams know intimately well. We also increased C&I loans by nearly 9% benefiting significantly from the contributions of our asset-based lending group that we launched late last year.

In equipment financing, we’ve seen immediate traction since we launched HVB Equipment Capital in March. We see a wealth of opportunity for our asset-based lending and equipment financing groups among both our long-time customers and prospects in our market and beyond.

As with all our lines of business, we’re maintaining our discipline on terms and structure. Residential mortgage lending which we’ve transformed into a competitive product for our market continues to be soft as it is around the country.

Turning to the other side of the balance sheet, we continue to grow what we believe is metro New York’s premier core deposit franchise. Deposits grew 11.7% in the second quarter. Deposit gathering in the quarter was broad-based in from both new and existing customers with law firms, property managers and municipalities remaining strong among the segments for these efforts.

We remain focused on our low cost sticky deposit base. We’ve kept deposit costs to just 17 basis points in the quarter. At June 30, noninterest bearing deposits comprised 38% of total deposits and core deposits represented 97% of total which we expect to continue growing over time. Clearly, deposit gathering and low cost sticky relationships is a core competency of our institution.

To complement our longstanding strength in building durable depositor and borrower relationships through personalized service, we further leveraged technology for our customers’ benefit. As we announced in January, we launched the $4 million, five-year strategic investment to develop and enhance our technology platforms delivering advanced mobile banking and cash management capabilities.

These new state-of-the-art platforms for online banking will help our customers efficiently and effectively manage their business and personal finances electronically where they choose from the office, on the road or at home. Integration of these platforms will also position us to move up market to serve new markets along with a larger population of our longstanding niche markets where we bring considerable expertise and insights. These enhanced mobile banking and cash management platforms are on target for introduction later this year.

Before turning the call over to Mike, I wanted to introduce Scott, our new Chief Banking Officer. Scott brings with him nearly 20 years of experience in banking and real estate particularly in many of our key areas of focus. He’s already bringing energy and insights to our efforts to develop business and create new products that strengthen our customer relationships as well as recruit and lead highly effective banking teams.

I’ll now ask Scott for some comments.

Scott J. Skorobohaty

Thanks, Steve. I am excited to have joined a commercial banking entity steeped in great tradition, a leader in community banking and an institution providing a client experience that is second to none. Augmenting an experienced executive management team along with a talented workforce, our future looks bright as we look to expand our entity’s footprint and realize our bank’s growth plan.

Collectively, we will determine the optimal path of execution that will exceed our client’s expectations foremost resulting in bringing an already unique and special institution to the next level on all fronts. Together, we will focus on traditional banking growth of deposits and loans and constantly consider and plan other verticals that align best with our core competencies.

Our asset-based lending group and equipment financing division are excellent examples of this that are beginning to take traction. We look forward to continuing this strategy but never forgetting what it is that we do best, the servicing and growth of commercial banking deposits and loans, assisting our clients grow, adding new clients to the Hudson Valley Bank family and pursuing business lines that are parallel with current and future client financial pursuits.

So in conclusion, I look forward to assisting and building and growing Hudson Valley Bank and making it the premier community commercial banking institution here in the metro New York area. Steve?

Stephen R. Brown

Thanks, Scott. We now have what I believe is a first rate executive management team that provides the expertise we need to fully leverage our core strengths while executing our business plan and maximizing shareholder value.

With that, I’d like to turn the call over to Mike to share his thoughts on the quarter.

Michael J. Indiveri

Thank you, Steve. Since you’ve all had the opportunity to see our release which we issued last Friday, I want to touch on a few key items before we move on and take your questions. Net income was $2.4 million or $0.12 per diluted share in the second quarter of 2014 compared to $0.14 per diluted share in the linked quarter of this year. That quarter excluded the effect of the FHLB prepayment penalty and the effect of the New York tax law change, as well.

The second quarter of 2014 included expenditures of $0.02 per diluted share related to executive severance payments and professional fees incurred to upgrade our residential mortgage underwriting platform. The upgrade in the residential mortgage underwriting platform enables us to improve our borrowers’ experience as well as improve the efficiency and capacity of our residential lending operation.

Net interest income improved from both the linked and prior year quarters reflecting continued liquidity deployment. The net interest margin declined by nine basis points during the quarter, largely the result of the low yield on new loans not matching the higher yield on maturing loans.

As we saw in our earnings release, in June we purchased $304 million in securities taking the investment portfolio from 538.3 million to 844.7 million at the end of the second quarter. Given the timing of the purchases, we will not see the full benefit of the securities portfolio until the third quarter.

Acquired securities were high quality agency bonds and mortgage-backed securities. As we noted in our earnings release, the average yield of these securities was 1.79%, the average life is 4.8 years and the average duration is 3.8 years. The newly purchased securities brought our total security portfolio average yields 2.08% as of June 30.

I want to emphasize that we view this as a good short-term use of cash. We project that the investment portfolio will generate approximately $275 million in cash inflows over the next 18 months, as well as providing ample collateral for future borrowing should loan growth exceed our expectations. As you can see, our balance sheet remains well positioned to take advantage of any increase in interest rates while continuing to generate ample liquidity to fund loan growth.

On the funding side, despite the significant deposit growth in the second quarter, our core deposit base averaged 17 basis points unchanged from the linked quarter. In terms of operating expenses, you’ll see that we’ve increased our spending on advertising to raise the awareness and visibility of our brand and of our products and services. Otherwise, aside from a modest increase in occupancy expenses there were no other notable changes in expenses in the second quarter.

The effective tax rate in the second quarter was 30.6% compared to 31.5% in the first quarter. Our effective tax rate continues to reflect non-taxable income from our tax-exempt investment portfolio, our bank-owned life insurance portfolio, our REIT subsidiary and our captive insurance company.

Turning to credit. Overall portfolio trends continued to improve. Asset quality showed continued strength reflecting an improving regional marketplace and improving general economic trends. Nonperforming assets continued to improve as well, totaling $20.5 million or 0.64% of total assets at June 30, 2014 compared to $21 million or 0.72% of total assets at March 31, 2014.

Provision expense was $460,000 in the second quarter and our allowance stood at 1.54% of total loans at June 30, 2014 compared to 1.62% at March 31, 2014. The modest second quarter provision for loan losses were 460,000 reflects continued improvement in the overall credit quality of our portfolio and in general economic environment we see today.

We experienced $90,000 in net charge-offs during the quarter with the additional provisions supporting our strong loan growth. With last quarter’s net recoveries of 836,000, we remain in a net recovery position halfway through the year. Finally, I want to highlight our capital position. As you can from our filing, our capital position remains very strong.

With that, I will now turn the call over to Steve for his closing thoughts and comments.

Stephen R. Brown

Thanks, Mike. Overall, we had a solid quarter and we’re pleased with our disciplined execution of our business strategy. Our core deposits continue to grow. Loan growth is accelerating in both real estate and C&I. Recently launched new lines of lending are ramping up. We remain focused on expense management. We expect any growth in noninterest expense to be directly related to expanding existing or new lines of business to drive revenue growth.

We are working to deploy liquidity through loan growth and possible securities growth through year end with a goal to reduce cash to less than 6% of assets. Our optimism continues to grow as we execute on our more diversified loan growth strategy as we continue to grow our premier deposit base and as we more effectively leverage our capital and expense base.

I’d now like to ask the operator to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Mark Fitzgibbon of Sandler O’Neill & Partners. Please go ahead.

Mark Fitzgibbon - Sandler O’Neill & Partners

Good morning.

Stephen R. Brown

Hi, Mark.

Michael J. Indiveri

Hi, Mark.

Mark Fitzgibbon - Sandler O’Neill & Partners

Hi, guys. Just to clarify first in one of your comments to take the cash assets balance down to less than 6%. Is that by the end of 2014?

Michael J. Indiveri

Our target is to get it there by the end of this year.

Mark Fitzgibbon - Sandler O’Neill & Partners

Okay. And then secondly, with the deployment of cash and the remixing of assets that’s going on, should the net interest margins slowly start to rise here in coming quarters?

Michael J. Indiveri

Yes. So as we continue to deploy the cash into higher yielding assets, we would hope that the net interest margin starts to increase.

Mark Fitzgibbon - Sandler O’Neill & Partners

Were you surprised by the magnitude of the compression in margin in the second quarter?

Michael J. Indiveri

We still have a fair number of loans from the 2008, 2009 vintage which come up for maturity, so we still fight that current. And as you know, the rates have come down considerably again and we can push so much but it was a little more than we would have liked to have seen.

Mark Fitzgibbon - Sandler O’Neill & Partners

Okay. And then I wondered if you could share with us what the total footings are in the ABL book right now?

Michael J. Indiveri

The ABL book has about 75 million of committed loans with about 35 to 37 drawn.

Mark Fitzgibbon - Sandler O’Neill & Partners

Okay. And then as it relates to capital, I wondered if you could share with us – I saw you increase the dividend. Any thoughts on a buyback program?

Michael J. Indiveri

A buyback program is a potential utilization of capital. It’s something that we talked about periodically but is not currently on the drawing board for the immediate future.

Mark Fitzgibbon - Sandler O’Neill & Partners

Thank you.

Operator

(Operator Instructions). Your next question is from John Moran of Macquarie. Please go ahead.

John Moran - Macquarie Capital, Inc.

Hi, guys.

Stephen R. Brown

Hi, John.

Michael J. Indiveri

Hi, John.

John Moran - Macquarie Capital, Inc.

Just a quick question, I think maybe part of it was hit in the prepared remarks. It sounds like ad spend went up and is going to stay up on the OpEx line. Did I hear that correctly?

Stephen R. Brown

The bank has traditionally not done much real advertising, so this year we’ve launched more programs to bring our brand awareness out there. I would expect we will continue to market our brand. And as we launch our electronic banking platform, we anticipate rolling out advertising to support that as well. So, a simple answer is probably yes.

John Moran - Macquarie Capital, Inc.

Got it, okay, that’s helpful. And then just on the one-time stuff that you guys called out, the $0.02 on severance and then the [IT] upgrade on the resi mortgage stuff, can you break that out? Was that 0.01 each or was it more weighted towards one or the other?

Stephen R. Brown

I don’t want to break it out for a variety of reasons. Again, severance is what it is and I don’t want to start breaking that out in public but it’s $0.02 and it’s something we need – we just decided to put it behind us. We could have made the case to capitalize some of the upgrades to the residential platform but it was a small enough number we decided to skip past it.

John Moran - Macquarie Capital, Inc.

Okay, fair enough. And then if I heard you correctly on tax rate, maybe we should be thinking about something trending more at this quarter’s run rate versus where it had been historically. I think you guys were running a little bit higher than where we came in this quarter. Is that a fair statement?

Stephen R. Brown

So more of what we’re putting on is not tax exempt, so the entire investment portfolio purchase that we added the incremental amount is 100% taxable. I would expect that we should start inching up incrementally as we generate more revenue, especially from the loan side and the nontaxable. The taxable portion of the investment portfolio, I don’t think it’s going to stay down where it is indefinitely.

John Moran - Macquarie Capital, Inc.

Sure. Yes, that makes sense. That obviously makes sense. Thanks. And then the last one that I have is just – I mean obviously you’ve got a pretty good first half credit experience here and certainly things are kind of cleaned up. As you think about kind of reserve methodology, is there a sort of loan – a reserve to loans sort of number that you guys are targeting or any kind of help that you could give us in terms of thinking about provision charge-offs and how those things are expected to trend?

Stephen R. Brown

We do not target a number for the reserve. We go through a fairly extensive analysis every quarter. As we continue to grow loan volume, we would expect we have to provide for at least anticipated experiences and historical activity on those lines. Charge-offs are – I mean we continue to work the credit quality. Charge-offs and recovery pretty much happen when they happen. I can’t give you any forecast on what might look like.

John Moran - Macquarie Capital, Inc.

Sure. But fair to say that I mean – you’re in a net recovery position for the six months and if charge-offs kind of run low, provision is presumably going to sort of run low, it will cover charge-offs and then provide a little bit for the growth, right?

Stephen R. Brown

We would expect to cover charge-offs and provide for growth.

John Moran - Macquarie Capital, Inc.

Sounds good. Thanks very much guys.

Stephen R. Brown

Okay, John.

Operator

Our next question is from Travis Lan of KBW. Please go ahead.

Travis Lan - Keefe, Bruyette & Woods

Thanks. Good morning, guys. Just one from me. Some other banks in your market said that if they wanted to meaningfully grow deposits, they thought they’d have to pay up to get them. I just wondered if you could just provide a little bit more color on the deposit growth in the quarter. Obviously, you guys have an extremely strong deposit franchise but just kind of how you got that growth and why maybe it was so large this quarter? Thanks.

Stephen R. Brown

Well, I think Travis that’s what we do here in institution. So typically in the second quarter of the year there is some seasonal effects and that largely comes from our municipal arena which we saw this year and the rest of it was broad based across most of our deposit segments. So I think it’s reflective of the general economy and the inflow of deposits but also despite the liquidity we’ve been consistent in saying that we will continue to grow our deposit franchise in the way that we have which means we’re looking for core, stable, low cost money and we had a good quarter relative to that as well as some upswing in seasonal factors that we see typically every second quarter for a long time now.

Travis Lan - Keefe, Bruyette & Woods

Sure. Thanks.

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to Steve Brown for any closing remarks.

Stephen R. Brown

I want to thank everybody for participating in our call this morning and thank you for your interest in and support of Hudson Valley.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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