Valley National Bancorp (NYSE:VLY)
Q1 2008 Earnings Call
April 24, 2008 11:00 am ET
Gerald Lipkin - Chairman, President and CEO
Dianne Grenz - Director of Shareholder and Public Relations
Alan Eskow - EVP and CFO
Sandy Osborn - KBW
Peyton Green - FTN Midwest Securities
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 - Chairman, President and CEO
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 - Director of Shareholder and Public Relations
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 - Chairman, President and CEO
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 - EVP and CFO
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:K) expenses had been met for many in the fourth quarter.
Additionally, during the period, Valley accelerated its stock award expense of approximately $900,000, mainly attributable for the age of employees as required under FAS 123(NYSE:R). As a result of these expenses, we anticipate operating expenses within this category to decline and normalize throughout the remainder of 2008. Valley's expansion strategy continues to impact of direct operating expenses as well as indirectly net interest income. On a linked quarter basis, direct operating expenses increased over $1 million due to the hiring of new commercial lenders and increased branch operating expenses. We have allocated over 75 million of free capital to the branch expansion initiative within the last 24 months, which on a comparative basis could have been used to fund loan growth or reduce borrowing costs. While we believe we will see a long-term increase in net income, currently operating revenue, net income, earnings per share and the efficiency ratio are negatively impacted by these.
Sequential period net interest income increased slightly, largely the result of growth in the balance sheet. Although, the net interest margin declined during the period from 341 to 335, we anticipate some improvement in the second quarter. The first quarter decline was mainly attributable to a decrease in the number of days from the fourth quarter, the premium paid on de novo branch deposits as well as the Fed funds are decreasing than the target Fed funds rate.
Due to Valley's asset sensitive balance sheet and immediate decrease in short-term interest rates has a negative impact on earnings until such time as our certificates of deposit reprice down. Over 80% of Valley's $3 billion time deposit portfolio reprices within a 12-month period. Additionally, due to increased loan demand, investment opportunities and financial market volatility, we have begun to redeploy some assets from our trading account and Fed fund sold to higher yielding alternatives.
Market forces surrounding a return to more rational risk-based pricing of loans coupled with the liquidity and capital issues facing many of our competitors continue to influence loan demand and earning asset growth. In a quarter, which is typically slow for loan growth due to seasonality as well as the cyclical nature of many of our customers, linked quarter loans expanded 8% on an annualized basis, similar to the growth experienced over the 12 months since the first quarter of 2007.
With the exception of construction and home equity lending, all mortgage loan categories increased. In addition to the growth on the balance sheet, Valley's commercial loan line commitments increased over 13%, although the usage was only up 3%. Loan growth in April remains strong combined with the anticipated increase in commercial line usage we expect another quarter of solid growth.
The loan loss provision for the quarter was $4 million, a decline of 864,000 from the fourth quarter and an increase of 2.1 million from the same period one year ago. We believe our current reserve allocations are more than adequate based on the current composition of loans, current delinquency rates, loss history experience and expected future losses.
Due to SEC guidance and Generally Accepted Accounting Principles, Valley is limited to the amount of provision expense each period. Future period loan loss provisions will continue to reflect the actual and expected delinquency rate, net charge-offs as well as economic conditions prevalent in the marketplace. Additionally, continued strong loan growth is another variable which will directly impact the future provision levels.
Total deposits of 8.4 billion increased sequentially 321 million mainly the result of increased retail certificates of deposit. The growth in deposits was accomplished late in the quarter, and as a result the average linked period deposit growth was negative, necessitating an increase in average long-term borrowings.
Valley will continue to maintain its balance sheet management strategy, which attends to effectively manage the duration of assets originating without the funding source. For the period, government deposits decreased approximately 30 million to 330 million. On an annual basis, the decrease was nearly $100 million. As Valley is able to increase deposits to relationship customers and part through our de novo expansion, we will continue to reduce our emphasis on transaction accounts with certain government entities.
As Gerry mentioned earlier, Valley's capital ratios remain sound. As of March 31, the impact of Valley's capital from changes in other comprehensive income is minor. On a linked quarter basis, other comprehensive income or OCI decreased $900,000 from negative 13 million to negative 12.1 million. The balance in the OCI account is largely the result of the pension plan as the variance between Valley's book value and market value of its investment and available for sale are only approximately $100,000. Additionally, although not a component of OCI, the book value of Valley's health and maturity investment portfolio is approximately only 3% greater than market value. On a total investment portfolio of nearly $3 billion, the consolidated variance between book and market is only 0.89%.
Valley's tangible common equity to tangible assets ratio as of March 31, 2008 was 5.92%. The tangible common equity to risk weighted assets for the same period was 7.75%, an increase from 7.66% the prior quarter. Valley's strong capital ratios allows the flexibility in the manner in which equity is deployed whether be it adding additional financial leverage, bank acquisitions or other strategies, which may be accretive to future earnings.
With this, I conclude my prepared remarks, and we will now open the floor to questions.
Gerald Lipkin - Chairman, President and CEO
Thank you, Alan. Does anybody have any questions?
(Operator instructions). And our first question is from Sandy Osborn with KBW. Please go ahead.
Good morning guys.
Good morning Sandy.
Quickly first, are you still projecting a 28% effective tax rate for the year?
It should be in that general range. Yes.
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?
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.
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?
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.
Okay. But generally you expect the margin to see some improvement in the next few quarters, is that correct?
Some improvement, yes.
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?
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.
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?
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.
Okay. Alright. Thank you guys.
You are welcome.
Our next question is from Peyton Green with FTN Midwest Securities. Go ahead please.
Yes. Good morning. I was wondering if you could comment, one, on the branch outlook…
…on the branch outlook, do you expect to open nine more or total of nine in the balance of ’08?
It will be a total of 10 for the year.
Okay. And so five are already opened.
No, nine more
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?
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?
Just the indirect auto book, yeah.
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?
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.
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?
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.
Okay, but it's not going to diffract from the overall ROA?
Okay, great. Thank you very much
Thank you. (Operator Instructions). Mr. Lipkin, we have no further questions.
Well, we thank everybody for tuning in. We will speak to you in three months. Everybody have a nice day.
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.
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