Valley National Bancorp Q4 2007 Earnings Call Transcript

| About: Valley National (VLY)

Valley National Bancorp (NYSE:VLY)

Q4 2007 Earnings Call

January 24 2008 11:00 am ET


Gerald Lipkin - Chairman, President, and CEO

Dianne Grenz - Investor Relations

Alan Eskow - EVP and CFO


Martin Meryerson - M.H Meryerson & Co.

Collyn Gilbert - Stifel Nicolaus


Ladies and gentlemen thank you for standing by, and welcome to the Valley National Banc Fourth Quarter 2007 Earnings Release. 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).

I will now turn the conference over to your host; Chairman, President, and CEO, Gerald Lipkin. Please go ahead.

Gerald Lipkin

Good morning and welcome to our fourth quarter and full year 2007 Earnings Call. I'd like to call now on Dianne Grenz to read the forward-looking statement.

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 and strategies, management's expectations about earnings, the direction and [severity] of changes in interest rates, effective tax rates, new and existing programs and products, relationships, opportunities, technology, the economy, market conditions, and the impact of management's adoption, interpretation and implementation of new or existing accounting pronouncements.

These forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from the results the forward-looking statements contemplate. 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, 2006, 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, and again good morning. Well, exclusive of an accounting charge which I will discuss shortly, we are pleased with our full year and quarterly results. Our avoidance of subprime mortgages, CDOs, SIVs and other forms of exotic high risk financial instruments allowed us to produce consistent results in a very tumultuous market.

Without the charge, core operating earnings for the quarter and year were strong, and inline with our expectations. Our core adjusted return on average tangible equity was 21.35% for the quarter and 22.81% for the full year. Our core adjusted return on average assets and efficiency ratios were all inline with Valley's historical averages, and actually reflected an improvement from the third quarter.

As I mentioned earlier, during the quarter Valley incurred a net after tax charge of $10.4 million associated with an accounting adjustment for Fannie Mae and Freddie Mac Aa3 rated investment grade perpetual preferred securities, where market value depreciation has been classified as an other than temporary impairment. The charge is attributable to eight separate securities which as of December 31, decreased significantly in market value.

According to the SEC guidelines on FAS 115, unless management can demonstrate a clear probability of full recovery within six to nine months, the accounting charge which already had been put through equity since the securities were classified as available for sale; must be realized through current earnings.

The devaluation of these investment grade securities is by no means directly attributable to the meltdown and subprime loan market, but rather than the marketplace view of Fannie Mae and Freddie Mac.

All dividend payments are and have all has been [occurring] and Moody's has reaffirmed the [issue] of rating as recently as this month. It should also be noted that since December 31, these securities already have increased in value by approximately $3 million, and overtime we anticipate a significant recovery in the value of these securities.

However, due to the accounting guidelines, no potential gains will be realized into income until the securities are redeemed or sold. While not immune to the economy, to date Valley has avoided the credit deterioration unfolding throughout the banking industry. The balance sheet management strategies and constraint in asset generation employed by the bank over the past few years, continues to pay immense dividends.

Unlike many of our peers, our overall credit quality remains strong. Net charge-offs are really 0.14% for the year. Looking back 10 years, including multiple credit cycles, our annual net charge-offs to average loan ratio had never exceeded 0.35%. Total non-performing assets as a percentage of total loans for the current period actually decreased to 0.38% on a length quarter basis and remained relatively flat with our December 2006 figure.

The length quarter increase in loans past due 90 days and still accruing, is partially the result of an increase in matured loans in the normal process of renewal and does not reflect a systemic change in the performance of the aggregate loan portfolio.

Considering that we have a loan portfolio of approximately $8.5 billion and only $8.5 million in loans past due 90 days are still accruing, the level of loans in this category remains low.

Loans past due in excess of 30 days were 1% of total loans at December 31, 2007, compared to 0.79% last quarter and 0.84% in the year ago period. However, the current period includes $10 million in loans, which since December 31, 2007 have either matured, they've been brought current, or paid off. Adjusting for these loans, the December 31, 2000 figure for loans past due in excess of 30 days would have been 0.88%, inline with our recent results.

Throughout the bank, the 30-day plus loan delinquency levels also remains low by Valley standards, as well as compared to the industry. For example, out of a portfolio of nearly 15,000 home equity loans, only seven were delinquent as of December 31, resulting in a 30 day plus delinquency rate of 0.05%. Similarly, our residential mortgage portfolio with approximately 9000 loans and nearly $2 billion in outstanding had only 57 loans delinquent more than 30 days at year end.

Furthermore, a departmental evaluation of those loans leads us to believe that we will not experience losses because of their conservative loan-to-value ratio. Exclusive of our SBA loan portfolio, which is largely guaranteed by the US government, our commercial lending portfolio which has approximately $4.4 billion in outstanding balances had a 30-day plus delinquency rate of only 1.11% at December 31, 2007.

Sensing the problems in the residential real estate market as a whole, we further fortified our loan portfolio by allowing our commercial construction real estate portfolio to shrink by nearly a $125 million or 23.5% during the past year. The credit quality within our consumer lending portfolio consists mainly of indirect originated loans, and that remains exceptional. 30-day plus delinquencies at quarter end average 1.17%, roughly 60% of the portfolio's historical 10 year average annual, and significantly below the industry average.

Net charge-offs within our consumer lending portfolio, remained at a level consistent with our 10 year history. While many within the indirect auto industry or actively pursuing exit strategies. We continue to strategically enhance our efforts and believe our prudent lending strategy focusing only on "A" paper, coupled with our experience in this market will continue to generate good returns and distinct long term growth opportunities.

During 2007, our automobile lending portfolio increased nearly 17%. We’re now the fourth largest auto lender in New Jersey up from eight in 2006. In Pennsylvania, we moved up to 17th from 28th, and in New York we increased from 47th to 25th. As we continue to develop our expansion strategy, growth will be less dependent on economic conditions in New Jersey, but rather that of the entire regional auto industry.

Furthermore, our previously announced plans, to actively sell off of automobile originations without financial recourse to Valley through the secondary market, have been placed on hold for the foreseeable future, as viable counter parties that purchases this paper have exited the market.

During the quarter, total loans increased 6% annualized. However this includes the repayment of a short-term, $141 million credit facility, which was originated relatively late in the third quarter, and as intended paid off early in the fourth quarter. Excluding the single credit, loans increased nearly 13% on an annualized basis during the quarter. While, news headlines continue to report a real estate melt down, application and funding activity at Valley remained strong.

On an annualized basis, both the residential and commercial mortgage portfolios increased 27% and 15% respectively. On a consolidated basis, we originated over $550 million in loans during the fourth quarter, which was higher than any of the trailing 10 quarters and marked the best fourth quarter since 2002 at the peak of the residential mortgage refinance boom. All of what which makes us optimistic about the future.

We continue to focus on our branch expansion program in which we have strength over $75 million in capital. Since 2006, we have opened 18 branches including four within the last three weeks.

Our entry in to Brooklyn and Queens has been extremely successful. We now have three full service branches in Brooklyn, and will be opening our second location in Queens next week. By year end, we anticipate opening 8 more locations bringing the programs total to 26.

By 2010, we expect to have added a total of 50 new branches to our network. Although as a result of this strategy current period earnings are negatively impacted due to capital outlay and increased operating expenses, we believe the long-term benefits to both our franchise value and earnings will be significant.

Today's operating environment remains challenging. As the economy weakens, disruption in the capital markets persists and the [pending] outcome of the subprime meltdown for others in the financial industry and many borrowers becomes unavoidable.

The manner in which Valley has operated and continues to operate becomes more paramount. During 2007, Valley celebrated its 80th year of continuous service to the community. During this timeframe, not once have we reported a loosing quarter.

Operating a conservative organization, which is apparent to its investors and the type of risk it engages, is the model that we have followed throughout our history. The actions we have taken, and more importantly, the opportunities that we have foregone, continue to prove themselves to be the right approach for the long-term well being of the bank, and most importantly our share holders.

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

Alan Eskow

Thank you, Gerry and good Morning everyone. On the balance sheet, our length quarter total assets increased over $300 million driven mainly by increases in loans of $126 million and an increase in other assets. The increase in other assets is attributable to the sale of investment securities which were sold during the fourth quarter, but has yet to sell, as well as a re-classification of approximately $ million of non- marketable Federal Reserve Bank and FHLBE securities from the health and maturity portfolios.

Exclusive of the request; the investment portfolio increased by approximately $100 million during the quarter. As Gerry mentioned earlier, the increase in loans is a net of a short term $141 million credit facility, which originated late in the third quarter, and paid off in early in the fourth quarter.

Excluding this loan, length quarter loan growth was strong, and was evidenced throughout every business line. The commercial mortgage portfolio increased over 15% annualized, representing the first length quarter growth since September of 2006. We currently have witnessed moderate adjustments within the pricing of credits. However, competition remains strong. Some of the most active players over the last few years have withdrawn from the market place due to liquidity issues of their own, while some other have attempted to reintroduce more rational risk based pricing.

We expect continued growth as the alternatives available as many of our time based borrowers diminish. Additionally, we have witnessed solid sequential quarter growth in the residential mortgage portfolio. As the secondary market for "A" paper jumbo loans works through some market dislocation. We have had an opportunity to purchase high quality paper at attractive risk based spreads.

Additionally, organic applications, either originated through our retail branches and our internal mortgage representatives remained quite active, reaching nearly $80 million in the month of December alone.

As expected, due to the seasonality within our market place, length quarter new originations for the indirect auto paper, auto dealer portfolio declined. However, as a result of our strategic initiative to expand Valley's geographic presence, new origination increased approximately 30% from the comparable period in 2006.

As Valley continued to enter new market places, we anticipate some reduction in origination volatility due to seasonality. Sequential quarter total deposits of $8.1 billion decrease by $349 million mainly the result of the aforementioned short-term loan, which was collateralized by a certificate of deposit, and the normal maturity of many high core CDs which Valley actively elected to be less price competitive. Length quarter non-interest bearing demand deposits increased 4.8% and comprised approximately 24% of our total deposit base.

The growth in earning assets and the resultant expected maturity of those combined with the rationality or irrationality of our competition in pricing deposits, and the availability of alternative funding sources will directly impact future period deposit growth. Maintaining a balance sheet management strategy, which attempts to effectively match the duration of assets originated with that of their funding resources. This is more important than merely growing high cost and more rate-sensitive deposits.

Net interest income and net interest margin. The net interest margin increased 1 basis point from the prior quarter, while net interest income increased approximately 900,000 marking the first sequential quarter increase since the third quarter of 2005. Average loans and investments increased over $250 million from the third quarter, as we attempted to deploy excess liquidity from federal funds, the higher yielding assets.

Total loan yield increased mainly as a result of the decrease in the prime rate as well as the decline in yields on new loans originated. However Valley was able to reduce funding cost to a greater degree than the decrease in earning asset yields. The decrease in funding cost is significant, as this comes at a time when Valley is actively marketing the positive initiatives which typically accompanies de novo branch openings.

During the quarter, the steepening of the yield curve provided Valley with opportunities regarding balance sheet growth, which were previously unobtainable, due to the relatively flatter inverted yield curve. As noted in prior releases, a steepening of the yield curve will help net interest income as a result of balance sheet growth. This will also help mitigate the loss of interest income on our prime based loan portfolio due to the recent FED actions.

Additionally, a reduction in funding cost, combined with the encouraging signs of increased lending volumes in most lending areas should help to offset a decrease in interest income. Our reported net income for the quarter of $27.7 million was negatively impacted by the other than temporary impairment charge discussed by Gerry earlier, as well as, the goodwill impairment charge associated with Valley's decision to sell its wholly owned broker-dealer subsidiary. The decision to sell this subsidiary was as a result of the company not meeting Valley's internal profitability objectives.

Exclusive of these charges, Valley's quarter adjusted net income was $39.5 million, compared with $36.5 million in the third quarter. Additionally, exclusive of the aforementioned impairment charges, operating leverage for the quarter was positive by over 2%. The improvement in operating earnings reflects the growth in Valley's net interest income, as well as, a decrease in operating expenses. The increase in core operating earnings comes at a point in time when current period earnings continue to be negatively impacted by our de novo branch strategy campaign.

We have allocated, as Gerry mentioned, over $75 million of free capital to the branch

expansion initiative, which on a comparative basis could have been used to fund loan growth or reduce borrowing cost. Additionally direct net operating cost for 2007 exceeded $11 million for the 18 branches opened since 2006. While we believe we will see a long-term increase in net income, currently operating revenue, net income, and earnings per share are negatively impacted.

During the quarter Valley repurchased 221,400 shares of its common stock at an average price of $18.50. Valley's tangible equity to tangible assets remained relatively flat from the prior quarter at 6.11%. Tangible equity to risk weighted assets for the fourth quarter was 7.66%, Valley's capital ratios allowed flexibility in the manner in which equity is deployed, whether it be additional financial leverage, bank acquisition or other strategies which maybe accretive to future earnings.

With this, I conclude my prepared remarks and we will open the floor to questions.

Question-and-Answer Session

Gerald Lipkin

Thank you, Alan. Questions?


(Operator Instructions). And our first question is from the line of Martin Meyerson with M.H. Meyerson & Co. Go ahead please.

Martin Meryerson - M.H Meryerson & Co.

Good morning.

Gerald Lipkin

Good morning.

Martin Meryerson - M.H Meryerson & Co

Gerry I was wandering if you are able to commit at this time, the 5% stock dividend that you have done for 19 years?

Gerald Lipkin

That will be up to our directors, and they will do that as they normally do. They will review the situation, usually the day of the annual meeting.

Alan Eskow

I could not make any comment on that.

Martin Meryerson - M.H Meryerson & Co.

Thank you.


Your next question is form the line of [Collyn Gilbert from Stifel Nicolaus]. Go ahead please.

Collyn Gilbert - Stifel Nicolaus

Thanks, good morning gentlemen. Just a couple of question. Could you Alan remind us of what percent of the loan portfolio reprises with prime?

Alan Eskow

Probably about $1.2 billion in total.

Collyn Gilbert - Stifel Nicolaus


Alan Eskow

About $8.5 billion. So, I don’t know whatever that percent is.

Collyn Gilbert -Stifel Nicolaus

Yes, got you, okay. And then, in terms of putting the auto deal kind of on hold now, had that really materialized in the much, I mean are we going to see a loss in fee income because of that?

Alan Eskow

No, no, we never sold of them. We never got one.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay, alright.

Alan Eskow

The counter party that we were negotiating with kept stalling us, and eventually backed away from it.

Collyn Gilbert - Stifel Nicolaus

Got you, okay. And then,, just on the deposit side, you guys have kind of been the only one it seems like in your markets that have been able to reduce deposit pricing. Do you anticipate to push further interest rate reductions through or were you kind of the leader and now you are just going to wait and see how the rest of it unfolds?

Alan Eskow

I think we are going to continue to decrease deposits, deposit rates as we see fit, as we watch what the FED does and treasury markets do.

Collyn Gilbert - Stifel Nicolaus

Okay. And then just finally on the Glen Rauch situation, was that -- in terms if them not meeting your objective, is that something that you've been tracking them for a while now, or did you look at something at year end and kind of went through your businesses and reassess who was most profitable and who is less than?

Gerald Lipkin

We've been tracking them for quite dome time, waiting for it to meet our objective. It was unable to reach that point where it met our objectives and we felt we can better deploy the capital.

Collyn Gilbert - Stifel Nicolaus

Okay. So there is nothing else on the horizon of business that you guys would get out of or sell or anything like that; that maybe would meet these profitability objectives?

Gerald Lipkin


Collyn Gilbert - Stifel Nicolaus

Okay, that was it. Thanks.

Alan Eskow


Gerald Lipkin

Thank you.


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

Gerald Lipkin

Well I thank everybody for tuning in and look forward to speaking to you at the end of the next quarter.


Ladies and gentlemen this conference will be available for replay after 2:30 P.M today through mid-night Thursday, January 31. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701, and entering the access code, 900061. 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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