By Matthias Rieker
The humming home mortgage business is expected to have slowed at
most banks in the first quarter--but not at Valley National Bancorp
(VLY), according to the bank's chief executive.
"We had a very strong first quarter in both numbers and dollars
of originations," stronger than the record fourth quarter, said
Chairman and Chief Executive Gerald Lipkin in an interview earlier
this week.
Mortgage applications remain strong so far in the
second-quarter, Mr. Lipkin said. "I am optimistic," he said.
Still, Valley National, like many banks, continues to feel the
pressure from the slow economic recovery. Businesses aren't
expanding, and that puts pressure on commercial loan growth and the
bank's profit margin from lending.
"It's challenging," Mr. Lipkin said about commercial banking.
"There are opportunities for the businessperson, but they work
against the bank," because borrowers take out loans that refinance
their existing commercial loans and commercial mortgages at lower
interest rates. "What that does is drive down revenue," he
said.
The regional bank, with $16 billion in assets and 210 branches
in New Jersey and New York, has come through the financial crisis
in better shape than many regional banks, but, like most banks now
struggles to grow in the slow economic recovery. Low interest rates
have put pressure on profit margins.
Analysts have been expecting home-mortgage revenue to decline at
many banks because fewer homeowners likely refinanced their home in
the first quarter than in the fourth, and the margin banks make on
selling the loans to Fannie Mae and Freddie Mac are expected to
have declined. The Mortgage Bankers Association estimated that
first-quarter mortgage originations would fall 5.7% from the
fourth, to $482 billion.
On Friday, J.P. Morgan Chase & Co. (JPM) and Wells Fargo
& Co. (WFC) reported results that were confirming analysts
worries: At J.P. Morgan, revenue from mortgage banking fell 20%
from a year earlier and 17% from the fourth quarter, to $2.7
billion; at Wells Fargo, mortgage revenue fell 3% from a year
earlier and 9% from the fourth quarter, to $2.8 billion. Mortgage
originations rose at J.P. Morgan but fell at Wells Fargo.
J.P. Morgan missed even subdued analyst expectations "by a mile
on the revenue side on mortgage banking," Raymond James &
Associates analyst Anthony Polini said.
But Valley National, a relative newcomer to the mortgage market,
has cranked up its mortgage engine, and the expansion paid off: The
Wayne, N.J., bank has been offering to refinance mortgages at a
$499 flat fee in New Jersey since 2009, which has proven popular
with borrowers.
This January expanded the program to New York; by mid-month,
more than 250 New Yorkers had applied for a refinance, Mr. Lipkin
told investors in January. During the interview Wednesday, he said
superstorm Sandy hurt originations in New Jersey, but "the
increased [origination] volume in New York offset some of the
slower volumes elsewhere."
Morgan Stanley analyst Ken Zerbe said in an analyst report last
week that he expected the disruption from superstorm Sandy to hurt
Valley National's revenue, and mortgage originations to remain
flat.
But Mr. Lipkin said Wednesday, "Our program is becoming
increasingly popular," he said about the flat fee refinance offer.
"If we hadn't expanded, we wouldn't see that."
Of course, it is easier for Valley National to grow mortgage
earnings because the bank is so much smaller and new originations
make a bigger difference. It originated $531 million in mortgages
in the fourth quarter; Wells Fargo & Co. (WFC), the nation's
largest mortgage lender, which competes with Valley National in New
Jersey and New York, originated $125 billion.
"If we receive 50 to 75 [mortgage] applications a day, for us,
that's terrific," Mr. Lipkin. For Wells Fargo, it wouldn't do much.
"Our volume is so small compared to [big banks], we can move the
needle" by expanding, Mr. Lipkin said.
Valley National's margins on selling mortgages to
government-controlled mortgage companies Fannie Mae and Freddie Mac
is falling but the increase of originations is offsetting that
decline, Mr. Lipkin said.
Valley National is scheduled to report earnings on April 24;
analysts expect the bank to earn 18 cents per share, up from 17
cents a year earlier but down from 19 cents in the fourth quarter.
Fourth-quarter earnings per share had matched analyst
estimates.
In the fourth quarter, loans rose 12.7% from a year earlier, but
fell 1.1% from the third quarter, to $11 billion. In the first
quarter, "I don't see a lot of expansion" by businesses that would
require new loans, Mr. Lipkin said.
Sandler O'Neill + Partners LP analyst Mark Fitzgibbon said in a
research note last week while the economy seems to be picking up,
some banks have become "irrational" in pricing loans. "Given
[Valley National] discipline, this likely means that loan growth
isn't likely to pick up materially in the near-term," he said.
Write to Matthias Rieker at matthias.rieker@dowjones.com
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