Virtus Convertible & Income 2024 Target Term Fund

For full-year 2007, net income was $140.3 million, or $0.71 per diluted share, versus $299.3 million, or $1.55 per diluted share in 2006. Fourth-quarter 2007 net income was $33.4 million, or $0.17 per diluted share, versus $62.8 million, or $0.32 per diluted share in Q4 2006. Year over year, assets rose 9%, loans rose 14%, and deposits rose 12%; in Q4, assets and deposits were basically flat while loans grew 5% linked quarter. Net interest margin rose to 332 bps from 313 bps in Q3 and was up 7 bps from 325 bps in Q4 2006. The company recorded a $55 million provision for credit losses, a pretax gain of about $22 million from the insurance brokerage sale, about $8.3 million of one-time pretax transaction costs, and about $6.7 million of pretax losses tied to equity method investments. Looking ahead, management projected Q1 2008 margin to be relatively flat and said margin could narrow during 2008 if LIBOR falls; it also expects 30-35 new store openings in 2008.

Robert Falese emphasized that the loan book remained healthy despite a challenging credit backdrop, with weakness concentrated in specific pockets rather than systemic issues across the footprint. He said mid-Atlantic problems were “not systemic,” and pointed to tighter underwriting in commercial real estate and construction, especially in Florida, where 23% of the increase in non-performing loans came from during 2007. His tone was cautious but confident, stressing secured lending, strong sponsorship, conservative loan-to-value discipline, and that the company felt it could handle foreseeable issues short of a recession.

Douglas Pauls focused on the quarter’s financial noise and balance-sheet repositioning. He said the company sold about $7.5 billion of primarily fixed-rate securities, reinvested into floating-rate securities, and thereby eliminated its negative balance sheet gap and reduced interest-rate exposure; as a result, cost of funds fell to 265 and margin expanded to 332 bps. He also said the bank lost approximately $1.5 billion of higher-priced deposits for a mix of market-rate and strategic reasons, and that non-interest expenses were up 17% in 2007 excluding a $21 million incremental FDIC premium and one-time insurance sale costs, with a plan to slow expense growth in 2008. He noted capital remained strong with a 6.01% leverage ratio and discussed a $1.1 billion unrealized loss mark on the securities portfolio, saying the losses reflected illiquidity rather than credit impairment.

Analysts focused on where credit weakness was showing up, and management repeatedly said it was scattered rather than systemic, with Falese citing one-off issues in Washington, Philly, New Jersey and New York and estimating about $75-80 million of NPAs in the mid-Atlantic. Questions also centered on deposit competition and whether TD’s pending acquisition affected deposit runoff; Pauls said the runoff was driven mainly by aggressive bank pricing, higher rates in the market, and the company’s decision not to compete, not by the TD deal. Analysts pressed on the $1.1 billion securities mark and whether it matched TD’s view, and Pauls said both sides agreed traditional pricing services were not capturing current illiquidity, so trader quotes were used for non-agency securities.