Valley National Bancorp (VLY) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter earnings release conference call.

(Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms.

Dianne Grenz.

Please go ahead.

Thank you.

Good morning.

I'd like to thank everyone for participating in Valley's second quarter 2010 earnings conference call, both by telephone and through the webcast.

If you have not read the earnings release we issued earlier this morning, you may access it, along with the financial tables and schedules from our website at ValleyNationalBank.com and clicking on the shareholder relations link.

Also before we start, I'd like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to Valley National Bancorp.

Valley encourages participants to refer to our SEC filings, including those found in Forms 8-K, 10-K, and 10-Q, for a complete discussion of forward-looking statements.

Now I'd like to turn the call over to Valley's Chairman, President and CEO, Gerald Lipkin.

Thank you, Dianne.

Good morning and welcome to our second quarter of 2010 earnings conference call.

In spite of a challenging economy, we are pleased to report our operating results for the second quarter, in which Valley generated net income of $33 million or $0.21 per share compared to $27.4 million or $0.17 per share for the prior quarter.

The results also compare favorably versus the same period one year ago when the Bank earned $9.2 million or $0.06 per share after preferred dividends.

The linked quarter increase is largely attributable to top line revenue expansion, in part due to an improved net interest margin and better internal operating efficiency.

Although better than most of the country, throughout our marketplace consumers sentiment still continues to be guarded and the unemployment rate remains at a disturbing level.

Until these factors change, business investment and spending on discretionary items will remain subdued.

Businesses of all sizes will continue to be hard pressed to expand operations, thus limiting growth at Valley and other financial institutions.

For the quarter, C&I activity remained relatively flat.

On a positive note, as anticipated for this time of year, commercial line usage has increased slightly to 36.4% from 36% in the prior quarter.

We continue to have conversations with potential borrowers seeking to change their banking relationship, mainly from the larger money center institutions.

However, in part due to Valley's credit underwriting requirements, many of these potential borrowers do not meet our threshold for obtaining a new facility.

In today's environment, only between 10% and 20% of commercial applicants result in an actual relationship.

Nevertheless, we are actively seeking new relationships.

In spite of the current economic conditions, we continue to have as many discussions with potential borrowers as in prior years.

But as I mentioned, we are only making loans when we feel we have a strong probability of being repaid.

The bank's commercial real estate portfolio contracted approximately 1% from the prior quarter.

However, as with C&I, our real estate lenders remain extremely active in soliciting new business relationships.

Most of Valley's current customer base remains guarded and focused on cleaning up current projects as opposed to aggressively initiating new ventures.

Commercial lending is highly dependent upon consumer spending activity.

As conditions begin to improve, we believe our commercial portfolio will expand accordingly as our current borrower base, coupled with the new relationships, begin to grow their operations.

We are in a challenging, yet potentially very rewarding environment as Valley is well positioned to take advantage of growth opportunities.

Consumer lending for the quarter reflected a mixed bag of results as increased residential mortgage activity was largely mitigated by portfolio amortization within the automobile segment.

Our automobile lending volumes, while increasing, are still constrained by the general level of consumer demand.

National auto sales are at levels between 30% and 40% less than just a few years ago.

Due to Valley's emphasis on borrower down payment, in addition to a high customer FICO score, we find our credit thresholds create a challenge for our auto lending initiatives.

During the quarter, we generated nearly 2,800 new auto loans totaling $54 million.

At the same time, we rejected an equal number of applicants -- applications for borrowers who have FICO scores greater than or equal to 700 simply because they -- due to an unacceptable loan to value ratio.

At Valley, our approach to lending is consistent throughout all areas of the organization.

All our borrowers must have skin in the game in order for us to maintain the historical strength of our portfolio and long-term returns to our shareholders.

That being said, we are encouraged by the fact that the past few weeks have generated the highest volume of new auto loans we have seen in nearly two years.

We are hopeful that this trend will continue.

Also encouraging, the per vehicle loss we recognized on each repossessed loan declined over 45% in the last 18 months and nearly 15% from the prior quarter.

The US automobile fleet on the road today is the oldest in decades.

As consumer confidence improves, we anticipate increasing demand and ultimately a reversal of the portfolio decline we have experienced since the third quarter of 2008.

Residential mortgage activity at the bank continues to be brisk as many consumers are taking advantage of the low interest rate environment to refinance existing mortgages.

Our one price refinancing program, as low as $499, including title fees, continues to generate huge volume.

Early indications in fact project over 1,000 applications will be generated this month, an all-time high for Valley.

Furthermore, our title agency has just been licensed to do work in Pennsylvania, which will enable us to expand our low-cost refinance program into that market and further increase our volume.

Under this program, we are encouraged by the fact that we operate profitably, whether we retain the loans in portfolio or sell the loans into the secondary market.

Along with the refinance volume, we are pleased with the number of new purchase applications received in 2010.

Purchase volume was up approximately 50% compared to this time last year and 75% compared to just the prior quarter.

Housing prices within our marketplace appear to have begun to stabilize and the consumer appears less reluctant to purchase a home than in prior quarters.

We continue to be extremely excited about both the LibertyPointe Bank and the Park Avenue Bank transactions, which closed in mid-March.

As a result of the transactions, we added over 600 performing commercial customers and expanded our presence in the New York metropolitan area.

Our lenders have focused on the identification of those relationships which can be expanded.

Although not every borrower will meet our credit standards, we firmly believe significant opportunities exist for many of them.

On the deposit front, we -- as expected, all of the higher cost time deposits, acquired through the transactions have either had their rates reduced or closed out during the quarter.

Our branch staff has done a tremendous job in retaining most of the core deposit accounts obtained in the FDIC assisted transactions.

In spite of the fact we closed five of the seven acquired branch locations through the first four months, typically the most vulnerable time for customers switching during an acquisition, we lost only 15% of the core deposit accounts.

From an operations perspective during the quarter, we completed the systems conversion and where branches were closed we successfully transferred the deposits to Valley branches located within close proximity of the closed locations.

Although not fully reflected in the second quarter figures, we anticipate saving an additional $1.5 million per quarter in addition -- and additional operating expenses due to further consolidation of positions and duplicate contracts in combination with streamlining the branch delivery channels.

During my tenure at Valley, we've acquired 23 banks via both traditional and government assisted means.

We have an experienced staff and a low-cost operating platform, which provides a competitive advantage to Valley for both FDIC assisted and traditional transactions within our operating footprint.

In evaluating potential acquisitions, significant emphasis is placed not only on the financial impact of the organization, but the operational impact as well.

From a financial perspective, the transaction may look wonderful, however operational issues, such as the geography of the target or the level of distressed assets may create operational risks, which cannibalize the financial rationale for undertaking the transaction in the first place.

That said we have no desire at this time to expand our geographic footprint outside of the greater New Jersey/New York marketplace.

We look for targets which culturally fit within in Valley's organization, make long-term strategic sense, and the ability to create enhanced shareholder net worth.

I would like to take this opportunity to comment on the recently enacted Dodd-Frank Bill.

While this act will have an effect on all banks, we believe it will have a much more -- it will have much more of a negative impact upon those institutions that are either much larger or smaller than Valley.

We are understandably unhappy to have another regulator overseeing our activities.

However, the new regulations that will come out of the newly established CFPA should force our competition to behave more like Valley in the future, which should have the positive effect of leveling the playing field and enabling us to generate more business in the future.

While our causative FDIC insurance will remain high in the future, the leveling of the playing field should more than offset that cost.

Nevertheless, until the final regulations are issued by the various regulatory agencies, we will not have a full understanding as the law's full effect.

Valley's strong balance sheet and consistent approach to traditional community banking provided the foundation for a profitable quarter.

We operate in one of the most densely populated and wealthiest geographies in the country.

This, coupled with our focus on the long-term viability of the organization, afford Valley many exciting opportunities unavailable to many of our peers.

We look forward to continued positive returns for our shareholders throughout 2000 and beyond.

Alan Eskow will now provide some more insight into the financial results.

Thank you, Gerry.

As Gerry mentioned earlier, we are pleased with our financial results for the quarter.

Revenues exclusive of OTTI, net security gains, and trading income/loss were up over 5% on an annualized basis from the prior quarter.

Net interest income increased $2.2 million from the prior linked quarter, which included a one-time interest recovery of $955,000 on a commercial loan, which was previously charged off.

The increase is largely attributable to the 7 basis point linked-quarter net interest margin expansion.

Improved yields on the investment portfolio and a change in the composition of earning assets with a greater emphasis on loans, coupled with a slight decline in funding costs, generated the majority of the expansion.

For the period, Valley's cost of deposits declined from 0.86% in the first quarter to 0.81%, mainly a result of the influx of deposits from the Park Avenue and LibertyPointe transactions.

The increase in taxable investment income was primarily accomplished via a slight change in portfolio composition.

During the end of the quarter, we liquidated approximately $200 million in short-term treasury securities and utilized the proceeds to purchase Ginnie Mae securities with a similar duration.

We anticipate the net interest margin will remain relatively stable for the remainder of the year, assuming the level and slope of market interest rates do not change materially.

Operating expenses were up approximately $1.6 million on a linked-quarter basis, reflecting approximately $600,000 in impairment charges on loan servicing rights, and a nonrecurring write off of software, equaling approximately $700,000.

In addition, operating expenses attributable to the two FDIC assisted transactions equaled in excess of $3.5 million.

Of this amount, we estimate approximately $1.5 million will be eliminated quarterly beginning the third quarter.

All else being equal, we anticipate slightly lower non-interest expense for the remainder of 2010.

The credit quality metrics reported with our press release and for which I'm about to discuss do not reflect the loans acquired via the LibertyPointe and Park Avenue transactions.

These loans are reported as covered loans on our financial statements, as we have entered into loss sharing agreements with the FDIC on both transactions.

Credit quality for the quarter remained relatively in line with the prior quarter.

Total of delinquencies, including loans past due more than 30 days, were $161 million or 1.71% of total loans.

The figure is comparatively unchanged from the prior quarter.

Early stage delinquencies, those less than 90 days, decreased over 20% from the first quarter and now account for only 0.55% of total loans.

Nonaccrual loans increased nearly $12 million, largely attributable to an increase in the construction portfolio, a portfolio in which our total losses in the last 12 months were only $1.6 million.

Although we are not happy with the increase in nonaccrual loans, for most of these non-performing loans we are comfortable with our collateral and the prospect of collection.

Troubled debt restructured loans, not reported as loans 90 days or more past due and still accruing, or nonaccrual for the quarter, represent 17 loans or $48 million in total outstanding principal balance.

We added 11 loans during the quarter.

The majority of the loans categorized, as TDRs are commercial lines of credit.

In determining the appropriate required reserve for our nonaccrual and troubled debt restructured loans, we analyze each in conjunction with our quarterly impairment analysis.

Based on this analysis, we have established a reserve of $12.8 million against principal balances of $113.6 million comprising the majority of our nonaccrual loans and troubled debt restructured C&I and CRE loans.

The $12.8 million reserve has been allocated to each loan category on the allocation table within our press release.

Net charge offs for the quarter declined significantly to just over $5 million from the prior period, largely a result of declines in both the C&I and automobile lending categories.

Auto net charge offs have now declined for five consecutive quarters.

In the second quarter, Valley's provision for credit losses was $12.4 million, roughly $7 million greater than net charge offs.

As a result of this variance, combined with the decline in Valley's non-covered loan portfolio, Valley's allowance for credit losses as a percentage of non-covered loans increased to 1.24% from 1.15% in the prior period.

Valley's reserve calculation encompasses multiple variables, including loss history and management's general economic outlook.

Until we are confident that losses have stabilized and the economy improves, we do not believe it is prudent to reduce the allowance or any of the specific reserve rates for each loan category.

Valley's capital ratios for the quarter remain strong.

For the period our tangible common equity and tangible asset ratio was 6.78% compared to 6.55% in the prior period.

Additionally, all of the bank's risk based regulatory ratios increased as a result of a decline in risk-weighted assets, coupled with an increase in equity.

This concludes my prepared remarks and we will now open the conference call to questions.

Thank you, Alan.

Thank you.

(Operator instructions) We do have a question comes from the line of Ken Zerbe with Morgan Stanley.

Please go ahead.

Hey, good morning.

Good morning, Ken.

I was hoping you could just talk a little bit about what's changed in your mind with the resi mors portfolio or the market?

Has it led you to retain more of the mortgages instead of selling them?

It just seems that the yields right now are probably not as favorable as they could be in trying to understand the decision.

Thanks.

Well, the portfolio itself has decreased substantially.

We are certainly not looking to convert or sell our balance sheet into that of a thrift, but we are looking for income, interest income.

And we are selective about which ones we put in portfolio and which ones we sell out of portfolio.

We're not going to have -- alter our portfolio tremendously by what we're holding, which is pretty much trying to hold the size of the portfolio and prevent it from further shrinkage.

All right.

So going forward, we shouldn't look for any big differences between the resi mors and the commercial side.

No.

Historically the bank always try to keep the resi mor (inaudible) about 25% of our outstanding loans.

Of course, the automobile portfolio has shrunk dramatically, so that makes it even more difficult.

But we're not going -- I don't anticipate any major change.

We're about $300 million or so below our normal level to begin with, so.

And the other thing we do is in determining which loans we'll keep or we won't keep, we do have models that we run that kind of look at the difference between fixed rate loans and floating rate loans, and where we are in our match of assets and liabilities.

And so we take that into account as well.

That makes sense.

And then just on the auto portfolio, maybe talk a little bit about competition.

I heard your comments that things have picked up in the last week or so.

Seems one of your competitors, or at least another mid Cal bank has had pretty good auto growth this quarter.

I mean is it competition that's been holding you down to some extent?

Or is it just purely based on sales?

Well, it's a combination in factors.

The large factor obviously is sales.

The second is that we do require more money down than some of our competition, so we do lose some business because of that, as I pointed out in my remarks, even though they -- the borrower may have a strong FICO, if they don't have skin in the game, we tend not to be excited about putting the credit on our books.

So that hurts us, although as I pointed out, the first two weeks of -- the last three weeks, actually, we've seen some of the strongest volume we've seen in a long time, so I'm hopeful that that is a trend that's going to continue.

All right, great.

Thank you.

And we have a question from the line of Matthew Clark with KBW.

Please go ahead.

Hey, good morning, guys.

Good morning, Matt.

Can you talk more about the TDRs?

And it sounds like a lot of them are on lines of credit in the C&I book, but just trying to get a better sense of what types of borrowers these are and whether or not any of those lines of credit are unsecured or not.

I would assume not.

Yes, well most of our TDRs are loans that are secured, even C&I loans we tend to look for collateral.

Today if you modify a loan the accountants are somewhat stricter perhaps in their interpretation of the definitions than they were in the past and we put them into TDR.

We have situations where the borrower continues to pay, but he asks for a lower interest rate and we can't substantiate lowering the interest rate, other than making a TDR.

I mean in prior years we probably would have just lowered the interest rate.

Not necessarily because the borrower's in trouble, but because the borrower initiates the action, it makes it problematic for us not to make it a TDR.

Yes, I think relative to your question, Matt, the ones that are TDR, whether they are collateralized or not, and most of them, I think as Gerry said, have collateral behind them.

We go through, as I said, an impairment analysis and that analysis helps us determine whether or not we're comfortable with that credit or not.

Many of them are performing today, or most of them are performing.

There are some that are not, but most are performing.

And we are setting aside any place where we have any discomfort with future collectibility down the road.

Okay.

And then just a little bit of color in terms of the types of borrowers these might be.

It's all over the place.

It's all over the place.

Okay.

And then I guess your outlook for TDRs.

I mean is this something that sounds like, like you said, the accountants have gotten a little bit more strict in the way you guys classify this.

Is this something you're going to see -- we should see more of or not?

I would -- in general I would say if the economy remains similar to the way it is today and doesn't improve, you're going to have more borrowers that will have problems.

No matter how good your portfolio is, and how well you underwrote it, borrowers are struggling today.

And to the extent they're struggling they're going to come in and look for concessions of some kind, and to the extent we give those concessions they become TDRs.

Okay.

And then finally, just on the -- on a Reg E, can you just update us on your thoughts and what the impact might be maybe in the upcoming quarter would be helpful.

You mean on the opt in are you talking about?

Yes.

Yes, we've been monitoring it pretty closely.

We -- of those customers that used it in the past, 50% by number, 58% by dollar amount have already opted in.

I think it's only a matter of time before we end up with a very high percentage of opt in.

If a person used it in the past, or where we paid it in the past, and they don't opt in, and we return their check or we bounce their debit card, they'll be opting in quickly.

I think this is -- it's just an inconvenience for everybody to have people opt in.

But they are going to opt in.

Great.

Thanks.

Okay, thank you.

And we have a question from the line of Craig Siegenthaler with Credit Suisse.

Please go ahead.

Thanks.

Good morning, Gerry, good morning, Alan.

Good morning.

Good morning.

Just another question on the TDRs here.

Can you give us a little better details around the loan mix?

So is it mostly on the consumer side or is it mostly commercial real estate?

And also disclose maybe what -- how these have been either charged off through charge off experience or reserved for over the past few quarters.

Yes, first of all I would say, as I said before, I think the majority are commercial C&I loans.

There are a few loans that are construction loans.

Very few are really consumer loans, especially -- and if they were, in number they're very small in balance.

And so we have been, as I said, we go through our analysis each quarter and we review them for impairment looking at either cash flows or collateral.

And determining what kind of an impairment we need on them.

So that will obviously continue.

I mean there are many loans -- well, at least in the non-accrual bucket, in which we don't need a reserve on.

So we're comfortable that there's sufficient collateral and/or guarantees.

On the TDR side of course, you can't necessarily count the guarantees in there, but we do look at what's behind the loan and whether we believe we'll collect.

And in most cases are these AB note structures?

And also, could you mention like what the reserve is in place of these TDRs or the charge off experience?

Well, I think first of all there's no AB notes that I'm aware of in any of these at the moment.

And secondly, there's not a lot of experience in charge offs at this point because there haven't been that many.

TDRs have been around for a long time, but nobody's seen any major increase in TDRs until the last year or so.

Probably even more current than that.

So I think I might have missed -- what -- was there a last part to your question?

Well, is there reserve in place?

Because you just covered charge offs.

Is there a reserve in place?

The charge -- yes.

The charge offs, again TDRs have been very small.

I indicated before between the non-accrual and the TDRs we have a reserve of $12.7 million set aside against $113 million in loans.

So that's running just slightly over 10%.

Okay.

And then just on the M&A environment, Gerry, how has your kind of view of the M&A environment changed over the last three months, just given regulatory reform, a little bit weaker economy?

I think -- my view is that a lot of the smaller institutions are going to throw in the towel in the next, I don't know, couple of years.

It's hard to put a date or a time on it.

As the new regulations take hold that I spoke about in my remarks I think a lot of them are going to find that the cost of doing business is going to rise dramatically and they're not going to be able to remain independent.

The AML, BSA, all of these compliance personnel that have been added to bank staffs or are going to be added to bank staffs soon as the regulation, that's just a non-earning expense.

Now I believe in our case, we already have the staff in place.

We've had the staff for a while and it's not going to become a significant burden to us and certainly not toward our earnings.

But I think in a lot of the smaller institutions it's going to become a significant burden to them and they're just not going to be able to generate the profits that are expected by their shareholders.

They're going to turn around and say wait a minute, I guess I'm going to have to sell.

So I think there's going to be a pick up in M&A activity going down the road.

We may not see it today, but I think certainly as these new regs take hold over the next six to nine months, we're going to see more and more institutions coming to the conclusion that they're better off affiliating with a larger institution.

All right.

Thanks a lot for the color.

All right.

And our next question will come from the line of Erika Penala from UBS.

Please go ahead.

Good morning.

Good morning.

Could you give us your observation as you progress through the year on commercial pricing competition and whether that's gotten much tighter either -- and not just pricing, also from a covenant perspective.

Yes, I think so.

I think that pricing has gotten a little bit tighter.

I think that everybody admits that finding good loans is becoming increasingly difficult.

And if you have a good loan, everybody wants it.

Well, the more people that want to make that loan, the tighter the pricing is going to come just by definition.

I think the restraints that the new legislation are going to put on banks are going to create a more level playing field though as far as the covenants are concerned.

Valley has always maintained relatively strict covenant requirements on its borrowers.

A lot of the terms and conditions that we would press our borrowers to do, I think a lot of institutions bent the rule a little bit and didn't require them.

I think going forward you're going to find more and more of those institutions are going to come online and require what we're requiring.

So in that regard, I think it'll be easier for us when we meet competition, because they're going to be asking for the same things we are.

Another question and this is related to some of the language in the Dodd-Frank Act.

Are you -- now that the Dodd-Frank Act is allowing banks to pay interest on commercial DDAs, first how much of commercial DDAs do you have?

And second, how do you view that as a game changer, if at all, in terms of rate competition for corporate deposits?

Well, in the short run, I don't think it's going to make much difference because the rate of interest anybody would pay for any deposit is relatively low.

So in the short run it's not going to have a material effect I think on anybody.

I don't think banks are going to run around and start paying 1%, 2%, 3%, 4% for that type of deposit.

All right?

In the longer run though, I think that's all going to be adjusted.

It's going to be adjusted in what the borrower pays.

Everything is a function of cost.

If the bank's costs go up, what we charge has to go up.

So I think the cost of borrowing is going to go up because of that and it'll offset the cost of those -- what we're paying in the long run.

Unfortunately, the brunt of a lot of those costs are going to be laid on the consumer, and I think consumer-borrowing costs are going to rise even more rapidly.

Unfortunately as I say, I think the consumer's going to get hurt more by this bill than the commercial is.

Thanks for the color.

And our next question will come from the line of Gerard Cassidy from RBC.

Please go ahead.

Good morning, Gerard.

Hi, Gerry.

How are you?

All right.

Butchered that, huh?

That's okay.

I've been called worse.

The -- curious on the securities, Alan, that you mentioned you guys bought at the end of the quarter, in your press release I think you said they had a similar duration of what you sold or to the portfolio.

What was the duration?

We were looking -- we're looking at Ginnie Maes right now.

We're buying generally higher coupon Ginnies.

So we're looking at much shorter duration.

I think in the last year or so, we've been buying say anywhere from 5% to 6% coupons and we've seen 50% of them pay off within a year.

So we've got securities that may have had two-year final, for example, on a treasury.

And we bought some Ginnies and we, as I said, they're similar duration.

They may not be exact, but if interest rates stay this low and we believe they'll be paying down quite quickly.

Okay.

And in terms of the yield, the actual yield to maturity that you're putting on the books, for the new stuff that you're buying in the last 30 days, what are you finding in terms of the yields for these --

Under 3.

Yes, we feel --

It's under 3%.

-- it's in the 2% to 2.5% range, Gerard.

So I mean we really haven't bought a tremendous amount in the last 30 days.

I mean we're being very cautious with where rates are about what we want to buy and what we don't want to buy.

Sure.

I mean we measure how to put the money in loans.

Yes.

Oh, no doubt.

Speaking of loans, Gerry, obviously you've been running Valley for a number of years.

And it's very easy for all of us to jump on the bandwagon about there's no loan demand, that's terrible for the industry, et cetera.

Do you sense, is there a shift do you think in your customers when you talk to your long-term customers, long-time customers that their borrowing habits, they're changed.

They -- for indefinitely, where they do want to take on the less leverage like we're hearing from maybe some of the experts that the consumer may actually now finally live with lower debt.

Are you guys getting any sense if that's true or --?

Very true.

Yes.

Oh, it is.

We tend, as you know, Gerard, to deal with a very affluent client base.

A large segment of our commercial borrowers either in the commercial real estate end or the C&I line tend to be more affluent.

We find that a lot of them today are acting, as you would expect, very conservatively.

They tend to be using more of their own cash, they're not borrowing.

They're husbanding their cash.

That's why cash balances are at all-time highs because the larger commercial account just is sitting on their cash.

They're not borrowing, they're paying down, as I mentioned.

A lot of our builders, our construction loans just keep coming down because they're paying down their existing debt, as you would expect, and they're not starting any new projects.

Eventually this will change.

I don't believe this is going to be a permanent modification to the marketplace, but until the economy starts to heat up a little bit, and that could be 12 months, 18 months, I don't know, that's going to continue.

They're just not borrowing.

Do you think the -- if we get through similar to other cycles that it's 2012 before borrowing really picks up?

That the lack of new loan growth is a contributor to potential sellers coming to you to say it's time -- aside from your comments about the increased costs due to regulation, that just the lack of demand for loans, is that also a contributor to potentially more consolidation?

Absolutely.

Yes.

Are you finding in your preliminary talks or telephone calls, if there have been any, are people receptive to talking today?

Or are they no, they're not interested?

I think increasingly people are starting to think about it.

People aren't throwing their hands up and calling me up and saying look, you've got to buy us today.

But I've had some conversations with some other banks that are saying we're starting to think about it, if our Board decides they would like to go in that direction, could we sit down and have a conversation?

They haven't committed to that conversation, but they like to know that we'd be out there willing to talk to them.

So I think that's going to happen.

And not today, not tomorrow, the next week.

This is not -- this is going to happen.

I think, and as I've said this before, I think that in 10 years we're going to go from the 8,000 banks that we have today to well under 5,000.

And I think it's going to shrink beyond that.

But I think over the next five to 10 years you're going to see a say 40% shrinkage in the number of banks outstanding.

No doubt.

You mentioned in your prepared remarks that if you do do anything it's going to be in the Metro New York marketplace.

Obviously we wouldn't expect you to go to Cleveland or something like that.

Correct.

Anyway, would Southern New Jersey, Southern Connecticut, Long Island be considered part of your marketplace?

I think Southern New Jersey I have relatively low level of interest.

A little bit more for Southern Connecticut perhaps, and a much higher interest for Long Island mainly because it's the -- it's a very homogeneous marketplace to where we are currently.

When we look at Northern New Jersey, you look at Bergen County and you look at Nassau County.

The two of them compare very similarly.

So it's a marketplace we're used to, we know, we're comfortable with.

If we're going to reach to expand our footprint, I want to do it in an area that our staff is comfortable with.

Good.

And then finally, did you guys get a chance to look at the Smithtown deal?

Or was that just (inaudible)?

I won't comment.

Okay.

Not appropriate.

Thank you.

All right.

Thanks, Gerard.

And our next question will come from the line of Collyn Gilbert from Stifel Nicolaus.

Please go ahead.

This is actually Travis Lan on for Collyn this morning.

How are you guys doing?

Hey, all right, Travis.

All right.

A lot of our questions have been answered, but maybe you could just provide some additional color on the impaired C&I loans that were specifically reserved for in the quarter.

What kind of color do you want there?

They're lines of credit and again, to the extent we don't go through credit-by-credit, so they're lines and to the extent we felt we needed some kind of reserve they were included in the overall analysis.

And as I said before, we've put about $12.5 million away against the impaired and the non-accrual loans.

Okay.

And then within the non-accruals, the -- was the increase on the C&I side in the quarter, was that broad based or is there one kind of larger credit that would be (inaudible)?

It was pretty broad based.

Pretty broad based.

Yes, I think there were 11 different credits.

Okay.

Have you guys modeled the effects of the interchange regulation on fee income?

Yes, we've looked at it and obviously it will have some impact on us.

How much?

They really haven't been set yet, so the problem is I think as Gerry said in his earlier remarks, until all the rules are set in stone, it's a little hard for us to give you an exact number.

Our annual income though on interchange is about $6 million.

$6 million annually.

Yes, so again --

And it's certainly not going to go to zero.

Right.

Somewhere in the -- it's going to take a while until that settles in.

Sure.

All right.

And then I guess finally just are deposit costs as low as you guys want to take them?

Or do you think there's still room there?

Well --

We'd always have -- costs you always like to see go lower.

Yes, I guess not do you want to take them lower but can you take them lower.

There's always room for some additional reduction.

I mean remember if interest rates stay at levels where they are and loan demand isn't there, and borrowers are demanding lower rates because of where treasury markets are, et cetera, then it's going to force a little bit of our hand on the deposit rates.

Thank you very much.

You're welcome.

All right.

And our next question will come from the line of Whitney Young from Raymond James.

Please go ahead.

Hello.

Hi, good morning, Whitney.

Both my questions were answered.

I just have a quick one for you guys.

Can you just remind us what the sort of normal commercial line utilization rate is?

It's about 36%.

Yes, it was at 36.4% (multiple speakers) recently.

But what's a more normal level?

I'm sorry.

It'd be about 38%.

38%?

And then besides that small increase in the quarter, was there anything else that you saw that led you to believe that things might be improving?

And what kind of indicators are you looking at?

Thanks.

Well, one of the things that I think will help improve the situation is the fact that the legislation has finally come to an end and people know better where they stand.

And over the next couple of months when the rules get put in place -- uncertainty is the hardest part.

That bothers banks.

I think a lot of people are looking on the economy.

They're looking for positive signs to come out of Washington.

Okay, thanks.

(Operator instructions) We --

Okay, thank you for attending -- Donna, sorry.

I'm sorry.

Do you have another one.

No, we have no further questions at this time.

Please continue.

Okay.

Thank you for attending Valley's second quarter earning conference call both by telephone and through the webcast.

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