Valley National Bancorp (VLY) 2011 Q2 法說會逐字稿

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

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given to you at that time.

(Operator Instructions) And also as a reminder, today's conference is being recorded.

I would now like to turn the call over to your host, Ms.

Dianne Grenz.

Please go ahead.

Thank you.

Good morning.

I'd like to thank everyone for participating in Valley's second quarter 2011 earnings conference call, both by telephone and through the webcast.

If you've not read the earnings release we issued earlier this morning, you may access it, along with the financial tables and schedules for the second quarter from our website at www.valleynationalbank.com.

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, Valley National Bancorp, and the recently proposed merger with State Bancorp.

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

And 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 earnings conference call.

We're pleased to report strong operating results for the quarter, as after-tax net income increased both on a linked-quarter and an annual basis.

Net interest income expanded during the quarter, as loan growth generated in the first half of the year positively impacted total revenues.

During the second quarter, loan originations held in portfolio declined from the prior quarter, as Valley originated approximately $550 million of new loans versus approximately $680 million during the first quarter.

Originations compared favorably to the same period one year ago in which Valley originated and held in portfolio just over $300 million.

The decline in linked-quarter originations is in part due to the current nature of commercial lending demand in our marketplace.

Many of Valley's new commercial lending relationships are largely the result of borrowers migrating from other financial institutions, as opposed to expanding existing lending relationships due to growth in the economy.

While long term we remain optimistic, the persistent uncertainty in Washington has undoubtedly negatively impacted the strategic focus of many businesses located within our marketplace and general consumer confidence.

The absolute level of customers, which during the first quarter initiated conversations about potentially expanding operations, has declined in both number and overall level of interest.

The economic and fiscal policies bandied about in Washington should focus on encouraging entrepreneurs.

Congress should offer stimulus to local businesses to make it worth taking risks.

The use of fiscal stimulus as opposed to the government trying to spend, spend and spend must take place if our economy is to show genuine growth.

Regardless of the economic conditions in which Valley operates, we've recognized that it is incumbent upon management to preserve shareholder value and capitalize on opportunities afforded us in our marketplace.

During the quarter, we emphasized our fixed price residential mortgage refinance program, which allows the borrower to refinance their home for $499 including title insurance.

For the quarter, we processed nearly 2,000 applications and closed over $230 million in new residential mortgage loans.

This program has the added benefit of generating significant cross-sell opportunities as the proportion of non-Valley refinances continues to escalate.

During the most recent period, approximately 85% of the applications approved or in process were to refinance non-Valley loans compared with roughly 65% last year.

As a result of this program, residential mortgage loans grew nearly 20% on an annualized basis from the prior quarter.

Valley's decision to sell our portfolio each loan is based on many factors, primarily credit quality, but also keeping in mind Valley's asset/liability mix and the bank's aggregate interest rate exposure.

As part of the bank's macro strategy to manage interest rate risk, Valley at times utilizes derivatives to convert fixed rate loans to floating rate instruments.

While the initial impact may negatively affect the portfolio yield, long-term benefits should protect earnings when interest rates return to more historic levels.

Due to the success witnessed in Valley's fixed one-price residential mortgage refinance program, this month, Valley introduced a one-price, all-inclusive residential mortgage purchase program in New Jersey, costing the customer just $1,899.

Our studies show that this is approximately one-third the cost of a typical mortgage closing.

The $1,899 program includes title insurance and all bank fees.

While the purchase market in New Jersey remains sluggish and currently represents only around 12% of our residential mortgage activity, we anticipate broad consumer interest and expect Valley's share of purchase originations in New Jersey to expand.

Commercial lending within Valley's New York and New Jersey marketplace reflect a dichotomy of results although consumers in both geographies remain guarded.

In New York, line usage continues to expand as many customers begin to grow inventory levels and seek expansion opportunities.

Conversely, in New Jersey, borrower sentiment remains more concerned about the long-term prospects of the economy, and as such see more reluctant to expand operations.

In total, C&I balances during the quarter contracted approximately $33 million, largely the result of seasonal activity combined with a significant volume of prepayments.

As we have previously noted, Valley enjoys the benefit of many strong borrowers with significant liquidity, who faced with the current interest rate environment choose to utilize some of their liquidity to prepay loans rather than allow the funds to earn nominal interest.

Although line balances outstanding during the quarter contracted from the prior quarter, total commitments increased approximately 3% annualized and we anticipate growth in outstandings during the second half of the year as a result of that.

Commercial real estate lending expanded during the quarter as our lenders continued to remain very active in pursuing new business.

During the quarter, we originated over $120 million of new volume, much of which was generated in our New York footprint, as the bank expanded its emphasis on co-op and multi-family loans in that market.

The competition for high-quality, low loan-to-value products -- projects remains intense in our marketplace.

Growth in the CRE portfolio will be somewhat tempered as a result.

Yet, we anticipate Valley's increased emphasis on both the co-op and multi-family marketplaces to provide future loan growth.

Consumer lending remains challenging in our marketplace, as many consumers are reluctant to borrow as Valley's stringent credit criteria coupled with our focus on receiving a reasonable return further limits growth opportunities.

The automobile portfolio contracted $20 million from the prior quarter, although activity was excellent on a relative basis and we booked over 3,700 new auto loans, representing a 34% increase from the same period one year ago.

Automobile sales in the US, while improved, still remain at only 60% of their peak earlier this decade.

While application volume was strong at nearly 20,000 during the quarter, many of the applicants failed to meet our credit thresholds.

We rejected over $250 million of auto loan applications during the quarter, a significant portion of which were due to unacceptable loan-to-value request.

It is our philosophy that all 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.

At quarter end, 30-day-plus automobile loan delinquencies were only 1.0%, and automobile net charge-offs fell to 0.17% for the first six months of the year, returning Valley to its historical performance levels.

We continued to witness an attempt to build market share by some of the larger auto lenders within our marketplace, as some competitors' buy rates for new automobile loans have dipped below 2%, a level at which we do not believe the business can be profitable.

We like the automobile lending business.

Nevertheless, when the competition sometimes creates an environment where we are unable to generate a reasonable return, our volume will remain constrained.

During the quarter, we announced our intent to expand into Long Island via our merger with State Bancorp and its principal subsidiary, State Bank of Long Island.

In State Bank, we have chosen a strong platform from which to expand our organization.

At present, State Bank operates 17 branch locations, of which 13 are located in Nassau and Suffolk counties.

Within the next five years, we intend to double the number of locations on Long Island by means of de novo branch expansion or future whole bank acquisitions.

We are excited about the prospects of growing the Valley franchise on Long Island.

The demographics are similar to Valley's core New Jersey markets, and we believe our consistent and commonsense approach to traditional banking will serve the marketplace well.

State Bank's loan portfolio is heavily skewed towards traditional commercial loans, which is very attractive to Valley.

Also, the fact that they do not focus on residential mortgage lending or consumer loans, areas in which Valley has been very successful, should present significant opportunities once the transaction closes.

Since the announcement of the transaction, we have met with State's lenders and branch staff, all of whom appear enthusiastic and excited about the forthcoming opportunities.

We've begun the process of systems integration and other logistical hurdles customary with integrating institutions.

It is our intention to have State's customers on Valley's data systems within a few months of the closing.

Earlier this month, we received all necessary regulatory approvals for the transaction.

We anticipate the transaction closing in the fourth quarter, subject to shareholder approval from State Bancorp and other routine conditions.

In summary, we are pleased with our operating results for the quarter.

Although the economy continues to show signs of distress, the bank is well positioned to provide positive returns in 2011 and beyond.

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

Thank you, Gerry.

For the second quarter, Valley reported net income available to common shareholders of $36.9 million or $0.22 per share.

The results included a few infrequently occurring items which I will detail shortly.

Valley's net interest margin remained unchanged at 3.71%, compared to the prior quarter of 2011 and represented a decline of one basis point from the same period one year ago.

Valley's ability to maintain a relatively stable margin in this volatile period is testament to our steady and sizable core deposit funding base, coupled with asset liability management decisions, which focus on the long-term sustainability of earnings as opposed to maximizing short-term current-period results.

The linked-quarter decline of three basis points in earning asset yields was mitigated by a slight shift in the composition of funds from borrowings to deposits.

The increased emphasis on deposits led to a decline in total cost of funds from 1.59% in the first quarter to 1.55% in the second quarter.

Valley's current cost of deposits, including non-interest bearing, equals 0.72%.

For the remainder of 2011, we anticipate slight margin compression, as earning asset yields remain under pressure due to the low level of market interest rates.

Much of the cash flow generated from both the investment and loan portfolio is reinvested in new assets at yields lower than those running off.

Partly mitigating the decline would be the reinvestment of both investments and excess liquidity in loans.

Further exasperating the margin is Valley's inability to derive significant additional declines in the cost of funds through the core deposit funding base, as the absolute rates being paid are already quite low.

In addition, Valley liquidated approximately $250 million of investments during the latter half of the quarter, reinvesting much of the proceeds in financial instruments, which yield approximately 75 basis points less than the securities sold.

Although the sale will slightly negatively impact both net interest income and the margin on a go-forward basis, the pure economics of the transaction from a total return perspective were very desirable.

During the quarter, Valley recognized $16.5 million or $0.06 per common share of income on the securities sold.

The gain on the sale of securities were nearly 9 times the lost annual interest income, net of reinvestment returns, which we believe would likely never materialize due to the prepayments and amortization, had we held onto the securities.

In addition, the majority of the proceeds from the transaction were reinvested in an asset class, which from a regulatory perspective does not require the bank to maintain capital.

The securities liquidated were largely both Fannie Mae and Freddie Mac securities, which although only require a 20% regulatory capital requirement do not represent an asset class in which Valley is currently comfortable maintaining.

In addition to the financial merits of the liquidation, the transaction enabled Valley to significantly reduce the bank's exposure to both quasi-guaranteed entities.

In fact, we have not purchased any Fannie or Freddie mortgage-backed securities since mid-2009 and have only seen our outstandings in these securities decline substantially.

Other infrequently occurring items which impacted the financial results for the quarter included a $1 million trading loss, mainly attributable to a non-cash mark-to-market losses on the change in fair value of Valley's own trust preferred debentures carried at fair value.

The trading loss negatively impacted current-period earnings by approximately $0.01 per common share.

During the quarter, Valley recognized an incremental tax provision of $8.5 million related to a change in state tax case law during the second quarter of 2011.

Under Generally Accepted Accounting Principles reporting, we are required to record tax law changes in the quarter in which the law was enacted for all current and prior years.

The total extra provision represents the aggregate tax for all tax periods.

The negative impact to earnings per share as a result of the charge is $0.05 per share.

Mainly as a result of this provision, Valley's effective tax rate increased to 40.6% from 31.9% in the prior period.

Our current expectation is for the effective rate to approximately 29% for the remainder of 2011, taking into account both the immaterial future costs of the tax law change and our increased and planned investment in additional federal tax credits.

The three aforementioned items, the security gains, the trading loss and the tax provision on an aggregate earnings per common share basis largely negate each other, resulting in a reported earnings per common share of $0.22 to be essentially the operating results for the period.

The credit quality metrics reported with our press release and for which I'm about to discuss, do not reflect the loans 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 few quarters, as from a macro perspective, credit appears to have stabilized.

Total non-accrual loans and early-stage delinquencies, those past due and still accruing, were $159.4 million as of June 30, declines of approximately $2.5 million from the prior quarter and $1.7 million from the same period one year ago.

Over $120 million, or approximately 76% of the non-accrual and early-stage delinquency loans are comprised of residential mortgages, construction loans and commercial real estate loans, all categories in which Valley [typically] has very low loss rates.

From January 1 of 2010 through June 30 of this year, Valley has recognized $12.4 million in net charges within these categories of loans.

The resulting annualized net charge-off ratios for these loans has only averaged roughly 15 basis points during this period.

The diminutive losses are largely a result of Valley's robust credit due diligence process at underwriting combined with Valley's requirement that all borrowers maintain a sizable equity position in each loan.

During the quarter, Valley classified approximately $12.1 million of new loans as accruing TDRs.

As a result, net of paydowns on existing TDR loans, the aggregate balance increased approximately $10 million.

In conjunction with Valley's quarterly impairment analysis, the reserve for TDRs was increased $1.9 million as a result of the new loans classified as TDRs during the quarter.

Once again, our TDRs generally have substantial equity from the borrower and our impairment analysis shows that losses for these loans, if any, should follow Valley's low loss history.

The aggregate reserve for loan and credit losses decreased slightly from the prior quarter from $141.7 million to $140.9 million.

However, the reserve for non-covered loans and unfunded letters of credit actually increased slightly from the first quarter of 2011.

Valley's capital ratios for the quarter remain strong.

For the period, our Tier 1 common capital ratio was 9.40%, an increase of 8 basis points from the prior quarter and 35 basis points from the same period one year ago.

We are comfortable with our capital ratios and believe they provide a solid basis with which to grow the organization.

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

Perky, is there any questions?

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Hey, good morning, everyone.

Good morning.

Good morning.

You start looking at the residential mortgage loan growth, the roughly $100 million, how much of that would be fixed rate mortgages?

And are you swapping on the cash flows on all of those?

It's 100% fixed rate.

They're all fixed rate and they vary between 15 and 30-year mortgages, and we don't necessarily swap every bit of the cash flows, but we do swap a percentage of that as we deem our model [close for it].

I'm curious, given your comments around the consumer and competitive environment, do you expect auto and home equity balances to continue drifting lower in coming quarters?

I think they're going to be relatively flat to a slight decrease.

I don't see a major increase in them.

Nonetheless, the consumer confidence levels increased substantially and the consumer gets more aggressive in going out and buying new cars.

As I pointed out in my remarks, we're at 60% level of between what the high was when the manufacturers were selling cars in the middle of the decade to where they are now.

They went from over 20 million units to 12 million units.

And just one final one, Alan, is there any opportunity to refinance or retire some of the long-term debt?

It seems pretty expensive relative to current rates.

You've basically hit it on the head, it's expensive.

Yes.

I'd say there is the prepayment penalties will be extremely substantial.

Okay.

Okay.

Thanks for taking my questions.

Okay.

Craig Siegenthaler, Credit Suisse.

Thank you.

Good morning, everyone.

Good morning, Craig.

Good morning, Craig.

First, just want to touch base on liquidity.

I noticed your cash levels are higher and also some of your deposit rate ticked up, and I kind of heard the reasoning on the call that I think you may shift some of your funding away from kind of a long-term debt.

But also could you comment on deposit competition broadly, and also if you're seeing or hearing any kind of pressure from regulators within the industry to increase liquidity levels?

I think we're seeing a fair amount of competition on deposit levels.

I think we are generally quite competitive.

And so we're holding our own on deposit levels pretty well there.

I mean we can obviously increase or decrease as depending on our liquidity levels, depending on our need for funding for loans or investments.

So we monitor that as part of our overall ALCO process.

In terms of liquidity, we're maintaining a fair amount of liquidity at the moment and I don't think we've heard anything from regulators relative to increasing liquidity.

I think we've been relatively pretty liquid in the last two to three years.

Well, and particularly it's Gerry Lipkin, I have concerns not knowing what's going to happen with the debt ceiling.

I want to make sure the bank maintains a strong liquid position at this time.

One of the things, Craig, we did see and I think we indicated is, we did see some brokered CDs on a long-term basis, not a short-term but long-term in the three to five-year basis.

So that's helped also in our funding base looking at the fact that we have a lot of long-term fixed rate kind of mortgages and we like longer-term funding deposits.

Got it.

And then, just my second question on the accounting rule change for troubled debt restructurings that's implemented in the third quarter, I'm wondering if you expect to see any impact from that, given by how you account for the TDRs now?

No, I don't think we expect to see anything.

I think we're fine with how we are recording our TDRs at this point.

Great.

Guys, thanks for taking --

Yes, I've spoken on this thing before, because this is a [source spot] with me personally.

I think that the category, the classification tends to distort more than it clarifies.

If you look at the interest rate that our TDRs are carrying --

5% -- over 5%.

Right, on average.

I mean this is -- but yet, they meet certain parts of the definition, we put it into that category.

Most of -- almost all of them are bank.

Yes, and I think as we indicated, Craig, not only they're paying, not only we have a lot of equity behind them, but they are performing very well and our loss history, both in terms of current and what our expectations are is relatively low on these, which again goes to how we underwrite credit and what kind of collateral we take, and then in addition, what kind of personal guarantees we may have on some of these loans.

Got it.

Alan, Gerry, very helpful.

Thank you.

[Okay].

[Okay, Craig].

Thank you.

Nancy Bush, NAB Research.

Good morning, guys.

How are you?

Good morning, Nancy.

Gerry, a quick question for you.

I mean, the mortgage business is a significant business for you, and could you just sort of give us your opinion of QRM, the Qualified Residential Mortgage, starting to get some push back from the industry right now?

Yes, I think it's going to hurt the housing recovery.

It takes away a lot of the flexibility on the part of the lender, because it fails in one category, it may have an awful lot of strength in another category.

But nevertheless, it has to be classified under the QRM.

The bank is not going to make the loan.

So I think the people, the folks in Congress in Washington missed the point on this one big time.

Could you just sort of put forth your opinion of how you would like to have seen it structured, or should QRM just not have been introduced at this point?

Well, you can certainly come up with certain guidelines, but to [make them] hard fast rules with penalties on the other side, if you violate the QRM, I think it just -- it ignores a lot of things.

It ignores loan to value totally.

I mean, if somebody is borrowing $0.10 on the dollar, on the price of a house, but their income measurement doesn't qualify, right away, it's a QRM and the bank doesn't want to do the loan.

Right.

Secondly, Gerry, if you could just also update us, I think last quarter, you gave some opinions or talked about the foreclosure issue in New Jersey and how that was being jammed up in the courts.

Has there been any progress in the last three months?

Well, we've seen a little bit of progress in our bank.

We only have a handful.

I believe at the end of the quarter, we had -- out of our 22,000 residential loans, we had of 88 of them in foreclosure and we have begun to see some of them now finally going through the process, getting them sold.

That is one of the major hurdles to this economy coming back.

We've just got to get rid of that product.

In our case, Valley in particular, it's really not a major factor obviously with the small number of loans in foreclosure.

Okay.

Thank you.

Okay.

Thank you.

Collyn Gilbert, Stifel Nicolaus.

Great, thanks.

Good morning, guys.

Good morning, Collyn.

Good morning, Collyn.

Just going back to the mortgage topic, I just want to make sure I understand this completely.

So all your originations, whether you portfolio or sell, obviously sell, but are fixed rate.

You're not portfolioing any arms?

No.

What's the reasoning behind that, just curious?

Well, there's very little demand, number one, for an arm.

Number two, I almost questioned somebody why they would take an arm when you can get a fixed rate long-term mortgage at such a low rate.

No pre-payment.

[Great].

It just doesn't make a lot of sense for people not to take it today, and so, hence that's the majority of the product we're seeing come through the doors.

Okay.

Okay.

And then, just a follow-up on that.

With the considerable success you've had in the mortgage business, do you guys have a program in place to try to make some of these mortgage borrowers actual bank customers?

Oh, yes, aggressively.

Could you just talk a little bit about that or is there anything you've tracked yet?

As I mentioned, we're up to 85% of the applicants that are coming in are non-Valley mortgages.

Of that, some of them are depositors obviously, but most of them are not.

And we close all of our loans in the branches and the branches are very aggressive in following up and trying to get checking accounts, savings accounts, do additional business with the borrower.

When a person is in there closing on their loan or applying for their loan, they're generally the most vulnerable to get their account away from another institution.

So we have programs -- incentive programs in our branches to try to [cross sell] them.

Okay.

Okay, that's helpful.

And then, just on the increase in the CRE non-performing loans this quarter, you had mentioned they were five of them.

Can you just give a little bit more color behind that?

And I know, Alan, you had said in general, you feel it is credit quality stabilized.

So was this quarter kind of an anomaly then with what came in, and maybe talk a little bit about kind of what's coming in and what's going out?

Yes, I don't know.

There's always loans coming in and out, so it's hard to do anything more.

We had one large loan come in; was not really a commercial mortgage, it was a commercial loan.

That was probably the largest of all of them.

We are working through that.

We expect to get out of it in a reasonable period of time.

I mean, our goal is to move these through the process as quickly as possible.

And obviously, in these troubled times, you're going to have borrowers that are going to struggle and have some problems.

But I think once again, we'd like to think that we have significant-enough collateral behind a lot of these to work our way through it.

Couple of our larger ones are sold under contract.

Going to take a while to close for whatever reason the borrowers -- closing a real estate transaction doesn't usually take 30 days or 14 days like you could do a commercial loan.

One of the -- the large loan that I just talked about, I mean, the reserves that we have against that is almost nonexistent, because again in the collateral situation.

Okay.

Okay, that was all I had.

Thanks, guys.

Okay.

Thank you.

Ebrahim Poonawala, Morgan Keegan.

Good morning, guys.

Good morning, Ebrahim.

Good morning, Ebrahim.

Yes, I have a question.

Just if you can talk a little bit on your title insurance business, we've talked about trying to cross sell that on the commercial side, if -- like what you're doing there?

And I guess the drop-off from the first quarter to the second quarter was essentially coming out of a seasonally strong quarter in the first quarter?

Yes, I mean what happens there is, there is a lot of cross-sell opportunities go talking mainly to our commercial mortgage lenders in making sure that they obviously are aware of the fact that we're out there with this product and that they should be pushing to the extent they can get a borrower to agree to take title insurance through Valley.

I mean, the rates are general -- they are the same no matter who you go to, and so we try and get them.

And I think over the last, probably two years, we've seen a very nice increase in the amount of commercial mortgage activity that has taken our title business.

Yes, we really have to emphasize.

We're not allowed to mandate the title insurance, and we don't, by any means.

But simply telling somebody that we appreciate their business, they -- we get an awful lot of it.

Yes, the first quarter, by the way, really the increase you saw was not necessarily the title business, it was the P&C business.

That is typically a first quarter on which we see a lot of additional commissions come through, and so that increases and that typically happens as a first quarter event.

So you see some drop-off in the second quarter, but it's not necessarily because of title insurance.

Got you.

And I guess if you can make a quick comment in terms of you've talked about de novo branches in Long Island, like do you already have some scheduled plans for the next two to three quarters in terms of how many branches you want to open or --?

Well, first, we haven't closed on the acquisition yet.

And one of the things that we're going to be relying upon is suggestions from their staff as to where we should be going.

They know Long Island far better than we do at this moment.

So we do rely upon that.

So we're really not going to see any activity probably for six to nine months, because even when they come up and recommend a location or a town, we then have to find a location within that town, acquire it, in most cases, build the structure, none of which -- get approvals for building it and then build it, none of which is going to happen in three to six months.

I said that we would like to double the number over a five-year period.

Okay, got you.

And just in terms of recruiting efforts like are you guys actively looking to get -- hire seasoned bankers, or have you been very active on that front?

Well, they have a great staff in -- at State Bank.

We're very pleased with their staff.

We've met with each and every one of them.

We've encouraged them to stay.

We've told them that we really want them to stay.

We've given some incentives to stay.

So I think we're going to be able to hold on to most of their staff.

So I don't see a big recruiting effort necessary for their bank.

All right.

Thank you, guys.

Thanks.

Thank you.

David Darst, Guggenheim Securities.

Hi, good morning.

Good morning, David.

Good morning, David.

Could you discuss the co-op and multi-family business that you're doing in perspective of the target size of the loan and current yields?

The multi-family and the co-op, and co-op, in particular, mainly New York City, we have gotten our name onto the street that we're interested in that.

Our lenders in New York have been meeting with people who own or who manage co-ops and expressed our desire to get involved in that marketplace as well as in the multi-family.

We tend to -- we look for those situations where we would have a very large equity position in the loan.

The yields are very competitive in that marketplace.

Right now, the co-op market is probably between 4% and 5%, when it comes to making loans on that product.

Of course, if they want a longer term, the rate is going to be higher.

It's just -- it's an individual negotiation on each and every loan.

We do have as we do on the residential side the ability to offset that by doing some swaps to convert the lower fixed rate to a floating rate.

We're constantly monitoring from an [outlook] standpoint where we stand.

But I do think that's a good opportunity for us.

It's a market that we really haven't had a big slice in, in the past.

In fact, on our books, the outstandings are still relatively modest.

So I think there's a good opportunity for future growth there for us.

Okay.

Could you tell us whether your loan pipeline has been building over the past quarter, or is it about the same or declined?

We've had a -- it's interesting as I alluded to, I mentioned in my presentation earlier.

We've had a good inflow of new business.

Unfortunately, we got that offset by prepayments, particularly on some of our larger loans, that really hurt us.

So we still have a nice pipeline and new stuff coming in.

If we don't get hit with prepayments in the third quarter, unanticipated prepayments, we should do very nicely.

Okay.

Thank you.

Thank you.

Ken Zerbe, Morgan Stanley.

Hi, guys.

This is actually Josh Wheeler from Ken Zerbe's team.

Good morning.

Hi, Josh.

Hey, Al, you mentioned you expect some margin pressure over the next several quarters, but if rates stay at this level, where do you think the margin kind of bottoms out?

I think as we said, we expect some slight compression.

I mean, it's a little hard to say.

If you look at the investment portfolio, I mean investments have continued to decline.

I mean you look at where the [tenure] is and where it was probably a year ago and it's probably down 100 basis points.

So I can tell you on the lending side, you've got a lot more competition out there these days.

It's forcing rates to levels that maybe we're not always 100% happy with, but if those rates can continue -- if we continue under pressure there, we're going to see some type of margin compression.

As I said, on the liability side, there's only so much you can do.

I mean, we're already paying some extremely low rates.

However, one of the things we are doing, as we indicated also, we've done some swaps and those swaps are helping us to the extent we are putting on some lower fixed rate loans and we'll continue to monitor that market as well to see what makes sense from us from an overall asset liability management involvement.

Okay.

And how far below the current yield on your loan book are new loans going on the books?

Not necessarily a lot.

Okay.

And last one, how do you see the repeal of Reg Q playing out in terms of the cost of corporate checking and then potential offsets in terms of eliminating your earnings credits?

Yes, it's kind of affected obviously.

I mean you're going to be paying interest on something you don't currently pay.

However, it won't affect this -- the very small check revenue accounts, because they don't have enough balances to offset their volume right now.

So they're not going to be affected by it.

The very large depositors, it's interesting, so far, most of them would rather opt for the FDIC insurance.

You have unlimited FDIC insurance if you don't get interest on your account.

That's significant to a lot of people.

Okay.

Especially if you've got -- somebody has got $20 million on deposits and then the prospects is they're going to earn some modest interest.

Yes.

Yes.

They'd rather have the insurance.

Thank you.

Okay.

(Operator Instructions) And currently, there are no further questions.

Please continue.

Thank you for joining us for our second quarter conference call.

Have a nice day.

Ladies and gentlemen, this conference will be available for replay starting today at 12.30 PM and will run until August 11 at midnight.

You may access the replay service by dialing 1-800-475-6701 and entering the access code of 209506.

Those numbers again of 1-800-475-6701 and entering the access code of 209506.

That does conclude your conference for today.

Thank you very much for your participation and for using the AT&T Executive Teleconference.

You may now disconnect.