Valley National Bancorp (VLY) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Valley National Bancorp first-quarter earnings conference call.

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

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

I would now like to hand the conference over to Ms.

Dianne Grenz.

Please go ahead, Madame.

Good morning.

Welcome to Valley's first-quarter 2012 earnings conference call.

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

Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry.

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

Thank you, Dianne.

Good morning and welcome to our first-quarter earnings conference call.

Valley reported first-quarter net income of $34.5 million compared to $24.8 million in the prior linked quarter.

We are pleased with the financial results for the period; although net income was negatively impacted by both non-cash trading losses and non-recurring State Bank merger charges.

Alan will provide a little more color on each of those shortly.

During the first quarter, we closed our State Bank acquisition and officially expanded the franchise into the Long Island market.

We now operate 44 full-service branches in the boroughs and Long Island.

Valley's total deposits in this market now exceeds $2.8 billion and over one-third of the Valley's entire C&I portfolio is domiciled in New York.

Long Island's demographics are similar to our northern New Jersey market and will provide an excellent opportunity for our customer-focused sales staff to cultivate both new and current customers.

Similar to our previous foray into the New York market with our Merchants Bank acquisition in 2001, State Bank offered very little consumer-based products.

This will be an area of focus for Valley in the future.

We have begun to aggressively market Valley's residential mortgage refinance program throughout the former State Bank branch network and anticipate introducing an enhanced low fixed cost residential mortgage refinance program for our New York customers in the coming months.

Currently, Valley's New York residential mortgage refinance program reflects a flat fee of $1999, which includes all bank fees and title insurance.

Even at this price, we have begun to witness initial consumer success on Long Island as residential mortgage applications from that market exceeded 200 units in the first quarter.

We anticipate a much expanded market penetration when we introduce Valley's new lower-priced enhanced product.

From a commercial lending perspective, early indications reinforce our belief that there will be significant opportunity to expand upon many of the former State Bank existing customer relationships.

Valley's larger lending limit, coupled with an increased commercial product offering, will provide the catalyst for Valley to develop a larger marketshare on Long Island.

Valley does not intend to halt its geographic expansion now that the State Bank transition is complete.

We believe we can enhance shareholder value and improve earnings per share by continuing our eastward migration through New York City and onto Long Island.

Preliminarily, we have made arrangements to open via de novo branch expansion two offices in this market later this year.

We are preparing plans to strategically open a minimum of five offices annually thereafter.

We may elect to expand via acquisition or de novo.

Nevertheless, moving the franchise eastward will be our strategic thrust in the coming years.

During the second quarter, we will be opening an executive office in Manhattan to spearhead this geographic expansion.

Both our senior staff and I will be spending time each week at this location in order to make ourselves readily available to this growing segment of our customer base.

The northern New Jersey, New York City and Long Island marketplace provides from our view the greatest demographic opportunities in the country.

As one of the longest standing middle market commercial lenders in the region, we have the history and stability to develop profitable relationships and promote the Valley brand while increasing both the earnings power and franchise value of the organization.

The following comments surrounding loan growth and activity for the quarter do not include the impact of the $37 million short-term loan to State Bancorp that was made in December of 2011.

That loan was used to repay their TARP funds and was eliminated at closing on January 1.

Total loan growth during the quarter adjusted for the acquisition of State was extremely promising as non-covered loans grew nearly 15% annualized.

Growth for the period was achieved twofold as Valley originated nearly $1 billion of loans internally and acquired during the last week of March an additional $112 million portfolio of mostly commercial real estate loans within our geographic marketplace.

We anticipate the purchased loans will be immediately accretive to our bottom line based on the underlying economics of each loan.

In addition, we will pursue additional relationships from the 185 commercial borrowers purchased.

We conducted full credit due diligence on each and every loan prior to the purchase.

Since we were quite selective in the loans we acquired, we will believe the transaction will add to our bottom line immediately.

New commercial lending originations for the quarter equaled approximately $350 million, relatively in line with the originations in the same period one year ago and an increase of nearly 20% from the prior quarter.

Exclusive of the loans acquired in both the State Bank transition and the purchased commercial real estate portfolio in March, total C&I grew 4.5% annualized during the quarter, equal to the 4.5% internal growth in commercial real estate.

Construction loans on an annual basis declined approximately 25% during the quarter as a few large projects converted to permanent financing and sales on certain projects have begun to accelerate.

In addition, linked quarter annualized commercial real estate lending, including construction, expanded 1.44%.

We are hearing positive signs of economic improvement from a few developers as sales have begun to improve, albeit from very low levels.

We are beginning to witness increased construction lending requests and anticipate the linked quarter contraction in outstandings to stabilize and potentially grow for the remainder of 2012.

Adjusted for the elimination of the $37 million loan to State Bancorp in the fourth quarter, the C&I portfolio expanded approximately $20 million from the prior quarter.

Commercial line usage spiked from an approximately -- line usage, excuse me, spiked approximately 38.5% in the fourth quarter to over 48% in the current period.

However, the majority of the increase is attributable to the State Bank acquisition and higher line utilization rates among their customer base.

Exclusive of the lines acquired in the State Bank transaction, legacy Valley line usage increased approximately $20 million in outstandings from the prior period.

Much of Valley's C&I growth has come from taking business away from some of our competitors as customer sentiment has not fully shifted in a positive direction.

Corporate earnings for the majority of our commercial customer base is improving from the record lows reported since the financial crisis took hold in 2008.

That being said, both current period revenues and net income is still significantly less than the amount realized pre-2008.

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

Due to the low level of market interest rates, the origination rates on many of these projects are at rates considerably lower than similar originations in prior periods.

We continuously monitor the duration and repricing characteristics of the entire loan portfolio and attempt to adjust our funding composition accordingly in an effort to maximize profits while mitigating excessive interest rate risk in the future.

One bright spot for Valley continues to be the overwhelming customer response we are receiving to our fixed cost residential mortgage refinancing program, which we offer for a one-time, low fee of $499 in both the New Jersey and Pennsylvania marketplaces.

During the quarter, we processed nearly 4000 applications, in line with the volume generated in the prior quarter.

However, loan closings for the quarter totaled $520 million compared to $380 million in the fourth quarter.

Loan activity continues to be brisk for loans originated by Valley's traditional branch network, as well as the loan production office we opened in Pennsylvania, which by itself originated over $30 million in applications during the first quarter.

Approximately 75% of the new residential originations are sourced from non-Valley residential loan customers.

As an ancillary benefit to the revenue directly recognized with the residential refinance program, we are able to actively cross-sell other Valley products and improve the overall profitability of the customer relationship.

As I stated at the onset of my remarks, we are pleased with our operating earnings for the first quarter.

We believe there is significant opportunity to enhance the reported results throughout the remainder of 2012 as we begin to recognize all the benefits associated with the State Bank transaction.

During the quarter, we completed the full systems integration of State Bank's back-office departments and now operate the combined institution on a single platform.

The total systems conversion was completed in less than 45 days from the date we closed on the transaction, a testament to the experience and outstanding capabilities of our staff.

We will begin to recognize the full benefit of our projected cost saves in the second quarter.

We have also begun to expand their product offering, which we believe will enhance the profitability of the current and future customer relationships.

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

Thank you, Jerry.

As indicated in the press release, my comments this morning reflect the 5% stock dividend declared on April 18, 2012 to be issued May 25 of 2012.

As a result, all per share data has been adjusted.

For the first quarter, Valley reported net income available to common shareholders of $34.5 million, or $0.18 per share.

Net income was negatively impacted by approximately $1 million or less than $0.01 per share due to the non-cash mark-to-market losses on Valley's own trust-preferred securities carried at fair value.

In addition, the financial results for the quarter were influenced due to the integration and merger expenses associated with the State Bancorp acquisition.

Direct non-recurring merger expenses associated with State added approximately $1 million to Valley's first-quarter non-interest expense.

Additionally, first-quarter non-interest expense included a significant amount of expenses that Valley anticipates eliminating through future cost-saving measures.

With the transfer to Valley of all the former State Bank back-office operations in February, Valley expects many of the projected cost saves to materialize in the second quarter.

The majority of cost saves will be recognized through employee salary attrition and the elimination of data processing expenses of which Valley projects will total approximately $1 million less in the second quarter than the expense recognized in the first quarter.

For the full year of 2012, Valley anticipates realizing approximately 23% cost saves on the former State Bank's non-interest expense base increasing to approximately 27% in the annual periods thereafter.

For the quarter, Valley's fully taxable equivalent net interest margin declined 4 basis points to 3.7% from the prior quarter.

The contraction in the margin is due to several factors.

The first is the impact of State Bank on Valley's balance sheet.

As required under GAAP, the carrying balance of State Bank's investment and loan portfolios were recorded at fair value as of the transaction date.

For the investment portfolio, the impact was significant as the stated coupon rate on the investment portfolio of 4.02% was marked down to 3.08%.

Although the purchase accounting mark positively affected tangible book value, there is an equal and an offsetting negative impact to net income and the net interest margin.

For the quarter, Valley reported a yield on taxable investments equal to 3.65%, a decline of 48 basis points from the prior period.

The recognition of the State Bank purchase accounting mark contributed approximately 7 basis points to the linked quarter decline.

Additionally, the decline in yield on taxable investments was the result of accelerated purchase premium amortization attributable to an increase in principal payment cash flows.

From the fourth quarter of 2011, the increased amortization negatively impacted the yield on taxable investments by 10 basis points.

Finally, the linked quarter decline in taxable investment yields was partially attributable to the liquidation in the latter half of the fourth quarter of approximately $140 million of investments, which management believed were at risk of accelerated prepayment speeds, in part as a result of the modified government TARP program.

The give-up yield on these securities was approximately 5.25%, which, on a linked quarter basis, accounted for approximately 9 basis points of the portfolio yield contraction.

It should be noted, in the fourth quarter, Valley recognized $12 million of gains on the securities sold, which we believe is significantly greater than the lost annual net interest income net of reinvestment.

The remaining linked quarter decline in the investment portfolio yield is largely attributable to the principal amortization of higher-yielding securities.

The linked quarter decline in yield on the loan portfolio of 28 basis points was in large part due to the absolute low level of market interest rates and the resulting pressure on both new and repricing loans.

During the quarter, the weighted average coupon of new loan originations held in the portfolio was slightly less than 4%.

Additionally, the loans acquired in the State Bank transaction were acquired at a prevailing yield of 5.15%, which further negatively impacted the aggregate loan portfolio yield.

As a percentage of total earning assets, the loan portfolio now comprises 78.5% of all earning assets compared to 75.6% in the prior quarter.

The increase in loan footings is partially attributable to Valley's decision to portfolio certain residential mortgages in lieu of acquiring similar lower yielding investment securities.

While on a loan portfolio basis the decision negatively impacts the portfolio yield, the benefit from a total earning asset yield view is positive.

On the funding side of the balance sheet, the cost of funds improved from 1.49% in the fourth quarter to 1.32% in the first quarter.

Declines in the cost of borrowings and in the cost of Valley's timed deposits accounted for much of the linked quarter reduction.

The decline in Valley's cost of borrowings is in large part attributable to the modification of $585 million of borrowings spread out between the latter half of the fourth quarter and into the first month of 2012.

We anticipate the annual reduction in interest expense to approximate $5.1 million as a result of the modifications.

Valley's cost of timed deposits declined from the linked quarter as a result of Valley originated certificates repricing at lower cost, coupled with the impact of the State Bank transaction.

The certificates acquired via State, inclusive of the purchase accounting adjustments, accounted for approximately 17 basis points of the total 27 basis points linked quarter improvement.

Valley continues to aggressively manage its cost of funds and we anticipate continued improvement in the cost of deposits.

However, as interest rates remain near their current low levels and the reinvestment rate on loans originated and/or modified continue to be less than the current yield of our loan portfolio, we anticipate continued pressure on the margin exclusive of the potential impact due to infrequent items.

Valley's asset quality ratios as traditionally measured were impacted in the first quarter due to the acquisition of the State Bank loan portfolio coupled with the purchase of approximately $112 million of mostly commercial real estate loans.

Both loan portfolios are accounted for under ASC 310-30, which requires Valley to initially record the loans at fair value, which includes an estimate of future credit losses.

As a result, certain asset quality ratios such as the allowance for credit loss as a percentage of total loans on the surface may appear to have declined, when in reality were to a greater degree impacted due to the accounting designation assigned to both purchased portfolios.

Similarly, Valley's delinquency and non-performing asset figures do not include the loans acquired in both purchased portfolios.

For the quarter, Valley's credit quality remained relatively unchanged from the prior period.

Total non-accrual loans were relatively flat at $125 million while total accruing past-due loans increased slightly to $44.7 million from $41.6 million in the fourth quarter.

Overall, Valley's non-performing assets increased $12.2 million, mostly due to an increase in market value of trust-preferred securities issued by one bank holding company in which Valley recognized a large other-than-temporary credit impairment in the fourth quarter and subsequently placed on non-accrual.

The linked quarter increase in reported non-accrual debt securities is not a sign of further deterioration in the securities, but rather the result of an increase in market value, which ultimately increases the balance of non-accrual debt securities.

In conjunction with the State Bank transaction, Valley recorded approximately $102.5 million of goodwill and $8.1 million of core deposit intangibles -- intangible assets, both of which compare favorably to the original estimate provided at the time the deal was announced.

As a consequence, management's original estimate of tangible slight book dilution associated with the transaction actually resulted in nominal tangible book value accretion.

For the period ended 3/31/12, Valley's tangible book value was 5.30% compared to 5.19% as of 12/31/11.

The State Bank transaction added approximately $0.02 of tangible book value to the current period's results.

As a result, in concurrence with the previously discussed cost saves, we fully anticipate the State Bank transaction to be both accretive from a tangible book and earnings per share perspective within the originally outlined 12-month period.

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

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

Maybe I'll start -- following up on Alan's comment that the expenses would come down around $1 million in 2Q, if we look at this quarter and take out the merger costs, we are running around $93.5 million.

Once the cost saves are fully in the numbers, should that run rate be somewhere around $91 million?

Is that where we're heading?

That sounds about right.

Okay.

And Alan, would that be by the fourth quarter or is that really we think about that in maybe the early part of 2013?

Second quarter.

That should be by the second quarter.

You think you will be there by the second quarter.

Oh, okay.

And what were cost saves, I may have missed it, in this quarter?

Well, the total were -- about 23% annualized at this point.

Oh, oh, I got you.

I miss that, okay.

And Alan, on the margin, given all the moving pieces you highlighted, how do we think about a base margin here heading into the second quarter?

You have got to start with where we are.

I think -- I try to keep telling everybody that there is a lot of moving parts.

Loan yields are down; investment yields are down.

We keep working hard on the cost of funds to bring those down.

I think, in addition, we have seen a lot of -- we have seen some growth in non-interest-bearing deposits, which has really helped us.

So the best I can tell you, Steve, is that we are working hard to keep that margin as high as we can.

Okay.

But do we work from the 370 you reported this quarter or are we starting second quarter at a different point just given there is a lot of moving pieces this quarter?

No, I think you've got to start at 370.

Okay, got you.

And finally, Gerry, I think I ask you every quarter if we are seeing any sign of the refi wave slowing, but I am going to ask you again.

Slightly in New Jersey, but I think New York and Long Island is going to more than pick that up.

So I don't think that, over the next quarter or two, we are going to see much change unless interest rates make a move.

I think more and more people are waking up to the fact that if they haven't already done so they really ought to.

Right.

Okay, thanks for all the color.

I appreciate it.

Craig Siegenthaler, Credit Suisse.

Thank you, good morning, everyone.

First question just kind of on your aggregate loan pipeline.

If I look at it -- if you guys look at it first quarter versus fourth quarter, if you can provide any commentary there.

And also as you are looking at kind of early trends in the second quarter in April, what type of kind of lending activity are you seeing broadly in the second quarter versus the first quarter?

I think it is just generally getting out on the street picking up business from our competitors.

As I said, I don't think there has been a major shift on the part of our borrowers and suddenly waking up and deciding they want to borrow money.

I think it is more that we are taking marketshare away from others.

We try to give very close to the vest attention to our borrowers, high-level attention to our larger borrowers and as a result, a lot of them have been referring friends to us and we are picking up additional borrowers.

So I am encouraged by what I saw in the first quarter coming out of State Bank.

Hopefully that trend that we are seeing will continue into the second quarter and throughout the rest of the year very positive.

And then the positive kind of points you are seeing out of State Bank, how much is it coming from products that State Bank wasn't allowed to offer 12 months ago, either the notional size was too large or they weren't large enough in the consumer area?

Nothing yet.

Nothing particularly large.

A little bit on the fringe.

We had a couple borrowers who have come to us because State Bank couldn't accommodate what their needs were in the past.

But for the most part, it is just more of the same, the same borrowers coming into us, not because they couldn't have come to State because I think the confidence that they are dealing with a larger bank gives them more comfort to do more of their borrowing from us.

Then just one final question, rates are really low, which makes a lot of areas of potential securities purchases pretty unattractive and then commercial demand arguably isn't necessarily strong right now in most areas.

But then you have had a lot of refi.

So how does resi mortgage continue to play a role in terms of your loan portfolio?

It has been a big help for us because, if you look at what a mortgage-backed security would produce in the way of a yield, you are probably talking in the high 2s.

And we can hold a resi mortgage at least 100 basis points or maybe more higher than that.

It is an attraction towards -- to let the mortgage-backed security portion of our portfolio go down and allow the residential mortgage portfolio to go up.

Quite frankly, from an asset quality standpoint, we have never had serious problems with the residential mortgage portfolio.

Our delinquencies today are a fraction, a small fraction of the national average as far as delinquencies are concerned.

So we are comfortable in our underwriting standards and holding in portfolio a larger portion of the resi originations.

That being said, if you look back historically at what our combined resi portfolio and mortgage-backed portfolio were, if you look back 10, 15 years ago to where they are today, we have -- we are not exceeding the point at where they were at the high point.

In fact, we are down from what the combined figure was -- 200%.

Got it.

All right, great.

Gerry, thanks for taking my question.

Ken Zerbe, Morgan Stanley.

Just a little more on the resi side.

Can you just remind us the duration of the new mortgages you are putting on?

And I thought I heard something about moving more into a fixed-rate product going forward.

Can you just address that please?

The duration is kind of hard to project because you don't really know.

It depends how long interest rates stay low.

We are figuring that the duration will probably be in the four or five-year range (multiple speakers) --

But are these -- I'm sorry -- are these like --?

(multiple speakers).

It could be 10 years.

But people don't stay in their house for 30 years.

So while it is a 30-year product, it is a rare mortgage that stays on the books for 30 years historically.

Okay.

I think the 30 year was what I was getting at.

I probably misspoke there, but okay.

Yes, it is rare that a mortgage stays that long.

I mean historically it was six or seven years I think it was.

I don't know, going forward, if someone has a cheap mortgage, well, their spouse has a hard time convincing them that they ought to buy a new home when they have a low interest rate and now rates are up, so they should sell.

That being said, people do move; unfortunately, they die.

They move; they have a change in job.

So mortgages don't stay on for the 30 years.

Understood.

Okay, and then just a little bit about Long Island or your plans to kind of expand into Long Island.

Is that something you guys can do -- that you feel comfortable you can do on an organic basis or are you looking more for smaller rollups there to accelerate your expansion?

We look with equal vigor to both, okay?

If there is an opportunity to acquire a franchise on Long Island that we feel will fit into our growth strategy, we would be happy to do the acquisition route.

In the absence of that, de novo.

Understood.

Okay.

All right, perfect, thank you.

Jason O'Donnell, CD Brokerage.

Good morning.

Alan, maybe just to sharpen the discussion a little bit around expenses.

Maybe would you mind giving us some color around the impact of seasonal items on non-interest expense this quarter?

It looks like comp and benefits was a little higher than we were looking for and maybe quantify, if you can, the impact of seasonality on occupancy expense.

Yes, I mean occupancy, just to start with that for a moment.

Obviously, that is down just based on the fact that we include in there things like snowplow removal and we had an almost non-existent during this quarter, so as compared to last quarter.

So if you're looking from quarter -- year-over-year, you would see that that would be down probably significantly.

That is a seasonal item that -- I would say that the rest of the quarters, other than the occupancy being up for new rent for new branches that we have taken over from State and so forth and the maintenance on those things are going to go higher than where we were in quarters two, three and four last year.

In terms of salaries and benefits, our own salaries we figured were up about 2.2% over the prior year and there was about a $3 million increase because of State Bank on just salaries alone.

In addition, because of the way benefit -- payroll taxes are up because of that.

So all of those kind of go hand in hand.

Additionally, pension expense is going up for everybody that runs the pension plan as compared to last year.

So there is a lot of benefit expenses at the moment that are higher.

Some of those will go back down as we consolidate in the State Bank people and in theory as less people are here versus what was here in the first quarter.

So it is obviously running higher in this first quarter than we will see in future quarters.

Alan, do you have the snow removal expense in there?

How much is that?

Off the top of my head, I don't know what it is.

It could be about $1.5 million.

Okay, great.

And then in terms of the securities portfolio, the securities book, how do you characterize the health of the trust-preferred portfolio at this point?

Or maybe more specifically your level of concern around having to take potentially additional OTTI charges later this year?

I think we are pretty comfortable with what we have at the moment.

For the most part, most of our trust-preferred securities are from the biggest named banks around the country.

Some of them were rollups from other banks they acquired.

So we are pretty comfortable with those.

I can't obviously project what is going to happen as the year moves out, but I think we are pretty comfortable with what we are holding.

I mean there is always the possibility in small OTTI on maybe some PMBSes or whatever as we go through the year, but I don't expect anything major at this point.

Okay, great.

Thanks, guys.

Dan Werner, Morningstar Equity Research.

Good morning.

I wanted to ask about the loan acquisition for $112 million.

You said it was from 185 borrowers.

Were those all originated by another local bank?

Yes.

Okay.

Do you anticipate any additional purchases from this source going forward or is this just kind of a one-off?

It is a one-off.

Okay.

And then in looking at the average balance sheet in terms of the long-term borrowings, in the footnotes, it says that the TruPS are included.

If you took out those TruPS, what would the about -- would it move the needle much on the average rate as far as the average cost of borrowing?

It would bring it down somewhat, sure.

There is no doubt about it.

There is almost $200 million in there of higher than the average balance here of 4.23% on long-term borrowings.

So they are probably closer to 7%.

Okay, okay.

And then you talked about the refinancing that you have done over the last two quarters.

Any opportunities to do anymore of that going forward?

We continually look at it.

As of right now, we don't have anything specific in mind.

But we will -- obviously as this low rate environment continues, we will continue to look at that.

Okay.

And then lastly, you talked about the multifamily growth in the quarter in the commercial real estate.

Can you kind of give me a sense of how much growth you saw from fourth quarter to first quarter and how large a book of business that is?

First of all, those are mostly our underlying co-op loans.

With a very, very low -- traditionally they can be 10% loan-to-value -- 7% on average loan-to-value on those, a couple hundred million?

$250 million.

$250 million.

I understand what it is.

I know that is a misconception that we are heavily into apartment lending and that has not been the case.

Okay.

So I tried to clarify that.

All right, thank you.

Collyn Gilbert, Stifel Nicolaus.

Thanks.

This is actually Travis Lan filling in for Collyn.

Good morning, gentlemen.

I believe the initial expected merger charges for State were about $21 million and it looks like you've recognized $3.5 million.

So are there any merger charges left to be taken and if so, kind of what is the timeline?

Yes, a lot of those actual charges came through on State's books before we closed.

Okay.

So you would --?

That is why you didn't see anything major.

There may be small amounts coming through, but, at this point, most of it has been recognized either on our books last year or on their books last year.

Got you, thanks.

And then exclusive of the acquired loans, I guess can you quantify the commercial pipeline right now?

And then kind of what is the split between legacy Valley and State?

So in other words, kind of what is the contribution on the commercial side you are seeing from State with kind of one quarter in the books?

We are beginning to see some very nice activity from State on a weekly basis.

We are looking at new credits of a reasonable size.

There is a fairly decent pipeline in the C&I portfolio in New Jersey and the commercial mortgage pipeline continues to be very active.

And then last one, I may have missed it, but do you have an expected timeline to get the low cost refinance program up and running in Long Island?

We expect to do it by the end of this quarter.

Got you.

All right.

Thank you very much.

Nancy Bush, NAB Research.

Good morning, guys.

I have a big picture question for you and I am sure it is a big picture that you live with every day, but in looking at your progression of earnings over the past several quarters and excluding fourth quarter where you had some special items, you have kind of been plus or minus $0.20 for a while now.

And I guess given that we have got this interest rate environment that looks like it is going to hang around with us for a while longer, I mean are there enough levers to pull there to kind of get you out of this earnings ghetto?

Well, I think a couple of the things that we did this quarter, for example, the loan purchase, which really didn't impact us in this quarter, will in the next quarter.

I think a lot of the savings on State Bank are going to start to materialize, which will help us going forward.

One never knows though when you are operating in this prolonged interest rate situation what that impact is going to be.

That is one reason we don't project and we don't give guidance on income.

It is our job to work as hard as we can get to get as much income as we can, period.

I think, Nancy, the only other thing I could say is that the obvious to me is to grow the balance sheet.

And I think that is what our key driver has got to be.

We have got to get more loans in the door and I think coming up with something like State and this other acquisition, we did all of those things to bring more loans in the door, as well as our own legacy customers that we have that were here before those acquisitions.

So as long as we can continue to drive those things, we will continue to see earnings come in at least as good if not better than they are.

A lot of it too has to do with our regulators.

Not only us, but I think all banks are impacted by that.

In the last dozen years or so, I think we have identified somewhere in the $40 million to $50 million range the expenses that have grown as a result of the regulators, FDIC insurance, everything else, things that we didn't pay for then.

They keep adding it onto us.

That impacts our earnings growth unfortunately.

Just one follow-up.

If we do get a -- should we get a change at the top in November in Washington, do you think that really would make any difference, Gerry, to the regulatory outlook or is so much stuff baked in right now that there really wouldn't be that much change?

I wish I knew the answer to that.

I would hope that if there were a change that the incoming administration would look more favorably on banks as a whole and stop blaming the entire industry for the misdeeds of a few.

Remember, it wasn't the industry that [all along] did subprime lending; it was a handful of institutions and many of them weren't even banks; they were mortgage companies.

But yet, we have legislation that came out of Washington that was quite punitive to all banks.

We need somebody who's going to stand up and say, wait a minute, it isn't the industry that did this; it was a handful of companies that did this.

And stop punishing the industry because all that does is come back and punish the consumer.

The industry is trying to make up for things like the Durbin Amendment.

Where the consumer got free checking in the past, it is going to be a rare thing to get free checking because that is the only place the industry can go to make up for lost revenue.

Unintended consequences, what can I say?

All right.

Thank you.

(Operator Instructions).

Ross Haberman, Haberman Management.

Good morning, gentlemen.

How are you?

A quick question for Alan.

Alan, you made a file about two or three weeks ago.

Most of that potential issuance, is that going to be for acquisitions, is that going to be for repaying of your existing preferred?

Could you shed some light on that?

I don't think we have any specific plans.

It is just a shelf that we have filed for when and if we decide to need it.

Okay.

All right, thank you.

Thank you very much.

We have no further questions at this time, so I will hand back to management.

Thank you for joining us on our conference call and have a nice day.

Thank you very much.

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