Valley National Bancorp (VLY) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Valley National Bank 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 at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Dianne Grenz.

Ma'am, you may begin.

Good morning.

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

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 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'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.

The banking industry continues to be besieged with a litany of external variables, ranging from additional regulatory expenses to the Federal Reserve's direct intervention on market interest rates.

Community banks have historically been a catalyst to the economic growth within the neighborhoods they operate.

Banks and the community they serve have a mutual interest in the prosperity of each other.

In today's difficult economic environment, the health and profitability of our industry will be closely tied to improving employment and economic conditions.

New and additional regulatory guidance surrounding the increased amount and form of capital held at every financial institution stands as an impediment to that expansion.

To further this disconnect, the new draft capital requirements issued by the joint regulatory agencies are inconsistent with the treatment of capital as outlined in the Collins Amendment, as they further limit the eligible forms of capital for many banks.

On the other hand, the proposed regulatory adjustments to the measurement of risk-weighted assets for certain loan categories is an improvement, as we have always believed every borrower needs skin in the game.

Specifically, the proposed Basel III guidance provides an advantage to those institutions, like Valley, which have emphasized larger borrower equity in their underwriting standards.

Based on a recent third-party review of Valley's first lien conforming residential mortgage portfolio, the adjusted mark-to-market, loan-to-value ratio was approximately 48%.

As a result, under the proposed guidance, we anticipate a significant reduction in the calculation of risk-weighted assets for that portfolio.

Therefore, based upon our initial review of the proposed Basel III capital requirements, legally we currently meet the enhanced 2019 well-capitalized definition for all regulatory capital ratios, as defined under the new proposal.

As the market level of interest rates remains constrained, due to a multitude of factors, Valley's emphasis on noninterest income revenue generating sources will continue to receive much greater focus.

The strength in Valley's residential mortgage banking division has consistently generated positive returns for the organization, and we anticipate continued benefits.

During the second quarter, Valley closed nearly $0.5 billion of new residential mortgage loans.

For the year, total closed residential loans exceeded $1 billion, and we are on pace to surpass all of 2011's actual volume by the end of this month.

We anticipate significant increases in mortgage banking revenue for the remainder of 2012, as we intend to sell a larger percentage of originations into the secondary market.

For the first six months of 2012, Valley earned approximately $6.3 million in gains on sale of loans into the secondary market.

We expect to recognize a significantly greater amount in the third quarter, than we generated in the entire first six-month period.

In spite of our recent success in expanding our mortgage activity, we still hold only a tiny market share in New Jersey, New York City, Long Island and eastern Pennsylvania.

Presently, approximately 73% of Valley's residential mortgage refinance applications are coming from non-Valley customers.

This not only represents a cross-sell opportunity, but provides management with an indication as to the potential product's acceptance when we begin to expand the geography in which we market these loans.

We emphasis the fact that we have no plans to lower our strict underwriting guidelines in this endeavor.

As we like to say, we plan to fish in a bigger pond, not deeper in our existing pond.

For over 15 years, Valley has actively sold loans to both Fannie Mae and Freddie Mac.

We have the infrastructure and experience presently in place to conduct this enhanced mortgage banking effort.

Historically, Valley has witnessed minimal repurchase requests from the agency, which is a testament to the strict underwriting and processes employed in this area.

At Valley, we have always retained the servicing rights to the loans we originate.

Interestingly, the performance of the loans we sell closely mirror the performance of the loans we retain in portfolio.

Furthermore, we believe these servicing rights will become a more valuable source of fee income in the future, as the propensity to sell or refinance properties currently being refinanced are at today's extremely low interest rates, and will be low in the future as market interest rates are likely to increase.

With our acquisition of State Bancorp in the first half of 2012, we expanded our branch franchise to Long Island.

In part, as a result of the acquisition, we expect residential mortgage application volume from the former State branch locations to grow accordingly.

State Bancorp was not an aggressive residential mortgage lender, and we are seeing great enthusiasm on the part of former State Bank branch staff to offer residential loans to their customers.

Valley's TV and radio commercials, supporting the New York market, were completed in early July, and the on-air media promotion has just begun.

As a result, it is brisk, and we anticipate a much expanded market penetration.

Total loan growth during the second quarter was extremely promising as Valley originated nearly $1 billion of loans.

Total linked quarter annualized growth in Valley's noncovered loan portfolio was 11%.

The commercial lending portfolio grew 4% annualized during this period, while the consumer lending portfolio expanded 23%.

The growth in consumer loans is, in large part, attributable to new residential mortgages.

However, we are beginning to witness some signs a sustainable expansion in Valley's consumer auto portfolio.

The portfolio grew over 7% annualized during the second quarter, and activity into July remains encouraging.

We continue to exercise extreme caution in underwriting these credits, focusing both on the borrower's FICO score, and more importantly, the equity component of the loan.

As an example of Valley's stringent underwriting criteria, for the first six months of 2012 we declined nearly $125 million of auto applications with borrower FICO scores in excess of 700, largely, because we were uncomfortable with the amount of the borrower's equity in the deal in relation to the financing requested.

While we like to maintain significant residential and auto loan portfolios, we are ever mindful of the fact that we are a commercial bank first and foremost.

Accordingly, as mentioned earlier, commercial lending activity during the quarter received a high level of attention, and as a result, growth was strong.

Total new originations were approximately $375 million, an increase of 7% from total new originations in the first quarter.

Specifically, total commercial real estate, including construction loans, grew over 6% annualized from the prior quarter as we continue to take customers away from our competitors, and begin to recognize some early benefits associated with the State Bank transaction.

While customer sentiment has not fully shifted in a positive direction, we are beginning to see encouraging signs of economic improvement from a few developers as sales have begun to improve, albeit from the very low levels in prior periods.

The competition for high quality low loan-to-value commercial products 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.

We actively use interest rate swaps and longer term funding strategies in order to protect our balance sheet from changing interest rate environments.

As a result, on many loans and investments, we routinely recognize less current net interest income in order to preserve a sustainable and predictable cash flow stream in future periods.

Similar to the manner in which we view credit, interest rate risk at Valley is of the utmost concern and receives a tremendous amount of management's time.

We stress our portfolio under numerous economic and interest rate environments.

Managing for the long term has always been the hallmark of the organization.

We are encouraged with the loan growth generated in the second quarter.

Although the current interest rate environment is negatively impacting Valley's net interest spread, the new relationships and tremendous franchise value to the organization provide expanded growth opportunities into the future.

Valley's mortgage banking business can generate significant noninterest income for the Bank, and we anticipate opportunities to increase revenues from this business line.

Although the economic environment is changing, Valley's diversified balance sheet, strong capital position and credit culture, provide many avenues to increase revenues.

We are excited about the many new opportunities in the coming months.

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 $32.8 million, or $.17 per diluted share, compared to $34.5 million in the prior period.

The sequential quarter decline in net income is largely attributable to a contraction in net interest income of approximately $5.4 million.

During the same period, Valley's net interest margin, on an FTE basis, declined from [3.70%] to 3.52%.

Approximately 11 basis points of the 18 basis points reduction in the margin, is due to diminished accretion income attributable to Valley's covered loan portfolio.

The declining accretion is in part due to a 41% annualized decline in the covered loan portfolio's outstanding balance, as compared to March 31, 2012.

Due to the nature of the underlying loans within each loan pool, and the specific accounting treatment applied to the covered loan portfolio, accretion income is sometimes volatile and largely subject to actual cash flows received, which are often difficult to predict in each reporting period.

The decline in incretion during the second quarter is by no means attributable to additional deterioration in credit within the portfolio, but rather the timing of cash flows.

Another variable negatively impacting Valley's linked quarter margin is the absolute low level of market interest rates, and the resulting pressure on both new and repricing loans.

During the quarter, the average loan yield was 5.09% compared 5.42% in the prior period.

Approximately 14 basis points of the decline is attributable to the aforementioned change in accretion on covered loans.

The balance is principally the result of market interest rate.

During the quarter, the weighted average coupon of new loan originations held in portfolio, was slightly less than 4%, which is consistent with the yield recognized in the first quarter.

Loan yields for the first six months of 2012 have been negatively impacted by management's decision to portfolio excess residential mortgage originations in lieu of purchasing lower yielding mortgage backed securities.

Total noncovered loan footings, as a percentage of total earning assets, equaled 80.3% as of June 30, 2012 compared to 73.5% in the same period one year ago.

Valley views the cash flow sensitivity of Valley originated residential mortgages to be relatively equal to the sensitivity of mortgage-backed securities.

Although the loan portfolio yield is negatively impacted, the effect on gross interest income is positive.

The yield on taxable investments declined 15 basis points to 3.50%, as prepayments on higher yielding mortgage-backed securities remained escalated.

In addition, trust-preferred securities, issued by financial institutions and held in Valley's investment portfolio, declined as issuers have begun to exercise call options subject to the change in regulatory capital treatment.

The trust-preferred portfolio currently yields approximately 5%, and total book balances are equal to $337 million.

We anticipate continued pressure on our earning asset yields, as Valley is mindful of the risk of extending duration in search of increased yield.

While we do not envision rising interest rates for the foreseeable future, we must remain vigilant in monitoring the composition of the balance sheet should unexpected rate shocks occur.

Our focus continues to be on maximizing long term sustainable earnings.

On the funding side of the balance sheet, the cost of funds improved from 1.32% in the first quarter to 1.26% in the second quarter.

Decline in every interest-bearing funding category contribute to the linked quarter decline.

Late in the quarter, we modified the terms on $100 million of FHLB advances, of which only a minor reduction in interest expense was recognized.

We anticipate future annual savings to exceed $0.5 million as a result of this modification.

The rate on time deposits contracted 6 basis points from the prior period.

A run-rate, which we believe is sustainable for the remainder of 2012.

Additionally, we have the ability to reduce the rates paid on other deposit products, although, the magnitude of such changes would be somewhat limited due to the absolute low level of current rates.

Noninterest bearing deposits, comprise a major funding source for Valley, as many of the Bank's commercial relationships maintain significant compensating balances.

As of June 30, 2012, total noninterest bearing deposits comprised nearly 30% of all deposits, and 23% of total funds.

Unfortunately, in low market interest rate environments, the value of this funding source is diminished, and actually, becomes a detriment in reducing funding costs, as the absolute rate paid is zero.

That being said, the franchise's value is considerably enhanced due to the stable inexpensive funding source.

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 the 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.

We do not anticipate the velocity of the contraction to parallel the current linked quarter decline.

Yet, in the current interest rate environment, it is very difficult to maintain a net interest margin above our current levels, unless financial institutions are willing to either extend asset duration or change their risk profile.

Noninterest income increased approximately $1.4 million from the prior quarter as declines in insurance commissions were more than offset by increases in the gain on sale of securities transactions, and trading gains largely attributable to the noncash mark-to-market gains on Valley's debt related to its own trust-preferred securities carried at fair value.

Noninterest expense declined approximately $3 million dollars from the prior period, largely due to the elimination of many expenses related to the acquisition of State Bancorp.

Salary and benefit expense for the second quarter increased approximately $200,000, as gross health care expenses increased approximately $1.2 million.

Health care expenses are, at times, volatile due to Valley's election to self-fund a large portion of the insurance plan.

The increase in benefit expenses obscured the contraction in salary expense attributable to cost-cutting efforts made by Valley in conjunction with the State Bancorp transaction.

Assuming health care expenses normalize in the third quarter, we anticipate a potential decline in salary expense for the remainder of 2012, as compared to the first half of 2012.

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

Total nonaccrual loans were relatively flat at $126 million, while total accruing past-due loans declined significantly to $31.5 million from $44.7 million in the first quarter.

Overall, Valley's nonperforming assets increased $15.8 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 credit impairment in the fourth quarter, and subsequently placed on non-accrual.

The linked quarter increase in reported nonaccrual 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 nonaccrual debt securities.

Additionally, impacting the increase in nonperforming assets was the reclassification of certain nonperforming commercial assets in which Valley obtained title.

We anticipate liquidating the majority of these assets by the end of 2012 for values in line with current carrying costs.

Net charge-offs for the period of approximately $10.5 million, include $1.8 million of covered loan charge-offs.

The resulting noncovered loan net charge-offs figure of $8.7 million was largely the result of a partial $4.6 million charge-off on one nonperforming commercial real estate loan.

Inclusive of this charge, annualized total noncovered net charge-offs to average loans for the quarter equaled only 0.31%.

We are comfortable with the credit quality of the balance sheet, and do not foresee a material change in the level of net charge-offs for the remainder of 2012.

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

Thank you, sir.

(Operator Instructions)

One moment for our first question -- our first question comes from Ken Zerbe from Morgan Stanley.

Your question please?

All right, great, thanks.

Good morning, guys.

Gerry, a question for you -- on the whole push into mortgage banking, why is now the right time to get more aggressive?

And I ask that -- I mean, understand the pressure on NII, et cetera, and it makes sense.

But if this is such a great business, and you could have been making a ton more money over the last six months, or the last two years, why not have started it a year ago instead of waiting for today?

Well, for one thing, we've been doing this, as I said, for 15 years.

We just haven't done it at the level we've been doing it at.

With the low interest rates, particularly, where they're currently sub 4%, is a huge demand for residential refinancing.

That didn't exist three years ago, or four years ago, or even two years ago.

It just started picking up in the last two years, and we've been growing with it modestly.

We recognize that we now have the infrastructure in place to do a lot more.

We started in the last 24 months advertising on TV, something we had never done before, using me as the spokesperson.

I don't know that it's me, I think it's the rate, but it has brought in a huge volume of applications, and an ever growing volume of applications.

Enough so that we are convinced that we can do even a lot more by bringing that product aggressively onto Long Island and into New York City, markets that we really never aggressively went after, and it does produce good profits.

Now we're not looking to hold most of the loans that we put on, particularly going forward as we get more aggressive.

We are looking to expand materially the size of our outstanding residential mortgage portfolio.

Although, I will point out that, when you combine our mortgage-backed securities held in our investment portfolio with those that we're originating, the mortgages we're originating, and the performance tends to be very close together, on a combined basis, we're lower today than we were five years ago.

So it looks like we're doing something more so of a change than we actually are when it comes to looking at the portfolio, and we are generating good fees.

We're originating them at a price that we can settle and make a profit.

So when we think about the loans that you're going to be writing going forward, third quarter, fourth quarter, are those -- should we be thinking about those as the amount of loans going on balance sheet is going to diminish because instead of holding them, you're going to be selling them?

Or are these new loans with different characteristics that you would not have written anyway?

We are not changing our underwriting criteria.

You're just holding less on the balance sheet?

Well, we are maintaining our balance sheet.

We want to hold at approximately our current level, the number of mortgages that we have.

And we are seeing some prepayment on that portfolio taking place.

So to the extent that we have prepayments taking place there, we'll hold those in the portfolio.

We are very strict, though, in what we underwrite and sell.

We don't underwrite and sell mortgages that are above, for example, 80% loan-to-value.

We generally try not to go much above.

Under some circumstances, we will go to 90%, but basically, we don't go above 80%.

And for us to hold it in portfolio, our threshold is generally a 70% loan-to-value.

Okay, so that all make sense.

Thank you very much.

Thank you.

Our next question comes from Steven Alexopoulos from J.P. Morgan Chase.

Hey, good morning everyone.

Gerry, I wanted to start -- we all know how conservatively you run the Bank.

And with the dividend payout ratio now, call it at or near 100%, how should we be thinking about the rest of a dividend cut?

We have not -- it is the desire of our board to continue the dividend as long as practical.

We are not under -- because we meet our capital requirements, we're not under, at the present time, regulatory pressure.

That all being said, I can only speak of what has happened up until 11.29 this morning.

You know, anything is possible to come down the pipe, which would require action on our dividend in the future.

I can't say that we will never reduce our payout.

But we're going to strive to do whatever we can, of course, to raise our income, so that our payout ratio is lower, so that everybody's happy.

Gerry, given the different tools you have to manage capital, how do you prioritize the dividend versus other items, such as, limiting balance sheet growth or raising common?

Just curious how you stack the dividend.

It's way up there, okay?

We, as I just said, we would not like to have to reduce capital -- reduce our dividend, but we are, of course, always mindful of our needs for capital, and the need to grow, so it's a balancing act.

And our board looks very closely at this.

Literally, every quarter when the dividend comes up, this is discussed in depth.

Up until now, nobody has expressed a desire to lower that dividend, but that could change next quarter.

I can't go into the future.

I don't have a crystal ball as to the mindset of our board who are the ones who actually set that.

Got you, that's helpful.

Alan, the reduction in margin from the accretion?

Is this the run-rate, or is there some of one-time reduction that will reverse next quarter, specifically related --

I think, as we said, you know, the cash flows kind of help determine that, and it's very difficult to be able to say for sure, whether this is a run-rate that will continue or not.

The reduction was fairly substantial this quarter.

Once again, I don't know that I could tell you that next quarter, it's going to run the same way.

I don't know that that will happen again, but it did this quarter.

Got you, and just a final one -- you guys talked about the significance improvement [and gain] in loan sales.

You talked about the first half, maybe a little better than that in the third quarter.

Are you thinking this is a $6 million, $7 million per quarter item, or could it be even better than that?

Anything is possible out there.

We're going to do what we have to do, you know, to make sure we don't take too much risk on our balance sheet, and we don't put things on that we don't want.

But that the volume is very strong, and it could produce, you know, some large profits.

I did make in my comments, the fact that we expect in the third quarter at least as much as we generated in the first half.

Thanks for all the color.

I appreciate it.

Thank you.

Our next question comes from Craig Siegenthaler from Credit Suisse, your question please?

Thanks guys, good morning.

Just first on the loan yield compression, I think there's kind of a big three area it's coming from.

One, accretable yield spread compression, and then also a little bit of loan class mix shift.

Maybe some swap, in fact, I'm not sure.

Could you kind of go through those, and attribute maybe roughly a third or a half, where it's kind of coming from?

Well, I think we said that for this particular quarter, 11 basis points came from the accretion issue.

There is no doubt there is some cost of swaps that are in there that also end up impacting the margin.

Not a large number, but it is out there.

And then, of course, I think what we said relative to the actual loan rates that we're reviewing with, I mean, we're seeing refinances every day of the week, people want to refinance.

That being said, rates are at that 4% level, give or take, and the average is at 5.09%.

So I don't know that I can give you a specific breakdown, but I think the one I did give you was the 11 basis points on the 18.

Got it.

And then, one of the things that could benefit you, though, is actually if you're growing loans faster than earning assets, deposits, and securities within the balance sheet, allowing mix shift to take over.

And one reason that isn't prominent is your C&I loan growth, it's actually fairly low versus the industry competitors.

Can you give us maybe some reasons, in terms of why your C&I loan growth is lower than competition?

Well, one of the reasons is our credit quality.

It's one thing to run out to simply grow the portfolio.

It's another to grow it under the lending criteria that we employ at Valley.

We're very tough.

Listen, our loan growth in the residential mortgage area was a laggard in 2004, 2005, 2006 and 2007.

That's because we wouldn't do sub-prime lending, okay?

Same thing applies here.

If we can't get enough of a rate to cover the risk that we're taking in the loan for one thing, we're just not going to make it.

It's easy to do asset-based lending at 100 basis points below prime, and think you're going to make money on that, but you're not factoring in your loan losses.

You know, one of the things in the credit card industry they learned is, as long as they can charge 20% interest, they can absorb a 5% loss.

But if they try to take put on credit cards at 6% or 7%, they're out of business, same thing here.

Got it.

And, Jerry, just to follow up on that point -- so your commentary is kind of like C&I loans are actually getting underpriced relative to risk.

I think many would argue it's potentially underpriced relative to the [NIM] and the [ROE] that translates.

There's just not a lot of asset yield there relative to funding costs.

But you're actually saying that there is actually some credit risk in the C&I that's getting priced to that?

Is that fair?

That's correct.

Okay, got it.

Guys, thanks for taking my questions.

Thank you.

Our next question comes from Dan Werner from Morningstar, your question please?

Good morning.

In looking at the balance sheet, and kind of the long-term borrowing bucket out beyond five years, as well your own TRUPs on the balance sheet, and since those are no longer going to be counted as tier one starting next year, does it make any sense to do a perpetual preferred non-cumulative or common issuance to replace the TRUPs, as well as absorb the prepayment loss that you would do on a refinancing of those long-term borrowings?

Well, first of all, our trust-preferred doesn't go away next year; it goes down by 10% towards capital each year starting next year.

So it doesn't go away overnight.

I'm just saying (multiple speakers) --

Obviously, long term, they are not going to have the value that they do.

They've passed their call dates, so we can call them at any time, and as you can see, we have in the past been calling them, piecemeal.

Our board is looking at all capital venues on a regular basis.

We have a very comprehensive capital plan, and we discuss our capital needs with the Board on a regular basis.

One of the topics that we have discussed is this perpetual-preferred stock.

There has been no decision made regarding any of these, but our board is well aware of the different areas.

As I say, we discuss them all the time.

If we have to make a change, we'll make a change.

Okay.

I guess I was just commenting that it would make sense from a margin standpoint if you could refinance those long-term borrowings and kill two birds with one stone.

I guess that's what I was -- but that's my comment.

Yes.

Thank you.

Thank you.

Our next question comes from Travis Lan from Stifel Nicolaus, question please?

Thanks.

Good morning, gentlemen.

Most of our questions have been answered, but just quickly, to be clear, the reduced accretion from the PCI loans was due to accelerated prepayments from Park Avenue and Liberty Point?

Yes, part of it was definitely that.

Okay, and do you have a sense if any of those borrowers refinanced back into the Bank?

Very few, if anybody.

I don't think hardly any did.

And then, Alan, do you a blended loan yield for the covered portfolio?

For the covered portfolio?

Yes.

It's about 7%.

Okay, that's it, thank you.

Thank you.

Our next question comes from David Darst from Guggeheim Securities, your question please?

Thank you, good morning.

Okay, so you said that the loan pool from the decline in the accretable yield was primarily those FDIC deals, nothing from State, yet?

Or are you seeing faster prepayments in that portfolio as well?

No, not at this point.

Okay.

And so should we treat any of that as an adjustment, or should we think about the margin going forward at this [3.50] level as a starting off point?

Yes, I think that's the way you would look at it.

And Alan, do you have the expected increase in your risk-weighted assets under Basel III?

That's actually going to be somewhat of a decrease.

I think Gerry hit that point before, the fact that our residential loans have such a low loan-to-value relative to the way the buckets fall, we do expect that that will likely go down.

Okay.

Do you have the proforma capital ratios?

Not off the top of my head, but --

We meet the minimum.

We meet --

Meet or exceed.

We expect to meet the well-capitalized certainly by -- today for 2019.

But we've only been through rough estimates at this point, so I'm not about to release those ratios.

You should just expect that we meet the requirements.

Okay, and I guess that -- but that also follows under your point on the perpetual-preferred and other types of capital that you can include.

That --

Exactly.

-- might not be dilutive.

Right.

Okay, got it.

Okay, thank you.

Thank you.

Our next question comes from Brian Kleinhanzl from KBW, your question please?

Hey, just a quick question on the mortgage banking, can I (inaudible) some color on what you're seeing on the gain-on sales margins, and if that went up or down from the prior quarter?

It went up a little bit.

And then, also you mentioned that the CRE nonaccruals that you have are relatively low carrying cost?

Can you remind us what that carrying cost is, and kind of what the inflows and outflows were out of those buckets this quarter?

No, I don't think we really disclosed anything on that.

Carrying cost is what our -- you know, there's not a huge carrying cost for those other than, obviously, taxes and a bunch of other items, but I don't have that --

No, I mean what is it marked to relative to its original balance?

Oh, how much did we write down the property?

Right.

Oh, I'm sorry; I didn't understand your question.

It's hard.

It's all over the place, and part of the problem comes in on the appraisals.

What it's carried at is what it now appraises at, although, some of the appraisals in my mind come in kind of crazy low today.

It seems like the appraisers are all trying to cover their backside, so they're having us write things down more than I understand.

Fortunately, we don't have a big pot of them, so it's not that material.

You know, just on that whole issue, you know, we go through a pretty good analysis of every single loan that's impaired.

And whether it's a new loan that went in this quarter, or it's prior loans that we continue to look at every quarter, you know, we take into account whatever the current appraisals are, whatever the discounted cash flows are relative to cash flow loans, and I think we've made sure that we are covered as of this point in time.

And that's why, when you look at the reserve, as an example, the reserve is reflective of everything, so it's not a matter of somebody might have said [bleeding] reserve.

I think it's more a matter of, what is our reserve needing to be relative to what we've already charged down, what we've already taken impairment on, or any kind of other reserve we set up on those.

Okay, great, thanks for taking my question.

Thank you.

Our next question comes Nancy Bush from Research, LLC.

Question please?

Good morning, guys, how are you?

Obviously, a response, or one response to the headwinds that you're hitting, which are pretty considerable, would be to cut costs more aggressively.

Have there been any sort of new initiatives set in motion this quarter?

And I realize it would be tough, given that you're trying to expand in some areas, but what is your ability to go to the other side and start cutting a bit more?

We're always looking at where we can cut costs, Nancy.

You know the Bank, we look at every expense on a regular basis.

We've been hammered, as I said, repeatedly by the regulators with additional costs that seem to offset our cost-saves.

Fortunately, we've come up with enough cost-saves, so at the end of the day, that we look pretty flat.

But, I mean, you have things like the Durbin Amendment, which cost Valley $4 million.

Well, you've got to come up with cost-saves to offset that $4 million.

The FDIC insurance today is high, and it's costing us roughly $14 million, $15 million a year.

If you look back 10 years ago, that number was zero, so -- or pretty close to zero.

We've been able to cut other expenses to make up for that.

You know, health costs, as Alan mentioned, are reflecting a significant increase, so we're looking at those areas where we can best deliver something to our staff, without killing the bottom line.

You know, Nancy, I think you will see some more, not huge, but some more additional saves based on the State acquisition.

But that being said, you know, we're in a mode now where we've increased our volume on loans.

Loans are coming in across the board in each of our major areas, and so it's hard to reduce a lot of those types of costs relative to putting on new loans, when that's going on.

We try, for example, we try to manage the staff in our branches by using as many part-time employees as we can.

Throughout the whole organization we look at those things.

So there would not be any kind of inclination, though, to delay, or whatever, any kind of expansion plans that you may have in the works as a result of this?

Well, we're looking a little bit harder at some branch expansion right now, because that would create a cost, you know.

In fact, if anything, we've closed several of our branches in the last six months, and we're looking at several others to make sure that they carry themselves.

All right, thank you.

Thank you.

And our final question comes from Matthew Breese from Sterne Agee, question please?

Just to be clear, to-date, let's call it over the recent 18 months, the build in the residential loan portfolio has been from booking excess from the mortgage origination platform, is that correct?

Right.

Okay.

And then you guys said that, you know, going forward, you're going to be booking more gain-on-sale, and so that portfolio should be flat?

Relatively, yes.

Okay, and then my last question is, there was some recent guidance from the FDIC about a self-implemented stress test.

You guys are covered by the OCC.

Has there been any further information on that, and any color or implications from it?

No, but I'll tell you, Valley has been stress-testing its portfolio for years.

It's not something new.

So whatever they want us to do, we're going to do.

Yes, we've had to do stress tests for a number of times, whether it was to get out of TARP or acquisition-related stress tests.

Yes, obviously, this will change, but I think based on what the results were of those things, we, obviously, passed all the stress tests, so we don't anticipate an issue there.

And I think, as we said before, when you look at things like our residential loan portfolio which has a low LTD, when you look at our commercial real estate portfolio that also probably has an LTD in the 50% range, we think that we'll be just fine.

So you think you have the infrastructure in place to keep expenses as it is?

Yes.

Okay, thank you.

Thank you.

And we have one more that just came in from Ross Haberman from Haberman Management, your question please?

Good morning, gentlemen, Ross Haberman.

Quick question -- I saw that -- I think it was BB&T issued a new trust-preferred (inaudible) last day or two at 5 and change.

Have you reconsidered your trust-preferred, and possibly issuing a new type soon?

Yes, you must have missed the -- that question was raised before.

We're looking at everything all the time.

There's been no decision made on anything.

It's interesting to note the interest rates that a perpetual-preferred stock has been issued at have been coming down rather dramatically over the last 18 months.

I guess that as interest rates fall, people are realizing that it's a good investment, so it seems the longer we wait, maybe the cheaper it will be.

Okay, at some point, it might be worth your while.

We look at that all the time.

Okay, thanks guys.

And I'm not showing anybody in the queue that --

Okay, thank you for joining our conference call.

Have a nice day.

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