Valley National Bancorp (VLY) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Valley National Bancorp first-quarter earnings conference call.

At this time all participants are in a listen-only mode and later we will conduct a question and answer session.

Instructions will be given at that time.

(Operator Instructions)

As reminder, this conference is being recorded.

I would now like to turn the conference over to your host Dianne Grenz.

Please go ahead.

Thank you, Greg.

Good morning.

Welcome to Valley's first-quarter 2013 earnings conference call.

If you've not read the earnings release we issued early 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 related to Valley National Bancorp and the banking industry.

Valley encourages participants to refer to our SEC filings, including those found in forms 8K, 10K and 10Q 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 first-quarter earnings conference call.

The economic and interest rate environment continue to present significant challenges for traditional spread banks like Valley.

This, coupled with the enhanced regulatory costs, continue to create a less than ideal operating environment.

That said, it is imperative during this difficult time that banks maintain both their credit due diligence, and interest rate risk profile.

At Valley our credit culture is the hallmark of the bank.

We attempt to resist short-term market pressures which only create additional hurdles in future periods.

During the last few quarters, we have witnessed a general denigration of credit terms, and many other financial institutions have become overly flexible on traditional lending standards and covenants, specifically, the relaxing of personal guarantees, coupled with expanding and acceptable loan-to-value and duration thresholds.

Within the geography in which we lend, economic expansion has been somewhat subdued.

As a result, much of the growth in loaner outstandings within the industry primarily reflects the movement of borrowers between financial institutions, as opposed to an increase in lending activity resulting from true economic expansion.

The catalyst for refinance of many of these loans has been the extended maturities, relaxed terms, and/or rates offered by competing financial institutions.

Expanding the loan portfolio merely to demonstrate growth is not and should not be an objective at Valley.

Generating positive returns, priced appropriately for both the inherent credit and interest rate risk, is the focus at Valley.

Putting on large volumes of long-term, low-interest rate loans or investments at this time will ultimately place undue pressure on bank capital and future earnings -- a lesson that seems to be forgotten by many in our industry.

In spite of the aforementioned challenges, Valley generated significant new loan originations of nearly $1 billion during the first quarter.

However, to mitigate the potential future interest rate risk, Valley sold a considerable percentage of the originations into the secondary market.

The sale of these loans, combined with increased refinancing activity and a small expansion in deposits, led to higher levels of liquidity during the quarter.

As of March 31, we had over $0.75 billion in cash that was earning between 0 and 25 basis points.

A large portion of this excess liquidity was the result of timing differences between loan payoffs and sales and loans in our pipeline awaiting closing.

This excess of liquidity directly impacted the bank's net interest margin, and more importantly, contributed to the $8.5 million contraction in net interest income.

Shortly, Alan Eskow will discuss the linked-quarter change in more detail.

However, prior to our Alan's review of the quarter, I want to discuss the steps we have undertaken to strengthen the bank's net interest income, while not increasing our interest rate risk exposure.

We do not intend to sit by idly and watch our net interest income contract.

Initially, we have reemphasized and expanded our marketing efforts for our low-cost fixed-rate residential mortgage refinance program.

During the quarter, we closed over $575 million of residential mortgage loans, an all-time record at the bank.

Nearly 22% of the originations were derived outside of New Jersey, compared to approximately 10% in the same period one year ago.

We anticipate continued geographic penetration in both New York and Pennsylvania.

As with prior periods, to mitigate the interest rate risks, we will continue to sell a majority of these originations.

However, to further augment the on-balance sheet portfolio, we have purchased and can continue to purchase loans which meet both Valley's stringent credit criteria and the desired duration.

Many of these loans are floating rate assets and should provide some boost to net interest income, both in the current interest rate environment and in future periods.

Unfortunately, these loans only began to come on to our balance sheet during the first week in April and were not reflected in the first-quarter results.

Next, we have started to further enhance our use of derivatives and introduced a new adjustable-rate commercial real estate loan product to garner a larger percentage of the refinance activity transpiring in our marketplace.

Preliminarily, we have seen a very positive reaction to this product by some of our clients.

As I stated earlier, we will not diminish our strict credit criteria simply to grow the balance sheet.

However, we believe there are opportunities to grow the commercial loan portfolio at attractive short-term rates layered with structures that reduced the future interest rate exposure.

During the first quarter, we originated over $300 million of commercial loans.

With the introduction of new pricing structures and a renewed emphasis on expanding the portfolio in a manner consistent with the bank's macro asset liability strategy, we anticipate improved new commercial lending volume as the year progresses.

Also, we intend to reduce a proportion of the bank's excess liquidity through direct purchases within the investment portfolio.

Historically, we have focused on higher coupon mortgage-backed securities with short duration.

Without altering our risk profile, we have begun to expand our investment strategy to capture a larger array of investment alternatives which provide similar duration.

Finally, we continue to be vigilant in controlling expenses and improving the operating efficiency of the bank.

During the past few quarters, we have implemented many significant cost-cutting items that will contribute to strengthening our bottom line, and we continue to explore all of our activities to seek out further savings.

We continuously review customer activity at all our branch locations and have put in place a strategy designed to right-size the branch network to aggressively meet both changes in technology and customer activity.

Branch staffing levels have declined.

The hours of operation at each location have been reviewed and adjusted to more efficiently align with customer usage.

Underperforming branches have, and will continue to be, closed.

Throughout the entire organization, staffing levels are being evaluated and processes developed to improve operational efficiency.

In just the last quarter, the full-time equivalent employees have declined over 1% and we anticipate continued progress in the future.

In summary, we have a well-diversified balance sheet and operate arguably in one of the most desirable geographic footprints in the country.

We continue to manage the balance sheet with an asset-sensitive bias, which we believe is prudent based on the current economic and interest rate environment.

We are optimistic about the future.

Largely through Valley's mortgage banking activities, we have infrastructure to generate additional revenue in the current environment.

We continue to evaluate all aspects of our balance sheet, and we are prepared to make appropriate adjustments wherever Management and the board deem it to be appropriate.

As commercial activity begins to rebound in our footprint, Valley's history in the marketplace, scale, and community bank culture provide a wonderful platform to service the needs of the community.

We offer customer-focused service, generally only obtained at a small bank, with the lending expertise and scale of a larger regional bank.

Valley's diverse and solid balance sheet should provide the vehicle for growth in future periods.

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

Thank you, Gerry.

The net interest margin declined to 3.18% from 3.41% in the fourth quarter.

As a result, net interest income in the first quarter was approximately $8.5 million less than the prior period.

The decline in both the net interest margin and net interest income is largely attributable to the low interest rate environment, the decline in number of days in the period, the contraction in linked-quarter average earning assets, and a few infrequent items.

The low interest rate environment continues to pressure asset yields as the competition for high-quality credits has intensified throughout the marketplace, and as a result tightened spreads and ultimately reduced loan yields.

During the quarter, the weighted average yield on new loans held in portfolio was less than 3.5%, which in part led to the decline in yield on average loans to 4.82% in the first quarter.

Further compressing the loan yield was both a contraction in prepayment fee income, and accretion on fully repaid FDIC-covered loan pools as compared to the fourth quarter of 2012.

The decline in these two items alone accounted for approximately 6 basis points in the linked-quarter -- 23 basis point decline.

Additionally, less days during the quarter further negatively impacted the margin by approximately 4 basis points.

As Gerry mentioned earlier, duration extension is a significant concern, and left unchecked will prove an insurmountable hurdle when interest rates eventually begin to rise.

At quarter-end, Valley had nearly $1 billion in cash due from banks and interest-bearing deposits with banks.

The effective yield on these funds is less than 25 basis points.

This increased liquidity, although a hedge against rising interest rates, had a negative impact on Valley's net interest income and margin.

Beginning in the second quarter of 2013, we anticipate a sizable amount of this excess liquidity will be deployed into loans and alternative investments to enhance the net interest income of the bank, while still maintaining Valley's interest rate risk profile.

Over the last nine months, Valley operated an originate-and-sell model for the majority of originations within the residential mortgage portfolio.

Although the yield on these new originations is greater than other loan types placed into portfolio, the unknown extension risk outweighs the short-term benefit to net interest income.

Similarly, within the investment portfolio, the tax equivalent yield of 1.43% on new purchases during the quarter reflects the bank's interest rate risk concern and strategy to reduce duration where possible.

Many of the new purchases are in either mortgage-backed securities with higher coupons and shorter average lives, or corporate securities with short-to-intermediate stated final maturities.

The absolute yields on new loans and investments are razor thin.

The incremental benefits and net interest income by extending out the curve provides only a marginal benefit to net interest income.

We have begun to enhance our utilization of customer derivatives, which although reduce current interest income, provide future asset sensitivity.

Additionally, we have expanded our purchases of other investment alternatives.

These steps will enable the bank to reduce the current excess liquidity, enhance lending opportunities, and most importantly, maintain the bank's target duration of interest-earning assets.

Valley's first-quarter total cost of funds was 1.21%, a decrease of 4 basis points from the prior quarter.

The cost of deposits declined 3 basis points to 0.46%, as on average the composition of non-interest-bearing deposits to total deposits increased approximately 1%, and the average composition of time deposits to total deposits declined approximately 1%.

The decline in funding costs is expected to continue as long-term certificates of deposit re-price at current market rates, and Valley continues emphasizing the importance of non-interest-bearing deposits throughout the bank's entire branch network.

As a percentage of total deposits, non-interest-bearing DEA account for approximately 31% of the entire base.

Although skewed slightly by the low level of market interest rates, these funds should provide additional duration protection in rising interest rate environments.

Although we anticipate continued improvement in the cost of funds, the compression on asset yields is far quicker and greater, and consequently we anticipate continued margin compression.

The scale of the decline in the margin is anticipated to improve considerably from the decrease recognized between the fourth quarter and first quarters.

The elimination of certain infrequent revenue items previously recognized in the fourth quarter, coupled with a decrease in number of days and excess liquidity in the first quarter, largely drove the linked-quarter contraction.

Many of these variables are expected to have little impact next quarter and as such we anticipate the margin to respond accordingly.

The provision for non-covered loan losses and unfunded letters of credit for the first quarter equal $3.9 million, while the total allowance for non-covered loans declined slightly to $114.7 million from $120.7 million in the prior quarter.

The $6 million linked-quarter decline is attributable to an increase in net charge-offs, largely the result of a $5 million loss on one commercial loan.

The loss was a result of fraudulent employee activities at the borrower.

The facility was in Valley's geographic operating vicinity and represented a longtime relationship acquired in the State Bank acquisition in 2012.

While we do we do not believe this loss is representative of the quality of the acquired portfolio, but rather an isolated incident.

In determining the appropriate provision for loan losses, a multitude of internal and external factors affect the decision.

Gone are the days of simply matching net charge-offs with provisions, regardless of GAAP guidelines.

Rather, alternative variables such as the period-over-period variance in risk ratings, changes in impaired loans and required reserves on those loans, and lastly, both current and anticipated economic conditions and their portfolio impact.

All the aforementioned, combined with a litany of other factors, provide the basis for the quarterly provision for loan losses.

Loans currently charged off may have already been in a previous quarter's reserve calculation, and additional reserves may not be necessary when a charge-off occurs, as we witnessed this quarter.

As of March 31, total non-accrual loans declined by $6.2 million, or nearly 5% from the prior quarter end.

As a result, total non-accruing loans as a percent of total loans declined from 1.2% in the fourth quarter, to 1.16% as of March 31.

Largely the result of an increase in market value of non-accrual debt securities of $7.8 million, total non- performing assets increased slightly to $200.3 million as of March 31, 2013, from $195.5 million as of December 31, 2012.

Exclusive of the change in market value on this security, non-performing assets would've contracted from the prior period.

In the aggregate, exclusive of the aforementioned fraud, credit remained stable.

Valley's total nonperforming asset numbers remain elevated largely for two reasons -- one, the average time required to complete a foreclosure in the state of New Jersey, which now stands at 1,002 days, is second highest in the country and over two times the national average.

Secondly, unlike some financial institutions, Valley rarely liquidates nonperforming assets through bulk sales or other secondary market activities, as in the past we have found a significant increase in ultimate recoveries by working the problem asset internally.

This methodology does have its drawbacks, as the net interest margin is negatively impacted by an estimated 5 basis points due to the balance of nonperforming assets and elevated short-term operating expenses due to collection and maintenance cost.

However, we feel the future benefit of net income in the form of recoveries outweighs the short-term drag on income.

As a result of the stagnant economy, and absolute low level of interest rates, Valley makes a concerted effort to monitor and, where possible, improve the capital efficiency of the organization.

During the fourth quarter, Valley's regulatory capital ratios improved as both the balance of risk-rated assets declined and regulatory capital levels expanded.

Valley's Tier-one regulatory capital ratio as of March 31 was 11.08% compared to 10.87% in the prior quarter, and 10.59% in the period one year ago.

The increase in regulatory capital is largely due to the bank's efforts to both rationalize the return on net income, and similarly substantiate the return to capital.

Although Valley's total assets outstanding have remained relatively flat during the last year, the bank's risk-weighted assets have declined nearly $335 million.

In this environment, rationalizing the return on both current and prospective regulatory capital under Basel 3 is essential, and from Valley's standpoint just as significant as streamlining the bank's operating efficiency.

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

(Operator Instructions)

Your first question comes from the line of Craig Siegenthaler from Credit Suisse.

Please go ahead.

Thanks guys, good morning.

Good morning, Craig.

One lever that you haven't pulled yet -- from the earnings perspective -- is restructuring the $2.7 billion of long-term debt, including the $2 billion from the FHLB.

If you were to restructure this balance, and let's say in a perfect world there weren't any capital charges, what do you think is the optimal level of debt for a bank of your size where current deposits and assets [are right] to have?

It wouldn't be that different from where we are today, because it's an offset to your long-term loans.

All right?

You can't get long-term financing from your deposit base, and if the customers increasingly are demanding longer-term financing, that's the place to go.

If we were to do it today, obviously the interest rate we would be paying on that long-term debt would be much, much lower.

It would probably be sub 2%, as opposed to nearly twice that level for us.

Craig, we think we have -- I think as Gerry said there, we have the right amount of debt.

We are not concerned that the debt level was inaccurate or whatever.

We've had a tremendous change in interest rates over a five-year period of time, and that debt was outstanding for a specific reason, to cover duration of longer-term commercial real estate loans, residential loans, investment securities etc., any of the things that we matched it up against, and it all provided a fabulous spread.

That being said, the world has certainly changed, and I don't think the level of the debt is the issue, it is the rate on the debt,

We did not use the debt to lever up the bank.

We were using the debt to offset the --

The interest rate.

The interest rate risk.

Got it.

So then my follow-up is, if you got the right amount of debt, can you give us some perspective on what it would take for you to refinance a lot of that debt?

I'm looking at the schedule here in the K, but what would it take you to really restructure that incur some near-term expenses but reduce that rate from about 4.2% as you said, maybe somewhere around or even below 2%.

It would probably cost us $200 million or $350 million --

Pretax.

--pretax, to pay it off.

I'm not sure that -- it's not linear so you wouldn't earn it back.

It would take a very long time to earn back $350 million.

You figure that out.

It does start to burn off in larger amounts starting in the latter part of 2015, '16 and '17 -- take care of most of the debt, so unfortunately it's something you have to ride out.

The question is, if we took the hit, could we earn back in the three year period that we -- that it would take here, $300 million -- $350 million?

You know --

Gerry, if you focus on the portion that's 2017 or later, $1.6 billion, have you looked at what the payback on that would be?

Yes.

It's in excess of probably four years.

It couldn't probably be less than that.

Is not something we don't look at, Craig.

I mean we do look at it, we do grapple with it, it's a very expensive proposition.

It is a significant hit to earnings and to capital.

But we understand your question.

But if we paid it off, do you think over the next three years we'd earn back that $350 million?

On that spread?

I think on the 2017 and later, that would be the portion of focus on not the stuff that's obviously maturing in the next five years here.

I know.

We're looking at everything.

Got it.

Well, guys, thanks for taking art my question.

Thanks, Craig.

Your next question comes from the line of Ken Zerbe from Morgan Stanley.

Please go ahead.

Great, thanks.

It sounds like you guys have a lot of initiatives that you are putting in place to keep your earnings up, but if we could just talk about the dividend for second.

If, for example, those initiatives don't play off or play out as much as you expect, how committed are you to the dividend -- understanding, of course, you don't want to cut it, but how should we be thinking about dividend sustainability and what are your contingency plans if the initiatives don't work out exactly right?

I have to give you my standard response, which is that every quarter our board of directors analyzes whether or not they should do anything with regard to the payment of the dividend.

They will look at our earnings, what they believe our future earnings will be, and -- it would be a very hard thing to reduce, although you may not -- as hard as that may be, it may be beyond a wise decision not to do something.

It will be looked at each quarter.

It will not be taken lightly -- a cut in the dividend would not be taken lightly.

But -- we have to see what the quarter develops and what our earnings look like.

Okay, understood.

And then, just a little clarification on the derivatives, is this basically that you're putting on more longer duration loans but you're just swapping fixed for floating?

Yes.

You're taking a hit on your current interest income in order to do that, but you're leaving the sensitivity out there as a floating rate instrument.

Got it.

And as we think about the second quarter raising balances, I don't know if you gave guidance on that or not, but is that enough to ought offset the reduction, so basically we should be looking at flat to growing balances?

I don't think you'll see growing balances in the resident area.

I think it would be flat.

If anything flat to down.

I think flat is a better way to look at it right now.

Okay

The management of this company looks at everything in the long term.

I think that's really critical.

We avoided sub-prime lending -- mortgage lending because we felt that even though some banks were reaping in big profits, and making us look bad because we were not enjoying those profits, that in the long run it was only going to come back and bite everybody, which we prove to be true.

The same thing here.

You can put on a lot of loan growth if you don't really watch the ratio, you don't care about it, but I do believe that rates are going to go back up.

I just can't tell you when.

And when that happens, though, all that long-term lending, if it is not protected, it's just going to work against you.

Okay, thank you.

Next question comes from the line of Stephen Alexopoulos from JPMorgan.

Please go ahead.

Hey, good morning guys.

Good morning.

I wanted to start -- I was looking for more color on the loan purchases you referenced that you started in April.

Maybe you could talk about the collateral that's securitizing the loans, the yield, the amount you expect to purchase, stuff like that?

It's a residential portfolio that's really floating-rate, which is not something that we find typically in this market.

Pretty much where rates are today, everything is fixed-rate that we are seeing.

So this gives us an opportunity to put on some floating-rate assets.

They're in the general level of interest rates that you're seeing today, relative to fixed-rate loans, so they're not like teaser rates that are at 1% or 2%.

I'll also point out they have a very strong third-party guarantee.

Would these be jumbo mortgages?

I don't want to get involved in discussing this.

I'd end up divulging who and where they're coming from.

But what it happens to be a very good opportunity for us, at least we believe.

Could you talk about the size, the amount that you're looking to purchase, maybe on a quarterly basis?

We've booked, so far in April, I think was $70 million.

Okay.

Is that a monthly run rate, Gerry?

No, no but we are looking at some additional loans.

Whether they come about or not, it's hard to say.

But we're very pleased.

This was a very good opportunity that came our way.

Okay.

All right so maybe it's more one-off.

Got you.

There maybe be more, but it's -- we have nothing in the pipe right now.

Right.

And then, Alan, I appreciate the commentary on the margin pressure being less in this quarter, but given how much pressure you saw -- as you balance putting more liquidity to work with that yield compression, most of your regional peers are talking about 5 to 10 basis points of margin pressure in 2Q.

Are you somewhere in that range?

I think we are probably more like at the lower end of that.

Okay.

That's what we're modeling out at this point.

But again, I think one of the things we indicated is we've seen of a fair amount of prepayments still, and so if those were to escalate higher than anybody projects at this quarter could impact us more, but at this point were not seeing it.

Then one final one regarding the 1000 days you referenced to close on a foreclosure -- what's the expected increase in the state-level G-fees, and can you talk about timing of that potentially?

There's been no specific announcement as far guarantee fees.

Most of our loan sales we're executing with -- through the cash window, so we're not creating securities, and the G-fee therefore does not directly impact us.

But right now we have no announcement from Fannie Mae or Freddie Mack as far as changing loan level pricing premiums, adverse marketing fee, etc., and to my knowledge they have not announced exactly where their G-fees are going if there is a secured station execution.

Okay.

Banking Connecticut said that their state-level G-fees are now going higher.

So okay.

But nothing in New Jersey?

They have threatened [fees] based upon extended foreclosure timelines, that a higher loan-level pricing premium might be possible but they have not announced anything specific, and they have not announced what states specifically would be incorporated into that strategy.

Relative to what we hear on the street, the number of loans that we have in foreclosure relative to the size of our portfolio is miniscule.

Okay.

Thanks for all the color.

Okay.

Your next question comes from the line of Dan Werner from Morningstar.

Please go ahead.

Good morning.

In terms of the net interest margin and what you're doing with that, are there any large buckets of CDs that are going to be repricing this year?

No, really not they aren't.

Ongoing basis, we do have CDs that are out there that originally were done over a five-year period, and they run off literally every day of the week.

We do see large CDs going down, and I think that's part of why you're seeing -- even though it's a small drop you're seeing a drop in the cost of time deposits.

So that will continue for probably a two to three year period.

Okay.

And then secondly, on the branch rationalization that you guys are going through, can you give us an idea of net count -- what you're thinking in terms of the franchise over -- through the end of the year -- are you going to be five fewer branches, you going to be about even because you open a few New York, can you give us some idea of what your thoughts are there?

Well it's probably in the low single digits, that we are talking about.

However, we have done other things.

We're trying to focus on using more part-time employees.

We have at least 25 of our branch managers who now supervise more than one office.

Okay.

All right.

That's a significant cost save there.

Okay.

Thank you.

Your next question comes from the line of Don Destino from Harvest Cap.

Please go ahead.

Hey, guys, I actually -- I thought took myself out but I'll forge ahead and ask the question anyway.

Gerry, could you help me make consistent that your two philosophies in terms of the dividend and how conservatively you're running your bank.

We appreciate how conservative you've been on credit and structuring and interest rate management, but it seems a little inconsistent with the capital management and not accreting any capital in such a tough environment.

I mean am I right to think of those two things of inconsistent?

And that it would be more conservative to just cut the dividend and start adding capital to the balance sheet?

We have more capital that we need.

We are very well-capitalized by all the measures of capital.

If we don't need any more capital, and we are having difficulty expanding the franchise through new loans, then you might as well reward the shareholders by paying them a dividend.

You can do other things, you can do --

Let me ask you another way.

Would you -- if your dividend, for whatever reason was lower, in this current environment would you want to be increasing it at kind of a 100% payout ratio in the current environment?

Probably not.

But I would -- we would do whatever we could not to, to quote, punch the shareholder by cutting him back if we don't have to, or if we don't have a better use for the funds.

Totally understood.

And then the second question was on mortgage banking.

You guys put up some impressive numbers relative to a lot of the banks that we've seen, both on margin and volumes.

It's our job to look at other banks, not yours, but can you distinguish why did better than most others?

I like to think we have a great staff and we have a great product.

I'm not going to talk about the marketing of it -- nobody's here to -- (laughter).

That has nothing to do with the spokesman.

I think we came up with a very unique product that has been very well received in our marketplace.

We have been expanding the geography when which we do it.

Only in the last six months or so have we really made an aggressive push into New York and Long Island, and that is now really bearing fruit.

As I pointed out, last year we had 10% of our laws come from there now are getting 22% of our loans coming from there.

We are also in Pennsylvania.

We find that it's an attractive product along the Delaware River.

We've opened up two offices, loan production offices, to help facilitate that.

It's very hard -- I listen to some of the giant banks when they talk about mortgage banking and having -- the difficulty they're having maintaining their levels, but remember that in our bank, we don't need as many loans to move the needle because of our size.

So if you take one of the gigantic national banks, you know they may need 100,000 mortgages a month to keep everything running.

In our case, we get a couple thousand in a month, we are real happy campers.

So it's easier for us to maintain the level that we are operating at, even if some of the refinance activity slows down nationally.

So that's a great explanation for the volumes.

Any difference in the gain on sale margins which is down a little less than most others?

It's down a little bit, we earn a little bit less on the New York mortgages than we do on the New Jersey and Pennsylvania mortgages because we have some other expenses in putting through the loan.

They're still profitable, but it does pull down, to some degree, our profitability on the overall product.

I was thinking the other way, that yours is down a lot less than others -- than others that we've seen gain on sale margins come down 25% to 35% and I think yours were down maybe 14%.

There was nothing in there in terms of a mark on the pipeline or anything like that that held up.

A lot of it had to do with pricing, too, that you can see when we sell them -- it's just -- it's a tough --

Got it.

Okay, thank you very much.

Your next question comes from the line of Collyn Gilbert from KBW Please go ahead.

Thanks.

Good morning, gentlemen.

Good morning, Collyn.

Just a follow up on Don's question, did you guys -- and if you offered this I apologize for missing it -- did you give some guidance or gross expectation range for mortgage banking for this year?

No.

Can you?

No.

Next?

All right, because a concern, obviously, is that so much of your business is the result of refi, and in the event refi slows, what's the implication?

I know you talked about going into -- expanding into different markets and such, but it seems conceptually like it's going to be a tough -- it's going to be a challenge to keep it at that $15, $16 million run-rate or so on a quarterly basis.

Going into areas where we haven't really been before, I think it's still quite fertile as far as the potential to continue doing refi.

At the same time, we are spending a considerable amount of effort right now, and gearing up our staff to go after purchase money --purchase mortgages.

I think when the refi dries up, is going to be the purchase market that's going to carry forward.

There are pockets of business that we really haven't gone after, as I said a few minutes ago, it doesn't take very much in the way of activity to move our needle.

It's not like we're putting on 100,000 mortgages a month.

If we could pick up an extra 100 or 200 mortgages under a product that we weren't doing before it's really comes in -- really talking about less than one mortgage for every branch that we have open -- operating.

So, they're doable numbers.

To keep it going.

Okay.

And then to ask a broader question on where you guys sit from a business perspective.

And I guess I'm struggling to understand, Gerry, -- totally hear you on duration risk that many of your competitors are putting on and the risk that's associated with the real estate assets at this stage of the cycle, I get that.

I guess though, given your position in the market, given the brand, given Valley's reputation, why is it that you're not able to grow CNI loans more?

You have to ask the industry.

I'm not just seeing a lot of new CNI expansion.

Collyn, you live right in the middle of our market, so do you see people opening up factories, do you see people opening up new shopping centers and growing stores?

It is not happening.

Unfortunately, people just are scared.

There's uncertainty in the environment -- the business environment out there, and they're not going aggressively.

So, then it comes to taking share then on the CNI side, and if means -- I guess I'm just try to understand -- to me it seems like there's a lot more value that will ultimately be created on getting more aggressive for CNI credit, where you get the totality of the relationship, maybe you get some fee leverage, because I think that's one area, too, where there's potential upside for Valley.

Versus -- and if the $70 million renting portfolio was a one-off, then fine -- it seems like you're getting -- the concessions could be made, you're getting customers, you are getting a variable rate product to just get more aggressive on CNI.

Even if it means going into different businesses.

To me it seems like the more obvious move.

I'll tell you this -- yesterday we had a discussion at our board meeting about the volume of calls that are going out and we've added more commercial lenders to our staff.

We have a larger commercial lending staff today than we had three months ago, six months ago, by almost any measure.

The number of calls they're making is up something like fourfold -- 400%.

It's not for want of not trying to find the business.

You have to be careful.

Sometimes a guy will say well, why should I leave my present bank to go to your bank?

That's the typical.

So we're going to have to offer something that his present bank isn't doing.

Either we're going to have to cut the interest rate, or we're going to have to lend them the money for a longer period of time.

People don't move, unless you give them something.

Yes.

Okay.

And then turning to more of a bright spot, I think, in Valley's future is M&A.

How are you guys seeing M&A right now, opportunities remind us, or give us an update of your thoughts on that at this point.

I think we are going to see more M&A developing as the year progresses.

I'm starting to hear from smaller banks the fact that -- they can't make it.

I keep talking about this regulatory burden.

It's enormous.

You add to that the net interest compression, and I don't know how they can survive.

I don't know how a bank under $1 billion today can meet all of the regulatory requirements in this interest environment and still make money.

So I think we are going to see a pickup in M&A activity.

As you guys look at it though, do you -- in terms of prioritizing targets, would you prioritize a cost efficiency type of partnership, or a revenue enhancement -- it seems like the revenue any kind of revenue enhancement --

The combination that makes the bottom line move.

The thing I look at in any M&A transaction is what's it going to do for our shareholders.

The only thing is going to make our shareholders smile is to see our bottom line go up.

So doing in a transaction doesn't cause our bottom line to go up within one year, we shouldn't be doing it.

If our bottom line goes up, we make more money.

Then we are all happy campers.

Okay.

Okay.

All right thank you.

Thank you.

Your next question comes from the line of Matthew Kelley from Sterne Agee.

Please go ahead.

Hey, Alan, last quarter gave us a pretty good breakdown of the components of mortgage banking -- sale loans, the valuation gain on loans held for sale and the reversal the mark-to-market.

Can you give us those three components again for this quarter?

I think the end of last quarter we had about a $4.7 million mark that gets reversed.

We have a about a three point -- the current mark I would have said was about $3.5 million, so anything in between that was the actual gain.

We actually lost about $1 million relative to the swing between the mark-to-market and what we sold.

Okay, got you.

And then question for you, Gerry, changes in terms, rate structure, underwriting; what market or asset class that you operate in are seeing the most aggressive behavior on each of those fronts?

Real estate lending is clearly the most aggressive.

Say that again?

Real estate.

Real estate.

Multifamily or commercial real estate?

Everything.

Across the board.

Across the board.

Okay, got you.

How much of the market do you think has moved beyond a five-year structure for multifamily and commercial real estate in the deals that you see and you're turning away?

It's enormous.

It's rare that you'll get a real estate person who will come in who will be willing to accept a five- or sub-five-year duration unless they have the product -- the property sold, they only need interim financing which is rare -- mostly people are looking for 10 or 10 plus years.

Okay, got you.

This is the lowest level of interest rates that these people have ever seen.

They are going to try and lock it in for as long as they can on the borrowing side.

The banks are struggling to put product on and so it's forcing banks to do things that maybe they shouldn't be doing, but it's forcing everybody into this mode.

Where are you seeing multi-family commercial real estate origination deals today, live?

Interest rate-wise or -- low threes.

Low to mid-threes.

Okay, and then as we think about the balance sheet progression, you've got securities-to-earning assets that I think about 18%, where do you see that ending up the year?

How much do want to pick that up?

I like to pick it up more but I'm not going to pick it up by buying 1.6% 30-year paper.

Yes.

It's just crazy.

How much (inaudible) dollars in excess cash do you think will be deployed over the next 12 months?

I'd like to see about 40% of it.

Okay.

Got you.

Any change in the tax rate -- what tax rate should we be using in the model?

Tax rate's around 29% or -- 29%?

29% is currently what we're running.

All right, thank you.

You're welcome.

Your next question comes from the line of David Jacobs, a private investor.

Please go ahead.

Thank you.

Two quick questions.

To what extent, and where would the regulators get involved, with respect to your dividend if your initiatives don't cause your earnings to go up a little from where they are now?

Well, I think the regulators, number one, would look at our capital structure.

Whether or not we were depleting our capital beyond the point that they'd be comfortable.

Which you are not doing, of course.

Right.

They would be more concerned about the capital than the earnings if you dropped $0.01 more per share.

It's hard to -- now you're asking me to give you an answer that's in somebody else's head.

I'm asking you to go back 30 years to your old position

They will be happy campers if for an extended period of time we are not earning the dividend regardless of capitals

The fact that we are a well-capitalized organization.

I see that.

Second question, again, to what extent, if you haven't already answered this, does M&T coming to your area through its acquisition of Hudson City, if indeed they finally get approval, how does that affect your business strategy, if it does?

Well, they are a commercial bank.

Hudson City is not.

So obviously, you can't deny that they will be increased competition.

There's increased competition any commercial bank comes into our area.

Will there be less competition on the mortgage side?

I don't know.

Neither do I. But I thank you for your thoughts.

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