Valley National Bancorp (VLY) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank Second Quarter Earnings Call.

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

Later there we will be an opportunity for questions.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you.

Good morning.

Welcome to Valley's second quarter 2013 earnings conference call.

If you have not read the earnings release that 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 in Forms 10-K, 8-K and 10-Q, for a complete discussion of forward-looking statements.

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 second quarter earnings conference call.

We are pleased with the second quarter results as the earnings, total past due loans, non-accrual loans, non-performing assets and criticized assets at the Bank all show signs of improvement.

Furthermore, we anticipate continued core net interest income expansion as we move into the second half of 2013.

Although the economy and regulatory environment remain challenging, we are beginning to witness opportunity that provide for growth in both the balance sheet and net income.

Loan prepayments continue to slow and Valley's portfolio of non-covered loans expanded on a linked quarter basis for the first time in a year, as we've also experienced broad-based growth in both Valley's commercial and consumer lending portfolios.

For the quarter, we originated over $970 million of loans, which represented one of the best quarters of originations in the Bank's history.

Originations in the consumer lending portfolio were largely driven by activity in Valley's residential mortgage department, although consumer lending, largely indirect auto, activity was also brisk with new originations increasing 10% above the first quarter.

During the second quarter, we closed over $480 million of residential mortgage loans, approximately 81% of which we either sold or targeted for sale.

The recent increase in market interest rates has negatively impacted application volume.

However, we have also enhanced the Bank's future profitability by beginning to retain a larger amount of originations into portfolio now that we are closing loans at interest rates worthy of holding in portfolio.

In response to the increase in market rates, we have modified our marketing strategies to highlight Valley's $1,899 fixed cost purchase program, which, similar to Valley's $499 refinance program, covers the cost of title insurance and all bank fees.

We anticipate significant traction in this product as application volume begins to shift from refinance activity to that of a purchase market.

Additionally, effective July 1st, we introduced a new low fixed cost product for two-to-four family homes located in New Jersey, New York, and Eastern Pennsylvania.

We believe this market offers a real opportunity as we have historically focused primarily on traditional single family home financing.

Even during the refinance boom, Valley's origination volume of loans paled in comparison to the major players in this field.

With the aforementioned product expansion, we believe even capturing a small percentage of this marketplace could produce significant results.

Consequently, while the increase in market rates is expected to negatively impact residential mortgage refinancing and result in a decrease in gain on sale revenue for the remainder of the year, the overall impact may be offset by the new products just mentioned.

Furthermore, as a positive, the increase in rates has improved the pricing profile on many commercial products.

During the last year, as market interest rates hovered at historic lows and banks competed on price to obtain business, we remained cautious about expanding loan growth merely to increase the size of the balance sheet.

At Valley, generating positive returns priced appropriately for both the inherent credit and interest rate risk, has always been our focus.

Putting on large volumes of long-term, low interest rate loans or investments ultimately place undue pressure on bank capital and future earnings.

However, the increase in market rates has now shifted the pendulum.

For many commercial credits, the market dynamics have improved as to where the risk/reward relationship is more rationale.

During the second quarter, we originated over $315 million of commercial credits, an increase of approximately 4% from the first quarter.

Also, our new loan pipeline is the strongest we have seen in many years.

As such, we expect new commercial lending origination volume in the third quarter to exceed the second quarter results.

Hence, as a result of this activity, we are guardedly optimistic that we will see an increase in our net interest margin in the third quarter.

Additionally, as customary and expected at Valley, we have not denigrated or relaxed credit standards in an effort to expand volume.

Quite simply from our perspective, pricing within the marketplace is returning to levels both equitable for the borrower and the Bank.

With regard to the marketplace, we are still witnessing extreme competition for quality credits.

Although pricing has increased, other loan terms often remain overly accommodative, and from Valley's perspective, create undue risk.

The relaxing of personal guarantees, coupled with expanding the acceptable loan to value and duration thresholds, are more common trends we have observed.

We continue to remain diligent in our underwriting and resist moderating our criteria simply to grow the Bank.

As we look to profitably grow the balance sheet, we remain focused in our pursuit to reduce operating expenses throughout the organization.

As a result of the decline in mortgage banking activity, we expect a commensurate percentage reduction in operating expenses.

We have already reduced staffing in the residential mortgage department by 20% and will continue to do so if market conditions warrant such action.

In addition, we have undertaken other steps to reduce operating expenses.

For example, in just the last year alone, we have announced or closed six branch locations that were either underperforming or there were opportunities to consolidate services with another nearby location.

However, we adamantly believe that the value of deposits will increase as interest rates rise, and we must be conscious of closing locations which may prove to be more valuable in a higher interest rate environment.

To remain prepared for the likely shift of the benefits of a broad-based branch network while simultaneously furthering our efforts to reduce expenses, we have pursued alternative strategies rather than simply closing branches.

We have combined the branch manager position at nearly 70 of our locations.

To put this in perspective, the cost saves attributable to just this one action are roughly equivalent to closing another 10 to 15 locations.

When contemplated in conjunction with the aforementioned actual branch closings, in just the last year, we have reduced the cost of our branch network by approximately 10% while only having to close less than 3% of our locations.

As I stated earlier, we firmly believe that as interest rates rise, the importance of deposits and the associated value of our branch in generating those deposits will be enhanced.

It would be shortsighted to naively close a long-term valuable asset due to current short-term economic conditions.

At Valley, we remain vigilant in continuously optimizing the cost structure and reducing expenses wherever appropriate.

In just the last year, staffing levels at the Bank have been reduced by over 2%, and we anticipate continued contraction as we automate more processes, reduce the size of our branch locations, and enhance the utilization of technology.

Our efforts to optimize staffing levels is a major accomplishment, considering the implementation of additional regulatory requirements throughout the Bank as mandated by Dodd-Frank, the CFPB, and our primary regulators.

To further reduce labor expense at the Bank, during the quarter, Valley's Board of Directors approved the freezing of our defined benefit employee pension plan, the executive benefit equalization plan, and the Board of Directors' pension plan.

While a painful step to take, a defined benefit plan has become a very expensive benefit due to the costly and often unpredictable nature of this expense.

Shortly, Alan will discuss the impact of this action -- exactly what the impact of this action will have on future period expenses in more detail.

We have been and remain proactive in reducing operating expenses both where appropriate and in line with the long-term interest of the Bank.

In summary, we are guardedly optimistic about enhanced income opportunities in the coming quarters.

The slowdown in loan prepayments coupled with the increase in market interest rates is encouraging and should have a positive impact on Valley's net interest margin and income.

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

Thank you, Gerry.

The tax equivalent net interest margin declined slightly from 3.18% in the first quarter to 3.15% in the second quarter.

The linked quarter 3 basis point decline, albeit negative, is a significant improvement from the prior quarter linked period decline in the margin of 23 basis points.

Net interest income for the quarter was $109.9 million, relatively in line with the results reported in the first quarter.

Earning asset yields contracted 6 basis points on a sequential quarter basis to 4.34% as the 6 basis point increase in loan yield was more than mitigated by a contraction in investment yields, coupled with the continued increase in average excess liquidity for the quarter.

The decline in investment yield is largely attributable to new investment purchases during the quarter of approximately $385 million with a weighted average yield of 2.22%.

Many of the new purchases were mortgage-backed securities with higher coupons and, to a lesser degree, corporate securities with short to intermediate stated final maturities.

During the quarter, Valley recognized nearly $8 million of premium amortization expense related to investment securities, which negatively impacted our investment yield and net interest income.

We have historically purchased securities with higher coupons and larger premiums.

As of June 30th, the unamortized premiums on mortgage-backed securities was approximately $64 million of which we are scheduled to amortize approximately $32 million over the next 12 months based on prepayment speeds recognized in the second quarter.

If market rates remain at or close to the increased current levels, we anticipate a decline in future amortization which would positively impact the portfolio's yield and net interest income.

The increase in loan yields of 6 basis points is largely the result of additional accretion on purchased credit impaired loans.

We anticipate additional accretion in future periods from the purchased credit impaired portfolios as the credit performance of each pool has improved, resulting in increased expected cash flows and a net reclassification from non-accretable to accretable yield.

Although interest rates have recently increased, absolute yields are still at historically low levels and the competition for high quality credits remains intense throughout the marketplace.

As a result of these conditions, credit spreads remain thin, resulting in yields on new loans originated to be below the current loan portfolio yield.

During the quarter, the weighted average yield on new loans originated and held in portfolio was less than 3.5%.

We anticipate the new volume yield to improve as market rates increase.

However, we do not expect the increased yield on new originations to have a positive impact on the overall loan portfolio yield until market rates increase to levels significantly above current rates.

As market interest rates improve, we anticipate shifting a portion of Valley's residential mortgage volume from a strategy of originate-and-sell to that of an originate-and-hold model.

The increased loans held in portfolio will likely reduce Valley's excess liquidity position and, as a result, positively impact both the net interest margin and net interest income.

With the expected decline in liquidity, due to the aforementioned change in residential mortgage strategy, coupled with the new loan volume Gerry referenced in his comments, we expect an increase in aggregate earning asset yields for the remainder of 2013, assuming market interest rates remain at or above current levels.

Valley's second quarter total cost of funds was 1.18%, a decrease of 3 basis points from the prior quarter.

The cost of deposits declined 3 basis points to 0.43%, 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 by slightly less than 1%.

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

As a percent of total deposits, non-interest-bearing demand deposit accounts represent approximately 32% of the entire deposit base.

When combined with Valley's long-term borrowing portfolio, approximately $6.5 billion or 45% of Valley's entire funding base is largely immune to increased interest rates.

We expect continued improvement in the cost of funds.

Although on an isolated basis, the market compression on asset yields, due to new volume rates, largely mitigates the entire benefit.

That being said, we anticipate other factors to positively impact earning asset yields and the margin in future quarters.

The additional interest accretion recognized on purchased credit impaired loans in the second quarter of approximately $2 million is expected to double in future quarters, assuming forecasted cash flows remain in line with expectations.

Additionally, if current interest rate levels remain static, due to a likely contraction in market prepayment speeds, we anticipate a decrease in premium amortization in the investment portfolio.

Finally, we expect to reduce a portion of the excess liquidity through loan growth.

When combined, we are optimistic these variables will expand both net interest income and net interest margin.

The lower provision for losses on non-covered loans and unfunded letters of credit when compared to net charge-offs is the result of a litany of factors.

The overall credit quality of the institution improved from the prior quarter as total accruing past due loans declined sharply from the prior quarter.

In addition, both criticized assets and non-performing assets also declined from the prior linked quarter.

As discussed in both our prior earnings calls and reflected in our regulatory filings, the actual net chargeoff amount recorded in each period may not be representative of the actual provision due to the methodology used to determine the quarterly reserve.

Non-interest income for the quarter was $32.9 million, an increase of $1.6 million from the first quarter.

$14.4 million of the income was attributable to mortgage banking, activity as the Bank originated and sold approximately $475 million of residential loans during the quarter.

Due to the increase in market rates, origination volume in the third quarter is expected to decline significantly from the second quarter.

Additionally, as market yields on this product have increased, Valley has begun to shift strategy from that of an originate-and-sell approach to an originate-and-hold model.

As a result of these events, we anticipate a reduction in gain on sale activity in the third quarter.

A portion of the decline in non-interest income will be mitigated by increased interest income attributable to expanded portfolio volume.

However, we do not expect the increase in interest income to fully offset the contraction and gain on sale income.

Loan volume is dependent on both purchase activity and the absolute level of market interest rates.

Non-interest expense for the quarter was $95.3 million, nearly identical to the amount reported in the first quarter.

However, the second quarter results included a few infrequent items, which we do not anticipate recurring in the third quarter.

Second quarter FDIC insurance expense of $5.6 million included approximately $1.6 million of adjustments to our assessment imposed by the FDIC.

Based on our current profile, we expect to incur future quarterly assessments of approximately $4 million.

Additionally, with the expected decline in mortgage banking activity, we have begun to actively address staffing levels and other direct expenses throughout the department.

It is likely non-interest expense attributable to mortgage banking will decline by approximately $1.5 million to $2.0 million in the third quarter, in part as a result of these actions.

Further, in June, the Board of Directors approved a freeze of all benefits related to the Company's defined employee and director retirement plans effective December 31st, 2013.

As a result of this action, we anticipate recording approximately $2.1 million less in non-interest expense over the next 6 months.

Additionally, retirement-related benefit expenses in 2014 will be considerably less as the increase in expense attributable to expanded employer matching 401(k) contributions will be a fraction of the previously-recorded annual pension expense recognized by Valley.

As a result of these proactive strategies to reduce non-interest expense, we anticipate third and fourth quarter recurring non-interest expense to be about $92 million a quarter.

Our effective tax rate declined during the quarter as a result of management actions to effectively use corporate structures to our benefit as briefly discussed in our press release.

Additionally, our use of tax credits also reduces our effective rate.

These credits generally require an investment by the Bank that is amortized over the life of the credit.

The amortization expense approximated $2.6 million during the quarter and was reflected in other expenses.

Although these expenses negatively impact our efficiency ratio, on an overall net basis, the tax credits have a positive impact on net income.

Currently, we anticipate using more tax credits in the future, so long as they remain available and accretive to net income.

We continue to actively manage the Bank's capital position, remaining cognizant of growth opportunities in the marketplace and new regulatory capital guidelines.

Improving the capital efficiency of the organization, whereby balancing both risk-weighted assets and regulatory capital in the framework of product pricing and rationalizing the return on net income, are an important focus at the Bank.

During the second quarter, we announced the redemption of $15 million in the principal face amount of trust-preferred securities expected to be completed tomorrow.

As a result of the new Basel III capital rules, trust-preferred securities for Valley will be phased out from counting towards Tier 1 equity effective January 1, 2015.

Our Board has authorized management to retire the remainder of our trust-preferred securities in a timely manner to conform to the new Basel III guidelines, and to adjust our composition of regulatory capital to both reflect the new guidance as well as reduce our cost of capital.

Valley currently maintains strong capital ratios, as evidenced by a Tier 1 common regulatory capital ratio of 9.37%.

Presently, this ratio exceeds the fully phased-in minimum Basel III Tier 1 common capital ratio, including the full capital conservation buffer by 237 basis points or over $270 million of common equity.

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

(Operator Instructions) Ken Zerbe of Morgan Stanley.

First question I had, just on the FDIC or the higher accretion in the non -- net interest income.

Want to make sure that -- because obviously you're very and very positively about this.

It does add to NII.

But just want to make sure we're thinking about this right, that this has a -- I'm going to say 80% offset in fees such that your fees actually go down by 80% of the increase in NII.

So is it right to think that the net impact of the higher or the better accretion is largely offset through lower fees?

Not through lower fees.

It's an income offset.

Well that's -- yes, I mean lower accretion from the FDIC (multiple speakers) asset?

It's a non-interest income offset.

Got -- okay, but that is the right way of thinking about it, that the vast majority really doesn't hit --?

Okay, okay.

Understood.

Thanks.

Then, can you be a little more specific in terms of -- you were talking about the pricing improving.

I think we've gotten mixed messages I guess from a lot of the different banks this quarter.

Where exactly are you seeing the better pricing?

Which products?

Maybe how much of improvement you're seeing versus where we were say a couple months ago?

Thanks.

This is Gerry Lipkin.

I think we're seeing it in our commercial real estate.

I think the spike up in interest rates, the 100 -- approximate 100 basis point increase has been reflected in underlying co-op loans.

We're seeing higher pricing in those loans.

We're seeing higher pricing in some of our garden apartment, high multifamily loans.

I think it's starting to settle in across the board.

We're starting to see higher pricing in the residential mortgage area for sure.

We were down pricing a 30-year fixed somewhere around 3.5% and right now that number is about 4.25% to 4.5%.

So that's a significant change.

We don't want to keep loans on our books at 3.5% or 3.25%.

If you're putting them on the books at 3.25%, you're certainly not going to help your net interest margin.

If you're putting them on your books at 4.25%, 4.5%, you are helping your net interest margin.

That's one of the reasons why we wouldn't hold at one level and we would hold at a different level.

Ken, just going back to your other question for a minute, you know not all of our PCI loans are covered by the FDIC.

A lot of those are loans that we acquired from state, for example, and another outward purchase.

So, therefore, if there is an adjustment, an accretion adjustment, it's not -- that doesn't necessarily get offset at all by non-interest income.

So that's a gain to the bottom line, pretax.

Got it.

Great.

Okay, thank you very much.

Steven Alexopoulos of JPMorgan.

I want to start with the new originate-and-hold model for the resi mortgage.

Are you going to essentially hold all of your production?

We never hold all of our production.

We will be holding a much larger percentage than we did in the past.

We always look at it in terms of our needs, in terms of asset liability management.

We look at credit quality.

So there are always going to be loans that are going to be originated, that are going to be available to be sold.

It just may be a lot lesser number than we've done in the last couple of quarters.

So 30-year fixed rate mortgages you'll start adding to portfolio as well?

We hope some could be, yes.

We've always looked at our entire composition of the balance sheet.

You can't pick out one category and look at that.

This is an entire asset liability strategy, if you will, and it changes with interest rate levels and what kinds of products we can do.

Long term historically, we found that the duration on a 30-year fixed and the duration on a 15-year fixed were very close.

But when the interest rates on a 30-year fixed got down below 3.5%, in some cases some banks were offering them below 3%, that loan's duration certainly is going to go out a lot longer than the historic 7, 8 years that we see on a fixed rate mortgage.

That's one reason we did not want to hold those in portfolio.

But as rates gravitate north of 4.25%, 4.5% maybe close to that -- if they keep moving in this direction they could hit 5%.

If that'd be the case, the duration will go back more closely aligning itself to our historic numbers.

That's the reason we've made the change.

So given this new model, maybe Alan, do you have an estimate of where that gain on sale revenue could go to?

I mean could that get cut in half when we think about third quarter?

Sure.

Could sure.

Could easily be that.

Okay.

Then on the margin guidance, which I think I get it, but I'm looking at the loan portfolio yields I guess around 4.5% this quarter.

You're adding you said 3.5% or you added at 3.5% in 2Q.

Securities yield 2.6%.

I think you said you're adding 2.2%.

How are you thinking about reinvestment rates?

Is this all basically just cash going from securities book into longer-term mortgages that's going to drive higher NIM and NII?

Or are you assuming reinvestment rates actually improve above?

A lot is going to be going into commercial loans as well.

The duration of those is a lot different.

Okay.

But you're assuming that core earning asset yields continue to decline.

It's just a mixed shift phenomenon essentially?

Steve, I think the way you really have to look at this is a number of factors.

One is we have this accretion.

So we theoretically, as you look at it, have been penalized to some extent, and you can only recognize it over a longer period of time as the credit quality in the pools do better.

So that's part of what we're seeing here.

The second thing is we'll be seeing, as Gerry indicated, larger revenue coming out of things like commercial real estate that we're putting on at higher levels.

We're also going to be using -- we're sitting with still a fair amount of liquidity at 25 basis points.

If I go from 25 to 4 or 4.5 or whatever that number is, it automatically increases my net interest income line.

Okay.

Maybe just one final (multiple speakers) --

Also, Alan pointed out, the amortization of the premiums we pay on higher coupon investments -- as rates move up, that amortization slows down.

The yield on that portfolio goes up.

Yes, one of the things we've already seen and, of course, we're not through the month yet, but we started to see a decline of prepayments running around 20%.

Now if that holds, you can do the calculation yourself as to what could happen.

That's helpful.

Maybe just one final one.

Alan, the $92 million run rate you spoke of on expenses, I guess the way to think about that is as some of these pension benefits kick in, in 2014, that'll step down further?

Right.

Could you give us a sense of where that could step down to?

I'd rather not say that number at this point.

I mean it could be -- let's say it could be in the $5 million to $8 million number.

For the full year benefit?

Yes.

Yes.

Okay, thanks, guys.

Nancy Bush of NAB Research.

Gerry, I guess this is the most optimistic I've heard you be in I guess a long time.

Can you just tell me if there's any particular catalyst here?

I mean in listening to you today, it sounds like some switch has been flipped somewhere and I'm trying to figure out where.

Because it hasn't quite made it out here to Hunterdon County yet.

Well, I have seen and we've all seen interest rates.

Just why we watch the 10-year US Treasury as an indication of all interest rates.

The 10-year is on -- up 100 plus basis points from its low level 45 days ago.

We've seen, as a result of that though, a general rise in interest rates.

We're seeing a slowdown in our prepayments, both in the investment portfolio and mortgage-backed securities, and in our own residential mortgage portfolio, which means that some of the higher yielding loans that we're prepaying are suddenly slowing down that prepayment.

We're putting on new credits at a little bit higher rate.

We've had some of our commercial borrowers, who've sat on the sidelines because they had another year or two years before their prepayment penalty expired on a loan, sitting there waiting to refinance some of their projects -- not necessarily loans with us in fact, which is the good news -- come to the table and say well, maybe we'll pay that prepayment penalty because we want to lock in the lower interest rate that we can get now, even though it's not as low as what we could have gotten a month ago.

So we're starting to see some activity that we hadn't seen in a while, which makes us that much more guardedly optimistic.

But it's not -- I mean this is a function of what's going on in rates.

Right.

Are you seeing sort of a corresponding better feeling about what's going on in the economy?

No.

Okay.

No.

But it's helping us, because it's helping us absorb the large unused liquidity position that we've been sitting on for the past 18 months.

If we're taking this 25 basis points in loans, that are sitting at the Federal Reserve, the money, the funds, and we put them out in 4.25%, 4.5% credits, that's going to have a marked impact on our net interest margin.

Right.

My other question would be, I think there was an article in the Times a couple weeks ago about the foreclosure dam finally beginning to break in New Jersey.

Are you seeing that?

In a little bit, we are starting to see some progress in getting through the foreclosure process.

We have a relatively small number of loans in foreclosure at the present time.

We really, throughout this entire cycle, it's really been less than 80, the number of loans in foreclosure in our Bank against a residential mortgage portfolio of roughly 20,000 loans.

So, it really -- while it makes our delinquencies look higher than they normally would be, it's still a relatively low number.

Right.

Okay, thank you.

Collyn Gilbert of KBW.

So, Gerry, maybe want to follow up a little bit on Nancy's question on sort of a change here in your appetite I guess for loan growth and pricing, and how it fell through.

I guess I'm trying to reconcile while yes, rates have moved here in the short term, but they're still at much lower levels than they would have been a year ago or two years ago when you still were sort of resisting growth.

So is it -- and with the outlook on the economy not necessarily better, I guess I'm trying to understand what you're seeing today when you -- it wasn't -- the returns weren't sufficient enough say two years ago to sort of put these assets on?

I don't believe that rates are going to go up and I could be wrong, but I don't personally believe rates are going to go up materially from the levels that they've reached at this point.

But they're a lot better than the rates that -- where the levels that they were sitting at six months ago or nine months ago.

If we were going to hold, for example, residential mortgages at 3.25%, all right, that certainly wouldn't be helping our net interest margin.

But if I'm going to hold residential mortgages at 4.25%, 4.5%, that does help our net interest margin.

So, that's part of what sways it.

As I said, prepayments are slowing down.

So that helps us.

We don't have to put as many loans on to have the portfolio grow today as we would have a year ago when we were experiencing very, very heavy prepayments.

So some of the higher yielding loans are sticking with us a little longer.

It all makes me feel a lot better.

Okay.

So what would your outlook be, do you think, for loan growth?

I mean CRE, you're feeling confident about it, but it wasn't -- 2%, do you think the momentum carries from there?

Yes.

And the appetite for resi mortgage, what is it there?

Because at the end of the day, whether you portfolio it or sell it, the volumes are dropping.

So how are you sort of thinking about that?

When you hold it as opposed to when you sell it, you get an immediate gain.

When you hold it, you get the gain but it takes a longer period of time.

So by holding the loans, we're not going to see the bottom line of the Bank jump in 30 days.

But it will gradually continue to grow, and that increased income over a period of a couple years brings back what we would have made in the short run.

Okay.

So do you think you'll -- you can migrate up 3%, 5% loan growth?

I mean I'm just trying to--

Oh, yes.

I mean in totality, the total portfolio you think could grow 3% to 5%?

Yes.

Okay.

Then just a question kind of on your asset sensitivity.

How are you looking at that now?

Maybe what percent -- I know you've talked in the past that the floors that you have in your loans could minimize that.

Maybe what percent of your loans currently sit with floors?

Then how does the asset sensitivity picture change with putting on some of these longer duration assets with the resi mortgages?

Well, we're not really putting on a lot of -- a lot more in the way of longer duration.

Remember a lot of the loans that are not prepaying help us with our loan growth.

If I'm having 2% of the -- if I'm having 5% of the portfolio pay itself off in a quarter or 6 months and all of sudden that drops to 2% or 1%, that helps our loan growth.

I don't have to put on that many more loans.

A lot of the loans we've put on simply were to keep ourselves even with the portfolio.

Is that what you are -- have been seeing, about 5% payoffs a quarter?

In resi -- we'll figure it out.

Okay.

(multiple speakers) You can hop back on.

We'll get back to you.

Okay.

So but -- just so then back to just to the asset sensitivity, how are you guys thinking about that?

Well, Collyn, what -- and I think I mentioned it before, you've got to look a little bit at the funding side of the balance sheet of what could happen with that or can happen with it.

At the moment, I think as we indicated, we have a substantial amount of funding that's very, very stable in terms of interest rates.

So even with the rise.

So 45% of it is probably not (multiple speakers) at all.

In addition, we're always looking at derivatives and using some derivatives to protect ourselves in the case of a rising rate environment.

We all know we have a lot of borrowings, and we're watching out for that as they get closer and closer to being restructured, redone -- not restructured but paying down and redoing them.

We look at derivatives so that we can protect ourselves.

Okay.

Just one final question.

Sorry to hog up so much time, but Alan, just your point on the accretions.

It was $2 million this quarter, could double next quarter.

So we shouldn't be thinking about that $4 million only on that 142 of covered loans?

That $4 million you're earning is on (multiple speakers) --?

That was my point to Ken before.

Okay, what's the balance of your acquired -- so in totality how should we be thinking about the portfolio that's generating that?

We have $800 million of loans other than the FDIC loans.

So --

Okay, so that $4 million is FDIC and that $800 million?

The $2 million that we had now were really the FDIC loans.

The next $2 million we're talking about really come from the other PCI loans, which has no FDIC coverage.

So there's no offset to that.

Got it.

Okay.

All right, thanks, guys.

Matt Schultheis of Boenning & Scattergood.

Actually, all of my questions have been answered.

Thank you.

Good.

Great.

(laughter)

(Operator Instructions) Craig Siegenthaler of Credit Suisse.

This is actually Nick Karzon standing in for Craig, today.

I guess just first on the tax rate with the updated and the restructuring.

I was wondering if you could give us the dollar amount of fixed tax credits and tax credits related to tax exempt investments?

Then kind of what the statutory rate is that we should be thinking about?

I think what I mentioned before is there's about $2.6 million of expenses that are related to those credits.

So, beyond that I'm not going to break it down any further.

I mean obviously it helps -- there's a positive benefit to that -- to our tax rate.

I mean the obvious federal tax rate is 35%.

The state tax rate runs on a statutory basis around 9%.

So it's bringing it down from that rate down to what we just showed you.

Okay, thanks.

Then second on the service charges on deposit accounts, you've seen that decline year over year for the last two quarters.

I was wondering if that's due to changes in customer activity or behavior, or if there's been a change in your fees or product lineup?

No, I think if anything it's (multiple speakers) --- yes, it's customer behavior.

Thanks for taking my questions this morning.

Sure.

Okay.

Thank you.

There are no further questions in queue.

Okay.

Thanks for joining us on our second quarter conference call and have a good day.

Okay, thank you.

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