Valley National Bancorp (VLY) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Valley National Bancorp Third Quarter Earnings 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) I'd now like to turn the conference over to Dianne Grenz.

Good morning.

Welcome to Valley's third-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 statements and schedules for the third 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 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 third-quarter earnings conference call.

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

Unfortunately, we did recognize a large charge-off totaling $8.9 million relating to a bankruptcy of a long-time commercial borrower.

Exclusive of this loss, aggregate net charge-offs for the entire Bank would have been less than $300,000 for the quarter.

While we are optimistic regarding future recoveries from this borrower, the amounts and timing are very uncertain due to the bankruptcy filing.

Although, we are disappointed with this one incident during the quarter, we are encouraged by a litany of positive activities and events throughout the Bank.

During the quarter, we originated nearly $1.1 billion of new loans.

For the first nine months of 2013, we have originated approximately $3.4 billion in total loans, compared to approximately $3.7 billion all of last year.

Origination volume during the quarter was skewed towards commercial as residential activity declined significantly from the prior quarter.

During the quarter, we closed $295 million of residential mortgage loans compared to $573 million in the prior quarter.

The decline was largely attributable to the 73 basis point increase in the average 10-year treasury rate between the second and third quarters.

Application volume, similar to the actual closings, weakened between the linked quarters, dropping to $254 million in the third quarter from $669 million in the second quarter.

The decline in application activity was prevalent in Valley's New Jersey and New York marketplaces, although slightly heavier in New Jersey.

Based on month-to-date application and projected closing levels, we anticipate a continued lower volume in applications and loan closings during the fourth quarter.

During the third quarter, as a result of the aforementioned decline in mortgage activity, coupled with Valley's decision to portfolio a larger percentage of originations, gain on sale of loan income declined $11.7 million from the second quarter and reflects current market conditions as the increase in purchase activity is negligible compared to the decline in refinance activity.

For some time now, Valley has emphasized residential mortgage activity as a means to mitigate the potential negative lending implications associated with the absolute low level of market interest rates, coupled with razor thin credit spreads.

Prudent asset liability management practices during this time period constricted Valley's ability to originate and hold loans at levels that would expand the size of the balance sheet.

As a result, during this period, we witnessed a build-up in liquidity and further pressure on Valley's net interest margin and net income.

However, as market dynamics have begun to shift and the pricing profile on certain commercial credits improves to levels that are both equitable for the Bank and the borrower, Valley's desire to leverage the balance sheet is enhanced.

During the quarter, we originated nearly $700 million of new commercial credits.

As a result, in the aggregate, together with C&I and CRE portfolios grew over $380 million in net loans, after payoffs, for the quarter.

However, many of these new originations closed in the latter half of the quarter and average commercial lending balances only increased $188 million from the second quarter.

The full benefit of the loan growth should be reflected in the fourth quarter.

It should be noted that none of this commercial growth resulted from purchasing securitized loan participations as commonly utilized by other institutions as a means to demonstrate loan growth.

Many of the originations in the commercial real-estate portfolio were 10-year adjustable rate loans with interest rate resets occurring after 36 and 72 months.

The initial interest rate on these new loans are at levels above Valley's net interest margin and the adjustable nature of each limits Valley's interest rate exposure and sensitivity in rising interest rate environments.

Significant prepayment penalties were built into these loans, which should be sufficient to prevent prepayment even if interest rates remain low following the interest rate reset periods.

The pipeline within the commercial real-estate portfolio remains strong and we anticipate continued growth within the portfolio during the fourth quarter.

Although not as sizeable as commercial real estate originations, C&I activity was brisk for the quarter as Valley originated over $160 million of new loans.

However, the portfolio only expanded approximately $8.9 million from the prior quarter as pay-offs within Valley's purchased credit impaired loan pools and legacy loans remain substantial.

Market conditions within the commercial space, in general, appear to have improved.

However, we are by no means entering a period of economic boom.

Nevertheless both micro and macro conditions appear to be gradually strengthening.

For many of our borrowers, cash flows are expanding, vacancy rates are declining and new business ventures are being explored.

We are guardedly optimistic that these indicators will continue, however there remain a multitude of economic hurdles still prevalent in the marketplace.

Loan pricing, although improving, remains challenging.

Quite simply from our perspective, there is an excessive amount of money chasing a limited supply of borrowers.

Although Valley is competitive on pricing, we remain unwilling to expand volume by relaxing terms and conditions.

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

That being said, as I stated earlier, the commercial lending pipeline remains strong and we anticipate continued growth in the fourth quarter.

As announced in this morning's press release, earlier this month, Valley sold impaired trust preferred investment securities issued by one deferring bank holding company for a net gain of $10.7 million.

This gain will be recognized in the fourth quarter.

These securities sold reflect Valley's entire interest in the deferring institution's trust preferred securities as of September 30, 2013.

Based on Valley's reported non-performing assets as of September 30th, the sale of these securities would have reduced the aggregate non-performing asset figure by approximately 25%.

In addition to the forthcoming gain in the fourth quarter, the transaction is of significant importance to Valley.

The sizeable decrease in the level of non-performing assets will allow us to once again earn interest on the $52.5 million, help reduce Valley's future FDIC insurance assessments, improve its capital position under Basel III and most importantly remove one of the largest single credit exposures within the Bank.

The reduction in non-performing assets attributable to this transaction is not the only positive event, from a credit perspective to have occurred.

In spite of the large charge-off associated with the one commercial borrower mentioned earlier, credit in the aggregate improved from the prior quarter.

Although total accruing cash to loans increased slightly from the prior quarter, $19.5 million of commercial real estate loans past due in the 60 to 89 day bucket are performing, well collateralized and demonstrate adequate ample cash flow.

These loans are only categorized as past due because of some delays in the renewal process.

Exclusive of this relationship, total accruing past due loans would have declined by over 30% or $14 million from the second quarter.

Total non-performing assets declined from the second quarter by $4.2 million due in part to OREO sales.

The market for OREO assets continues to improve, while at the same time our residential mortgage non-accrual loans are beginning to complete New Jersey's three-year foreclosure backlog.

Based on the judicial process, we anticipate another 18 months until we are able to fully reduce the residential mortgage non-accrual loan balance to levels reflective of Valley's current credit condition.

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

The decline in mortgage banking, although significantly, will ultimately be replaced from the revenue perspective through loan growth.

Credit quality is improving and we continue to focus on improving operating efficiencies throughout the Bank.

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

Thank you, Gerry.

The tax equivalent net interest margin improved from 3.15% in the second quarter to 3.20% in the third quarter.

This marks the first linked quarter improvement in the margin in over two years.

Net interest income during the same period increased approximately $1.8 million to $111.7 million.

The expansion of the margin and net interest income is largely attributable to strong loan growth coupled with a decline in premium amortization on our taxable investment securities portfolio and a decline in interest expense on time deposits.

Earning asset yields increased 5 basis points from the second quarter to 4.39% in part as loan growth enabled the Bank to deploy excess liquidity, which had been earning 25 basis points, into higher yielding loans.

Although total loans grew over $500 million for the quarter, average loans expanded only $223 million as many of the new originations closed in the latter half of the quarter.

The increase in interest income on new loan originations was partly mitigated by a continued contraction in Valley's purchase credit impaired portfolios.

The decline in these asset portfolios negatively impacts both the margin and income as the loans maturing or paying off are at levels far greater than the rates earned on new originations.

In the aggregate, Valley originated over $1 billion of new loans during the quarter in which the average yield was a little north of 3.5%.

While the yield is accretive to net interest income, it is less than the collective yield on total loans.

Until such time when market level interest rates begin to rise, we anticipate continued pressure on the average loan rate.

The expansion of earning asset yields for the quarter was attributable to a reduction in premium amortization within the securities portfolio.

The increase in interest rates and decline in residential mortgage refinancing activity has led to a significant decline in pay down activity within Valley's mortgage-backed securities portfolio.

During the third quarter of 2013, cash flows were approximately 23% less than the second quarter.

Based on preliminary cash flow forecast, we anticipate a similar reduction between the third and fourth quarters.

As of September 30th, the unamortized premiums on mortgage-backed securities was approximately $60 million, of which we are scheduled to amortize approximately $18 million over the next 12 months based on projected fourth quarter prepayment speeds.

In addition to the aforementioned, another variable impacting the net interest margin in the fourth quarter will be the positive cash flow received from the sale of the impaired trust preferred securities that Gerry previously mentioned.

With the liquidation, we will receive over $50 million of cash, which can be redeployed into earning assets.

As a result of the impairment, Valley had been accruing no interest on the principal.

Valley's third quarter total cost of funds of 1.18% was equal to the cost of funds reported in the second quarter although the cost of deposits declined from 0.43% to 0.41%.

The decline in linked-quarter cost of deposits is largely attributable to a slight shift in the composition of funds as time deposits declined $144 million from the prior quarter with the resulting interest expense declining by $515,000 and now comprise only 20% of Valley's total deposit base.

During the quarter, Valley redeemed approximately $15 million of junior subordinated debentures.

We announced the redemption of the remaining outstanding notes equal to approximately $131 million tomorrow, October 25.

The rate under debentures is equal to 7.75%, of which the interest expense is reflected on Valley's income statement in interest expense on long-term debt.

The decline in interest expense associated with the aforementioned redemption will be partly mitigated by the cost of the 10-year fixed rate subordinated debt that Valley issued on September 27.

That note rate on that debt is 5.125%.

Effective with the settlement of this newly issued subordinated debt, Valley entered into a derivative transaction where Valley receives a fixed rate of 5.125% and pays a floating rate of one month LIBOR plus 238 basis points.

As a result of the combined transactions, the effective current cost of Valley's newly issued subordinated debt is approximately 2.56%, which compares favorably to the 7.75% rate on the junior subordinated debentures, which are being redeemed.

In addition, during the quarter, Valley purchased an interest rate cap with a notional amount of $125 million and an effective date and maturity date equal to the aforementioned subordinated notes.

Based on the aforementioned, we anticipate a savings of approximately $6.4 million annually.

The fourth quarter will have a benefit of approximately two months of savings or about $1 million.

Non-interest income for the quarter was $22.4 million, a decline of $10.5 million from the second quarter.

The decline was principally the result of a decline in mortgage banking activity during the quarter.

In the second quarter, we recognized mortgage banking income of $14.4 million, which declined to $2.8 million in the third quarter.

The decline is attributable to both a reduction in loan closings as well as Valley's decision to shift strategy from that of originate and sell to that of originate and hold model.

Valley's decision to retain or sell future production is dependent on a multitude of factors, emphasizing credit exposure, portfolio concentration and interest rate risk.

If market rates continue to decline, we may elect to sell a greater portion of our origination volume in the fourth quarter.

Non-interest expense for the quarter was $94.5 million, a decline of approximately $1 million from the prior quarter.

The linked-quarter decline is largely attributable to a contraction in FDIC insurance assessments and advertising expense.

However, mitigating the decline in these items was an increase from the prior quarter of $2.6 million in mark-to-market gains and losses related to mortgage banking derivatives.

The valuation and size of mortgage banking derivatives at each period end is mostly subject to Valley's activity in the secondary market coupled with the movement of market interest rates during the quarter.

In addition, during the quarter Valley closed three underperforming branch locations.

While we anticipate reducing further non-interest expense as a result of this action, we did incur approximately $500,000 of expenses associated with these closures.

For presentation purposes, the expense is recognized on our income statement in loss on sale of assets.

We anticipate further streamlining of our branch network either through consolidation of personnel, redesign and subsequent reduction in the branch footprint or direct office closures.

We regularly analyze branch performance, including loan activity generated from each location.

We have established internal return thresholds and will act accordingly if these bogeys are not met.

As part of our branch delivery philosophy, we focus on incorporating technology driven delivery channels as a supplement, not a replacement, to our branch network.

During the last couple of years, we have spent over $6 million incorporating new technology throughout the branch footprint.

Our effective tax rate declined during the quarter as a result of management actions to expand the use of tax credits in addition to the settlement of an income tax examination.

The tax credits utilized, generally require an investment by the Bank that is amortized over the life of the credit.

The amortization expense approximated $2 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 focusing on both risk weighted assets and the cost of regulatory capital.

As discussed earlier, Valley announced the redemption of substantially all of our trust preferred securities portfolio with the exception of those acquired through prior acquisitions.

As a result of the new Basel III capital rules, for Valley, these instruments will be phased out from counting towards Tier 1 equity, commencing January 1, 2015.

As a replacement, Valley issued $125 million of subordinated notes, which count as Tier 2 equity, the same qualifying equity level as the trust preferred securities after the phase out period.

As a result of the full redemption on October 25 of the trust preferred securities, we anticipate a decrease in Valley's Tier 1 equity ratio.

Had the redemption occurred at September 30, our Tier 1 ratio would have declined from 10.64% to 9.55%.

Valley's capital ratios will remain strong even after the redemption as evidenced by a Tier 1 common cap regulatory capital ratio of 9.17%.

Presently, this ratio exceeds the fully phased-in minimum Basel III Tier 1 common capital ratio, including the full capital conservation buffer by 217 basis points or by over $250 million of common equity.

To put this figure in context, Valley has only recognized approximately $170 million in net charge-offs on non-covered loans since the inception of the Great Recession in 2008.

The current amount of excess capital above and beyond the aggregate level of net charge-offs is 147%.

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

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Hey good morning everyone.

Morning, Steve.

I have few questions on the commercial real estate.

With balances being pretty flat over the past few quarters, can you give a bit more color on what's behind the jump driving more volumes?

We're seeing this from other newer players as well.

Well, for one thing the increase in interest rates, a slight increase but an increase, makes them more attractive to us, so we become more aggressive in going after them.

I think a lot of our borrowers and I'm sure that of other banks as well, who have been sitting on the sidelines fear that rates or at least during the last quarter feared that rates were going to rise.

So they wanted to jump on the bandwagon and refinance their projects before that rate rise fully set in.

So I think that attributes for most of the activity increasing.

So Gerry what does that imply for future growth here that rates have backed down a bit?

I don't know.

We have been telling people, I don't know how long they'll stay low where our pipeline is still pretty strong in that area -- Bob Meyers heads up that area.

CRE pipeline is well over a couple of hundred million right now of [approved] and accepted loans.

And the C&I pipeline is in excess of $100 million in approved and accepted.

They won't all close but we anticipate the bulk of them will.

And that's only in the first two weeks or three weeks of the quarter.

All right.

And Gerry when you said that commercial real estate loan yields were above the NIM, were you saying the loan yield is above the NIM or that the new NIM on those loans is above the current portfolio NIM?

I said the interest rate that we're getting on those loans is above our net interest margin.

I didn't say that net interest margin on those loans are higher.

Got you.

And what was prepayment penalty income in the quarter?

Wasn't that significant.

Very insignificant.

Insignificant, okay.

Yes.

And Gerry just a final one related to capital.

Historically, you paid out I guess around half of earnings with the dividend.

Earnings now are running about half they were pre-crisis, what's your hesitancy here to reset the dividend to a level that at least gives you more capital flexibility?

The dividend, as I said, at every call, first of all our historic is more than half.

Our historic has been closer to 60%, 65%, number one.

Number two, our Board looks at that every quarter, assesses what our current estimated earnings are going to be for the remainder of the year, where that is going to place our dividend in relation to our earnings for the year, where else we could deploy the capital if we didn't put it into -- if we didn't pay it out to the shareholders and then they make their decision every quarter as to whether or not they should keep the dividend the same, increase it or decrease it.

All those factors will be looked at by the Board I'm sure in November when they renew the dividend.

Okay, fair enough.

Thanks for all the color.

Okay.

Ken Zerbe, Morgan Stanley.

All right, thanks.

I think I have more of a conceptual question.

When I look at the trajectory of earnings, obviously you're still in the sort of mid-90s on expenses, fees have certainly come down.

When you plan ahead right because you don't have the mortgage banking income to rely on anymore, it seems that you're still facing sort of a material headwind in terms of how do you grow earnings.

And I heard the comments about closing branches but when you think ahead over the next year or two years, where does the material earnings growth come from if there is any.

I mean, can you be more aggressive on cutting expenses.

Not from $94 million to $93 million but like from $94 million to $84 million or some number like that or other revenue streams that we can start looking towards?

Thanks.

Well, there are a couple of things.

For one thing, loan growth is the best source of revenue for the Bank.

And we have added some lenders to our staff.

We are aggressively going out, looking for credit that meet our criteria.

It makes it a little bit more difficult for us because we do believe we keep a criteria that's somewhat more stringent than a lot of the competition.

And I think when you look at our historical loan losses that's reflected in that.

There are lots of things that we try to do.

We're always looking for new areas to expand the Bank.

We look to increase our footprint.

We're looking for new products.

We have some new loan products that we've introduced in the last year that is starting to take hold and I think will help generate future earnings for the Bank.

And we intend to be somewhat opportunistic.

I think we were opportunistic when it came to the mortgage banking activities and while that market existed we think we did quite well.

I'm still somewhat perplexed as to why it was almost like a light switch going off in the refinance activity when rates moved up 100 basis points, it just shut the market down even though, historically, the 30-year and the 15-year are at very, very low levels.

I think it may reflect and I know interest rates have dropped a little bit although we haven't really seen much of a reversal, but with the recent small drop in interest rates, that may come back a little bit, comes back a little bit, couple that with the other loan growth we've seen, I think our revenues will show a good future.

Understood, okay, because I guess I was just getting out of, if you posted the $0.14 and I understand there were some positives and negatives in the number, but it seems that you're looking for ways to improve earnings, but barring, finding something material or getting a material increase in mortgage banking, the $0.14 is probably not that bad of a run rate going forward at least in the near-term.

Rhetorical question.

All right, I'm done.

Thank you very much.

Thank you.

We don't give guidance, so, but I think we gave you lots of indications in Alan's report and in my report on some of the good things that we expect to happen in the fourth quarter.

I am done now that you did and I appreciate it.

Thank you.

Dan Werner, Morningstar.

Hi, good morning.

Morning, Dan.

Going forward, are you looking for the loan loss provision to approach closer to the net charge-off levels going forward here given where the allowances and as well as to kind of account for the loan growth that you're talking about?

Dan, I think we've said it pretty much the last couple of quarters in a row, we have a methodology, not best based on charge-offs, it's based on the overall portfolio.

I think, as Gerry mentioned, criticized went down, classified went down, non-performings overall went down, the impaired loan requirement went down.

All of those things went down based on what we're seeing in our portfolio.

So we're not gearing it towards anything other than what the methodology really shows us.

Okay.

And then, second question, is there going to be any significant staffing changes with regard to the mortgage business that would be impactful to expenses?

We have already cut the staff in the mortgage area by about a third.

If it continues to not show growth, there will be further reductions in that department in accordance with what the levels of production are.

Okay.

And then in terms of the mortgage production, is it primarily [three-ones, five-ones that you're adding] on right now and not much in the way of a fixed rate?

We're doing it both fixed rate and adjustable.

But again, I think as I indicated we are still seeing some low 15-year fixed-rate loans coming on that we're going to look at very closely in terms of whether or not we're going to add them to our portfolio, we want to sell them.

Okay.

Yes, it's really.

I personally don't like to see us build a portfolio of long-term very low interest rate loans.

Okay.

All right, thank you.

Nancy Bush, NAB Research.

Good morning guys, how are you?

Good morning, Nancy.

Good morning, Nancy.

Couple of questions, Gerry does the implementation of the qualified mortgage rule make any difference in your outlook for the business or the kinds of mortgages you are going to be doing or is it consequential I guess is my question?

I don't think it's going to be consequential at Valley because our underwriting criteria closely resembled -- historically, closely resembled the qualified mortgage.

We never did subprime mortgage lending because that wouldn't have fallen within that purview.

It may make it difficult in a handful of loans that we would have done in the past, some interest only in certain circumstances, but for the most part the bulk of our loans well into the 90 percentile, it should make no difference.

And secondly I noted your comment when you said about your mortgage apps declining and you said the decline was slightly heavier in New Jersey than in New York.

Could you just kind of speak to the whole sort of economic situation in our state and are you seeing any lift or--?

Well, let me start out by saying we did very little activity in New York State up until about two years ago.

When we acquired State Bank, we became a lot more aggressive in New York.

So that market, I think, there is more low-hanging fruit than there is in New Jersey, so the decline while it is there isn't as great as it is in New Jersey.

New Jersey is suffering in many areas.

It is not seeing the growth.

We just, at our Board meeting this week, we had a presentation on the economic conditions that are prevalent both nationwide and in our region and then a breakdown in our region and it showed -- the statistics that were presented to us indicated that the growth in New York City, Long Island was stronger than that in New Jersey.

So we do monitor those statistics and we try to focus our attention if loan growth -- if the economy is growing stronger in Long Island, the benefit of our having a franchise that extends itself both over New Jersey and New York, we will focus more into that New York area.

Well, I mean our tax situation still has not improved that much and we're still losing business that's the problem.

You have to get the folks in Trenton to recognize that that is an impediment to growth.

Okay, all right, thank you.

Thank you, Nancy.

Any others?

Craig Siegenthaler.

Good morning.

This is Nick Karzon for Craig Siegenthaler this morning.

Morning.

I guess first just with this upcoming stress test, can you talk about what preparations, if any, you've made for that or how that's changed your outlook looking forward?

We have a fairly large in-house group that's working on this stress testing.

We brought some outside people in in terms of consulting a little bit with us.

And we're working very hard on meeting the requirements so that we'll be ready for the filings as is required by the law.

So it's taking a lot of time and effort of a lot of different people and we are mainly doing it on the inside although we are using outside people to assist us in the preparation or to validate what we're doing.

Thanks, and I guess as a follow-up, you mentioned earlier this year that you expected to see increased M&A activity.

I'm just wondering to what extent that has occurred or that outlook has changed at all?

I think my outlook on that is unchanged.

I think that it is going to pick up.

You hear more people talking about it today than we did a year ago.

We continue to hear a lot of chatter about it.

This M&A activity doesn't happen overnight.

It usually takes months or years before somebody either decides that they want to sell starts to find out who they would like to join up with.

When someone wants to buy, you've got to convince the other party that it would make a good combination.

So it's a time -- a lengthy proposition.

I do think you are going to see an increase in that activity though.

Okay, thanks for taking my questions this morning.

All right.

Collyn Gilbert, KBW.

Thanks.

Good morning, guys.

Good morning, Collyn.

So Gerry, I don't want it to sound like a dumb question, although it might be, or a simple question.

I guess, I'm just trying to understand how the loan growth -- just in practical terms kind of going from an institution where the lending operation was fairly dormant, which by design, we understood certainly clearly where you stood on it all.

And then to ramp up the way you did in a one quarter's time, I mean, how does that just work, I guess just logistically?

And again, recognizing you are not the type of bank that has all these teams of lenders that have come on to really juice that engine.

So I'm just trying to understand conceptually sort of how that works.

We have added a couple of new lenders which helped in this situation, but for the most part, it's a lot of our existing customers, as I said earlier, that pretty much sat on the sidelines, came to the conclusion that interest rates had bottomed out or were close to bottoming out, and they felt that this was the time they could lock in some longer-term money at lower rates.

We did it on an adjustable basis for the most part, so that it was good for them and it's good for us and we saw a lot of activity.

We actually started seeing that activity.

Loan activity takes a lot longer between the borrower approaching the bank and our closing the loan than one might think.

Meeting all of the regulatory requirements and underwriting requirements, it usually takes many weeks, if not, a couple of months for a loan to close.

So some of this activity actually started at the latter part of the second quarter, we started seeing it, and I think I gave some indication in the end of the second quarter that we were starting to see a lot of activity building up.

That activity did build up.

As I pointed out in my comments, if you look at the average loans that went on the book -- that we had on the books and where we are at the end of the quarter, a lot of the loans didn't close until the latter part of the third quarter and some of the pipeline that we are sitting with today will be closing into the fourth quarter.

They may have actually started though some time early in the third quarter.

Okay.

It wasn't a light switch, it didn't just suddenly happen as one of (multiple speakers).

So -- but it seems like again, just kind of following your commentary in the second quarter.

So it seems like the move on your borrower base, maybe was more rate driven than economic driven because I thought you said in the second quarter that your borrowers are still not feeling good about the economy, which is why the C&I growth was -- you're less optimistic about the C&I loan growth.

I think [you're correct].

Could we -- I mean, as we think about I guess, I mean I'm not asking for explicit guidance, but as we think about kind of that growth trajectory from here.

So there is certain dynamics that are going on in the third and fourth quarter that could pull some of that demand forward.

I mean, are you -- or do you think given your sort of appetite for growth at this point and the dynamic in the market that we'll see double-digit loan growth in 2014 from you guys?

2014?

Ask me that question, in another month or two, I'll have a better feel for it.

(inaudible).

I mean, I -- listen, would I like to see double-digit loan growth, I would like to see double-digit loan growth.

I mean that will be -- will we see it?

I don't know.

Okay, and then just the next question on the loan yield.

You said the average yield on that billion of originations was about just a little bit higher than [350].

And I guess just thinking about the split of that, if you're putting on resi mortgages, if it's the fixed rate 30 products.

And I know, Alan you said, you're doing some arms and stuff, but I guess what I'm saying, is that implies a pretty low CRE yield?

Well, as I pointed out, they're adjustable.

Most of the -- a large portion of that, we put on at one rate that in 36 months re-adjust to a predetermined higher rate and in 72 months from now would adjust to a predetermined higher rate yet.

Okay, okay.

So we are not locking ourselves in as we would on a resi to a fixed rate, low rate.

And these are ultimately only 10-year loans.

They are not 30-year, they are not even 15-year loans.

So I think from a structure standpoint, they are excellence of the Bank and the way we've got it structured, I think, the client is pretty happy with it.

Okay.

And the other thing Collyn is that -- that's the average of all loans in the bank.

So for example, we do put on a fairly large volume of [auto] loans.

Auto loans are historically and certainly today at a much lower rate than where commercial real estate loans are et cetera.

And because they are at such a low rate, they tend to bring the overall average down.

So wasn't that it was CRE loans that were that low, it was the average of all of those and these days auto rates are in the [twos].

Okay, all right.

Well that leads to my last final question and then I'll hop out.

I guess again kind of big picture, just thinking about the balance sheet and if we see and I guess where I'm going with this is kind of the trajectory on the NIM because if we see this, the asset yield likely migrate into the 4% range maybe even lower given the dynamics of the loan yield that we may see here in the next year or two.

And the difference that you all have relative to maybe some of the peers that are getting more aggressive on loan growth, are you still are sort of saddled by that the high cost borrowings.

So if we've got a 4% loan yield and a funding cost that can't move much below, I would guess that 150 and I'm -- then that's a 250 NIM.

I mean am I crazy to think that there is a lot -- still a lot more downward pressure to go on this NIM?

We've got to keep one thing in mind Collyn, like you just said, [you just said] over the next couple of years, but over the next couple of years, those borrowings are going to start to go away by themselves.

Well, (inaudible) -- right I'm talking the dynamics between now and 2018 when those borrowings go away.

You still have --.

(inaudible).

Or 2016, so in the next three years?

Well, we're up to 2014 already.

So listen, well it is what it is, by putting more emphasis on some of the higher yielding products that are out there that's fine.

There are certain things that we don't do and that I don't want to do, and I won't -- and we don't try to do the purchasing of securitized loan participations that lots of companies get involved with and they can show huge loan growth and sometimes at higher yields.

But from a credit quality standpoint, I know how I feel on it, I know I've had conversations with the OCC about things like that and I think they feel like I do.

I don't know how you do but --.

Okay.

I said that was my last question.

One more quick question.

The securities, how much do you think you can take securities down to sort of fund the loan growth.

Basically, how much longer can you see this benefit of this mix shift going on?

I think the cash flow is showing somewhere between $25 million and $35 million a [month].

So whenever that comes down, if we don't see a reason to put it into securities, we'll fund loan growth.

Okay.

[We just got $52 million].

Okay, all right thanks guys.

Okay, all right.

Matthew Kelley, Sterne Agee.

Yes, hi, just a follow-up on one of Collyn's question there.

During the three to six year fixed-rate period on these kind of resetting commercial real estate loans, what are the coupons during that fixed-rate period?

So if I get a three year fixed and seven years ARM, what am I paying in that first three years?

You're all over the place.

What would --.

There is a variance of perhaps as much as 40, 50 basis points between loans.

Okay.

Well, let me ask you this -- of the 380 million of commercial real estate originations during the quarter, how much was multi-family, net growth I should say?

A fair amount of multi-family, not necessarily what you might be thinking of, a lot of them were New Jersey garden apartments, some of them were co-op type loans.

They were not necessarily New York City apartment loans, so if that's what you're thinking of.

Underlying mortgages on co-ops (multiple speakers).

(Operator Instructions) [Glen Marder] (technical difficulty).

Hello, can you hear me?

Yes, sir.

Yes.

Good.

Gerry, I mean when asked before about the dividend, you said the Board reviews its decision every quarter.

I mean you are the Chairman and you are in a public forum and I think you should tell your investors how you feel about it.

I mean you guys came through the financial crisis so much better than peers and your stock performed so much better from peers, but has underperformed somewhat dramatically here and a lot of it frankly is because you're chewing up all your capital with the dividend and you'd probably get some multiple expansion if you would let your capital base grow.

And so I think your Board is a little bit asleep and perhaps has been asleep and maybe it's time to start thinking about that.

That issue has been discussed at the Board.

How I feel as one member of the Board would be inappropriate even though you said this is a public forum for me to comment on my feelings.

It's up to the Board to decide that what they're doing on the dividend.

I hear what you're saying and I understand and I think the Board hears what you're saying.

We'll discuss it at the (multiple speakers).

I mean look if you were to do $0.10 a quarter, your dividend yield would still be among the highest of 90% of all peer companies, that's still pretty respectable and it lets your capital base grow, I mean it's time to do something.

I hear what you're saying.

Thank you.

And there are no further questions at this time.

Okay.

Thank you for joining us for our third quarter conference call and have a great day.