Valley National Bancorp (VLY) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank fourth quarter earnings conference call.

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

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

(Operator Instructions) At this time we will turn the call over to your host, Miss Dianne Grenz.

Thank you.

Good morning.

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

If you have not read the earnings release we issued earlier this morning, you may access it along with the financial statements and schedules for the fourth 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 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

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

Thank you, Dianne.

Good morning, and welcome to our fourth quarter earnings conference call.

We are pleased with Valley's fourth quarter results as the financial performance and credit metrics continue to improve markedly from prior periods.

During the quarter we originated over $700 million of new loans despite a considerable contraction in residential mortgage activity.

Commercial lending was once again the bright spot generating over $500 million in new originations, an increase of over 50% from the same quarter one year ago.

Valley's commercial mortgage portfolio comprised the bulk of the originations accounting for over 60% of the new commercial volume recognized in the fourth quarter.

For the year, Valley originated over $1.3 billion of new commercial mortgage loans representing nearly a 150% increase from the same period one year ago.

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.

For the fourth quarter the average rate on new commercial real estate originations was approximately 4%.

To a great extent, a sizable amount of the new volume originated was within the New York City geography as both the New Jersey and Long Island markets continued to slowly rebound.

Competition within the CRE market place remains fierce as large money center institutions, local community banks and even credit unions compete for the traditional middle market customer.

At Valley, credit quality remains absolute and while we may modestly relax on pricing, we remain steadfast on credit terms and conditions.

Although not as sizable as commercial real estate originations, C&I activity was brisk for the quarter as Valley originated over $200 million of new loans, nearly 25% more than the prior quarter.

However, the portfolio contracted slightly as payoffs within Valley's purchased credit impaired loan pools and legacy loans remained substantial.

Specifically within the C&I market, borrower and financial conditions have improved.

Profitability and liquidity continue to expand for many of our customers.

However, many appear unwilling to take the risks necessary to expand their businesses.

A disproportionate percentage of origination volume is a byproduct of refinance activity.

That being said, we are guardedly optimistic about the opportunities prevalent in the commercial lending space.

Overall, economic conditions appear to be improving and fundamentally our borrowers have the capacity to expand operations.

Within the consumer lending portfolio, loan originations declined significantly both on a linked quarter and annual basis.

The decline in residential mortgage outstandings during this period accounted for the entire contraction as payoffs outpaced originations retained in the portfolio.

However, other consumer lending originations, particularly autos, were strong.

Residential mortgage volume continues to be negatively impacted by the decline in refinance activity, although purchase applications have nearly tripled since the beginning of 2013, the sheer number is dwarfed in comparison to the refinance activity we experienced in 2013.

During the quarter we closed approximately $95 million in new originations and processed nearly $225 million in applications.

Unless market interest rates decline considerably we anticipate 2014 residential loan volume to be consistent with the levels recognized in the fourth quarter.

Other consumer lending activity was strong in the fourth quarter as closings exceeded $120 million.

For the full year of 2013 total consumer lending originations were slightly less than $500 million, which reflects nearly a 60% increase from the level of originations realized in 2012.

Largely as a result of the increase in origination volume total consumer loans outstanding excluding residential mortgages increased nearly 16% on an annualized basis from the third quarter period end balance.

We anticipate continued strong origination volume throughout 2014.

During the quarter, Valley recognized a gain of $11.3 million related to the termination of a branch operating lease associated with a sale lease back transaction entered into during 2007.

Although the gain reflects an infrequent event, the occurrence should not be considered a one-time event.

Valley owns over 100 properties, almost all of which are carried at the low fair market value.

This hidden value has been discussed for years at various investor conferences and included in regulatory filings.

As we evaluate our traditional branch network in an effort to right size the branch footprint, similar opportunities may manifest producing gains in the future.

In that regard, as announced by a press release in the fourth quarter, we have embarked on a branch modernization initiative which will incorporate new digital delivery channels and self-service banking platforms.

As a result of this plan, Valley intends to introduce new technologies that will enhance the customer experience while simultaneously reducing overhead expense over time to reflect the new reality of retail banking.

As part of this modernization initiative, when appropriate, we have begun to design new branch interiors which both incorporate the latest technologies being employed while simultaneously updating the interior layout to encourage even more personalized service.

As a result of the increasing use of mobile banking and remote deposit capture, foot traffic in most branches has shown a significant decline over the past few years.

Accordingly, for the majority of our branches, the square footage required has declined.

As an example, we were able to reduce the square footage by nearly 50% at the location in which we terminated the lease and recorded the gain on sale of assets in the fourth quarter.

In addition to the gain on sales, future period occupancy expense should decline as a result of the decrease in rent expense.

In 2014, we intend to begin the installation of new technologies at approximately a third of our branches.

We do not anticipate an increase to expense as immediate savings should be achieved through staff reductions, attained largely through attrition, and occupancy savings.

The speed at which we integrate additional technologies and upgrade further locations will largely be driven by customer acceptance and the equipment installation time frames.

Although the emphasis in which I just mentioned is focused on reducing branch overhead expense, greater prominence is directed towards reducing Valley's total core expenses.

The branch modernization initiative is merely a microcosm of a heightened effort throughout the organization to reduce total non-interest expense.

Earlier in 2013 we announced a series of initiatives to reduce benefit expenses, including the suspension of both the employee and director defined benefit pension plan.

We have also implemented strategies to reduce Valley's FDIC insurance expense, just to name a few.

In spite of the additional regulatory requirements, we must, and will, adjust the entire non-interest expense throughout the bank.

As I mentioned earlier, asset quality improved appreciably from the prior quarter as the ratio of non-performing assets to total assets declined from 1.22% as of September 30th to 0.77% as of December 31st.

The decline is largely attributable to the liquidation of impaired trust preferred securities issued by one deferring bank holding company.

As a result, non-accrual debt securities declined from $52.3 million in the third quarter, to $3.8 million in the fourth quarter.

In addition, non-accrual loans declined $21 million, or nearly 18% during the same period.

The improvement in asset quality is significant as it allows the bank to redeploy funding to new performing assets, reduce Valley's FDIC insurance expense, and unlock capital to leverage the institution.

In addition to the improvement in non-performing assets, the level of net charge-offs recorded in the quarter was an improvement on the third quarter.

The reported figure of $5.4 million, or 19 basis points as a ratio to non-covered average loans, included approximately $2.9 million of charge-offs related to valuation adjustments of certain impaired loans.

Exclusive of these adjustments, the annualized ratio of net charge-offs to average loans would have reflected only nine basis points.

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

Expanding the balance sheet by a loan growth, coupled with new initiatives developed to reduce operating expenses should provide the catalyst to both earnings and tangible book value expansion.

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

Thank you, Jerry.

Net interest income in the fourth quarter expanded $4.5 million from the prior quarter, to $116.1 million.

The increase is largely attributable to growth in average loans outstanding, reduced premium amortization within the investment portfolio, combined with a reduction in interest expense on most interest bearing liabilities.

Average loans outstanding grew over $500 million during the last six months as Valley redeployed excess liquidity into higher yielding assets.

The increase in average loan balances accounted for approximately $2.0 million, or 45% of the total linked quarter increase in net interest income.

The improvement in loan interest income during the fourth quarter was partly mitigated by a contraction in portfolio yield as the average rate on Valley's loan portfolio declined five basis points from the third quarter of 2013.

In the aggregate, Valley originated over $700 million of new loans during the quarter at an average yield of approximately 3.6%.

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

Unless market level interest rates begin to rise beyond current levels, we anticipate continued pressure on the yield on average loans.

In addition, fourth quarter interest income was positively impacted by $1.8 million due to a reduction in premium amortization on Valley's taxable investments as compared to the linked prior quarter.

Principal paydowns on mortgage-backed securities declined nearly 35% from those realized in the third quarter and nearly 45% from the cash flows recognized in the same period one year ago.

As of December 31st, the unamortized premiums on mortgage backed securities were approximately $56 million of which we are scheduled to amortize approximately $14 million over the next 12 months based on current projected prepayment speeds.

As a result of the reduced premium amortization recognized during the quarter, Valley's fourth quarter net interest margin was positively impacted by approximately five basis points from the third quarter.

Although we anticipate continued contraction in premium amortization based on early cash flows received during January of 2014, coupled with the level of current market interest rates, we do not anticipate significant further benefits to both the investment portfolio average rate and net interest margin.

Further benefiting the improvement in linked quarter net interest income was the reduction in interest expense of $1.3 million as Valley's cost of funds declined from 1.18% to 1.13%.

The reduction and long-term borrowing costs largely attributable to Valley's capital optimization strategy, including the early redemption of junior subordinated debentures employed during the second half of 2013, accounted for the majority of the reduction.

As a result of these actions, interest expense was reduced by approximately $1 million and the net interest margin was favorably impacted by three basis points.

The junior subordinated debentures were not fully redeemed until the end of October.

As such, we anticipate a minor reduction in first quarter borrowing expense attributable to the aforementioned capital actions.

Valley's cost of deposits declined one basis point from the third quarter to 40 basis points.

The cost of Valley's time deposits declined from 1.28% to 1.23% as higher costing deposits either mature or re-price at lower rates.

We anticipate continued contraction in this portfolio as nearly one half of the entire balance in time deposits matures during 2014, although most of the maturities are skewed to the latter half of the year.

The reduction in current period cost of deposits is also attributable to the increase in non-interest bearing deposits, both in absolute dollars and as a percentage of total deposits.

On average, non-interest bearing deposits now account for nearly 33% of all deposits and, remarkably, over 25% of Valley's entire funding base.

Largely as a result of the aforementioned linked quarter changes to interest income and interest expense, Valley's net interest margin improved 7 basis points to 3.27% in the fourth quarter.

As discussed, many of the positive benefits realized in the quarter may not be as significant in future periods.

When viewed in conjunction with the reduction in number of days in the first quarter we anticipate a slight reduction to the net interest margin.

That being said, we continue to focus our efforts on expanding net interest income as the margin is mostly a barometer of the interest rate environment.

Non-interest income increased significantly from the third quarter, principally due to two large infrequent items.

Net gains on securities transactions increased nearly $10.7 million from the third quarter as Valley sold a non-accruing debt security for proceeds of $52.5 million.

Additionally, during the quarter, Valley terminated an operating lease related to a building sale lease back transaction entered into during 2007.

As a result of the lease termination, Valley recognized the gain of $11.3 million.

The decision to terminate the lease is consistent with Valley's previously announced branch modernization initiative.

The new location, which is located on the same block, allowed Valley to right size the facility in light of current branch transaction activity, while integrating a modern platform in delivery channel.

Non-interest expense for the quarter was $96.1 million, an increase of $1.6 million from the prior quarter.

Many variables attributed to the increase during the current quarter.

Positively impacting the current period expense was a decline in net occupancy expense, essentially the result of the aforementioned lease termination in the amount of $1.7 million.

In addition, changes in the mark to market on mortgage banking derivatives further reduced fourth quarter non-interest expense by $1.5 million, as compared to the third quarter of 2013.

Mitigating the reductions in expense were a few large items which we expect to wane in future periods.

Amortization of losses related to the write down of tax credit investments equaled $5.9 million while salary and benefit expenses increased $1.2 million from the third quarter.

Of the combined $7.1 million, we anticipate only approximately $2 million to impact the first quarter of 2014, a net reduction of over $5 million.

As Jerry mentioned earlier, reducing our expenses and enhancing the efficiency of the organization is key to delivering improved profitability in 2014.

Our effective tax rate increased during the quarter to 28.9%, an increase from the 20.8% rate realized in the third quarter.

The increase is fundamentally attributable to the shift in composition of revenues generated in the fourth quarter, combined with the timing and recognition of tax credits utilized.

For the year, Valley's effective tax rate was 26.35%.

We anticipate for 2014 the effective tax rate to range between 26% and 29%.

On October 25th, Valley redeemed substantially our entire trust preferred securities portfolio largely in response to the new Basel III capital rules.

As a result, the Bank's Tier I and total regulatory capital ratios declined from the prior linked quarter by approximately 100 basis points.

However, Valley's Tier 1 common regulatory capital ratio expanded 11 basis points to 9.28%.

Presently, this ratio exceeds the fully phased- in minimum Basel III, Tier I common capital ratio, including the full capital conservation buffer by 228 basis points or nearly $270 million of common equity.

Tangible book value increased from $5.28 as of September 30th to $5.39 as of December 31st.

During the fourth quarter Valley's Board of Directors announced a reduction in the common stock cash dividend.

We believe the retention of a higher amount of capital will enable us to leverage the balance sheet to grow net interest income and tangible book value in future periods.

This concludes my prepared remarks.

We will now open the conference call to questions.

Thank you very much.

(Operator Instructions) We will take our first question from Ken Zerbe, with Morgan Stanley.

Please, go ahead.

Thanks.

Jerry, just want to follow up on the expense guidance that you were talking about.

Obviously, you are selling your properties.

You are investing in something smaller.

Did I hear right that expenses are going to stay flat on a go forward basis as your investing is offset by cost-savings, or are we actually looking at a material decline in expenses over the next X-number of years?

It is kind of difficult to measure the long-term benefit.

We don't expect, at least at this point we do not expect, any increase in expenses as a result of the steps we are taking.

Now, if we can reduce some of the expenses along the way, that will be terrific.

And I want to make it clear that we are not talking about a wholesale sale of all of our facilities.

This is really a rifle, not a shotgun approach.

If we have a situation that appears to be -- we would be better off if we relocated the branch to a different location, sold the branch, moved into a smaller facility, that would make sense.

As we have announced over the years that we have had this pent-up, stored up value in our branch network and the buildings that we own.

And, where appropriate, we over the next whatever period of time it takes may decide to sell some of them.

Just a little more specifically because in your prepared remarks it sounded like out of the hundred this is going to be something we could see fairly frequently.

Just to get a magnitude, are we talking one per year or are we talking five per year?

I really couldn't give you a number because it involves a lot of strategic issues.

The sale of a building doesn't mean necessarily that we don't want to continue a branch at or at approximately that location.

We would first have to find another location that makes sense.

In some cases it may prove that, wait a minute, we are not going to sell the building.

We are going to lease out part of the building.

There are a number of alternatives, and there hasn't been anything definitively outlined about it.

Surely over the next several years we may see other opportunities coming up.

That helps.

And then, just last question, on the non-interest bearing deposit growth you saw in the quarter, was there anything unusual with that?

I remember before you talked about funding loan growth with securities, but it seems you didn't need to just given the strong deposit growth this quarter.

To some degree that is correct.

All right, thank you.

Thank you.

Our next question in queue will come from the line of Steven Alexopoulos, with JPMorgan.

Good morning, guys.

Good morning.

Regarding Jerry's opening comments, that commercial real estate originations were up 150% year-over-year which was a great full year, but really made up of no growth in the first half and then this surge in growth in the second half of the year.

Can you just talk about the market dynamic that is causing such a jump in commercial real estate originations in the back half of the year?

A lot of it is coming, as I said in my remarks, out of New York City.

The real estate market in New York City is very aggressive.

It is a very strong marketplace.

More so than we see in our northern New Jersey footprint, although I am not ignoring our northern New Jersey footprint, but this has nearly been the strongest spot we have seen.

If you look at the demographics as we presented, actually, to our board yesterday, the growth in greater New York City has outpaced both New Jersey -- north New Jersey, central New Jersey, and even Long Island for that matter.

We are fortunate we have grown our footprint so that we cover Manhattan, New York City and we are able to take advantage of that.

So, Jerry, would that primarily be multifamily?

A lot of it is underlying co-op loans, if you are familiar with that market.

It is a pretty secure market.

You are really only lending a small percentage of the appraised value.

Usually, on average, it is well under 10%.

So it makes us feel comfortable with that product.

We have seen other types of real estate in New York City too that are very attractive.

Do you feel the market is growing this quick or are you just taking quite a bit of market share here?

To some degree we are taking market share.

They are not building that many new buildings.

So if there was an existing building, we are taking it from somebody else.

We are fortunate we have a really strong commercial lending staff and they are well known in the community, and they are taking advantage of the opportunities that are presenting themselves.

So do you think that what we saw in the back half of the year could be sustainable in 2014?

Yes.

Okay.

And just one final one regarding the 10-year term loans that you talked about, they reset at 36 and 72 months.

What would they be resetting off of?

What is the benchmark rate?

It is a predetermined rate that we use, that we use the swap rate in setting the loan initially.

The first three years are a little bit lower for the borrower and the next three years are just about at market and the last four years are somewhat above what the current market would be.

So that if rates do move up we have some comfort that we are protecting ourselves.

We have heavy pre-payments on those as well.

Yes.

So that we know that we are going to get the benefit at the back end and the higher rate we are entitled to.

I appreciate the color.

Thanks.

Sure.

Thank you.

Our next question in queue will come from Craig with Credit Suisse.

Please go ahead.

Good morning.

This is actually Nick Karzon for Craig.

Hi, Nick.

Just following up on your comments on the investment securities portfolio, if we continue to see relatively strong loan growth, could that decline further?

And then also in terms of the rate, wondering what the current rate is on the taxable investment securities and where that might ultimately migrate to with rates remaining relatively constant over the course of the year?

Yes.

That's a good point, Nick.

This is Jerry.

As far as loan growth is concerned, the bank would certainly prefer to make loans as opposed to investments from an income standpoint.

Obviously, we need a certain amount of investments for liquidity purposes, but from an income standpoint we are far better off making loans.

I would rather grow the portfolio by putting on more loans.

Alan, do you want to speak to this?

Yes.

The interest rates obviously have gone up, mostly as a result of the premium amortization which I think we talked about in the release.

That being said, that was part of our strategy all along.

For a number of years we were buying high premium and high coupon securities.

So, in the time of lower interest rates you were getting a much lower return.

But we anticipated eventually as rates moved up, we would be able to see a shorter amortization period and interest rates would rise on those particular loans.

We did this mostly on all kinds of mortgage backs.

And so that's what actually has happened in the last, say, six months or so when rates went up to, say, 3%.

The pre-payment slowed down; the amortization slowed down; and the yield on the portfolio went up.

That's helpful.

And then a second question, on the interest bearing deposit accounts it looks like the rate that you were paying picked up a little bit quarter over quarter and I was wondering if that's largely driven by mix shift or if there are any changes in pricing in the quarter?

I think it is a mix shift kind of a thing more than anything.

Thanks for taking my questions this morning.

Thank you.

Your next question in queue will come from Dan Werner, with Morningstar.

Good morning.

Given that you have had such significant auto loan growth, could you remind us how much of that is from indirect versus direct?

And on the indirect side, the dealer network, has that been expanding, contracting?

Used versus new?

Give me a sense of how that business is going.

Our loan auto volume is predominantly almost entirely indirect.

We have grown our network of auto dealers, but I think -- which is right now it is approximately 300 different dealers that we buy paper from.

Mostly located in our footprint, northern New Jersey, Long Island.

We try not to stray too far from that.

We do a little bit in Pennsylvania.

It is a mixture of both new and used.

Ironically, our performing -- I am being told by my officer here, it is 60% new.

It is a business that Valley has been in for many decades.

We actually got into the business in the mid '50s.

We have never left the business.

The sale of automobiles dropped dramatically in the 2008, 2009, 2010 period.

As a result our volume went way down.

But it seems to be coming back again to levels that are not quite where they were at their high, but much, much better than we had seen at the low points.

And then the second question, could you reconcile for me the modernization program with the branches that you said that you wanted about a third of them to be modernized?

Can you reconcile that with the sale lease backs you will be doing going forward?

Let me talk a little about the modernization so we all understand.

That is bringing in equipment that enables the customer to have a different experience in the bank.

They don't have to use a live teller.

They can if they want to, but they can also use various automated approaches.

This ties in, to some degree, with my other remark that people are using remote deposit capture to a much greater extent, and that people are using mobile banking to a much greater extent.

We want to make sure that our branches are designed in such a way to accommodate those clients that would like to have their banking experience handled in that manner.

As a result of that, the size of the footprint of the branch is not required to be as large as it was 15 years ago when many of the branches were acquired.

As a result, we are always looking to see if we can reduce the size of any specific branch.

It is not a shotgun approach, though, as I mentioned before.

It is more of a rifle approach.

We look at each individual branch.

Can we move that branch to another location that doesn't disturb the customer flow, the traffic patterns?

Could we divide the branch?

And since we own a lot of the branches, in some cases that is another alternative.

We don't necessarily have to sell it.

We may be able to subdivide part of it off, sublet part of the branch, generate some revenue from the portion that we are subletting.

So there are different approaches that we could take, all of which help generate additional revenues for the bank in the future.

Okay.

Thank you.

Thank you.

Our next question in queue will come from David Darst, with Guggenheim Securities LLC.

Please, go ahead.

Good morning.

Good morning, David.

Jerry, I think in the last slide deck, where it actually gave the dollar amount of your real estate, or the unrealized gain.

I guess it has been a couple years, but it is about $200 million?

Gross was about $200 million, yes.

It is very hard because when you are not looking to aggressively sell it and you are not putting it on the market, it becomes more of a guesstimate.

But in the case of the location that we sold, it actually was sold for more than our initial guesstimate was.

So it is kind of hard to tell.

Some may not sell for as much as our guesstimate, but I think you number is probably a good ballpark.

Okay.

And could you comment on the C&I payouts versus the origination volumes, or are you at a point with some of the things that have been cleaned up and criticized and classifieds that we might see more of that C&I production stick in 2014?

There were a lot of payoffs that came from some of the acquired institutions.

That probably had some impact on this and probably larger than what might be normal.

We have seen those portfolios.

Remember, they are theoretically rundown portfolios.

They are runoff portfolios.

And so they are going down and they are not getting added to and a lot of that was C&I business.

Alan, if you just had to think about when your margin might stabilize, do you think it is mid-year or end of the year or any idea?

Well, tell me where the rates are going to be, David, and maybe I can give you a better indication and where the competition is going to be pricing loans.

That has an awful lot to do with everything.

No matter what we think, if the competition is 50 basis points less than us, we have to price near or at that number just to put the loans on the books.

It is a combination of the level of rates and the competition.

So a little hard to tell you when it is going to stabilize.

Okay.

And then just on the caps and swaps and a number of other things you have done to manage your position, I think you have done that to probably be more asset sensitive, if some of those are having a negative impact.

That's correct.

Any changes with that strategy or when things might roll off?

I think some of it rolls off about two years from now?

I would say, in 2015 some of it rolls off.

This is the swaps we put on.

Basically the ones I think he is talking about that are negatively impacting us, I believe they are in 2015.

Okay.

Thank you.

Thank you.

Our next question in queue will come from Collyn Gilbert, with KBW.

Hi, good morning, guys.

Good morning.

I just want to make sure, Jerry, I heard you correctly in your opening comments.

You had made the point that the residential mortgage volume will be consistent in 2014 with what we saw in the fourth quarter, is that right?

Yes.

Okay.

So you are not anticipating any net growth in that portfolio?

Not right now.

A lot of it depends on interest rates.

If the Fed decides they have to juice up the economy again and they are going to drop interest rates, we might see a resurgence in some of the refi market.

If the economy continues to show signs of improvement, there may be more in the purchase market.

QM is another issue.

You know, that qualified mortgage can have a very negative or a positive impact depending on how it is interpreted.

Collyn, I think one of the things also was the fact in the fourth quarter, it wasn't that the volume itself was as low as maybe you seem to be considering, but it is also the fact that we sold over 50% of loans in our portfolio that came on that quarter.

So you didn't see any real retainage.

I think the number we were down was about $35 million.

I am not so sure we will be down if we continue to do the same new volume coming in, but rather, it is a matter of what we decide to hold, and if we hold the larger amount, the portfolio will not continue to go down.

Okay.

And do we assume that the portion that you sold this quarter was just because it was more fixed rate production that was coming through versus variable rate?

We see mostly fixed rate.

I think it is more credit quality.

If we see LPVs that we are a little concerned with, we sell the product off.

Got it.

That's helpful.

And, then, just to tie back to the NIM question a little bit, I guess given the dynamics that is going on I would have thought the loan yield would have compressed more this quarter than it did.

Can you just talk a little bit about that?

Was that just timing of when the loans were put on the balance sheet, or are you seeing better pricing?

No.

I don't think so at all.

I think you are seeing a mix of loans coming on the books.

The auto loans are obviously coming on substantially lower in yield.

However, the commercial real estate loans and some other consumer loans are coming in at 4% plus.

So even though you see in this 360 blended rate there are still plenty of loans coming on that are at higher rates.

Okay.

That's helpful.

And, then, just one last question.

You know, we have heard from a number of your peers this quarter, and it seems like there has been heightened regulatory pressure demands or whatever that has come into the market, I would say, maybe even in just this past quarter.

Are you seeing anything in that regard or have you seen any --?

No.

No.

If they were running the type of loan loss percentages that we were, they would not be running into so many [multiple speakers].

No.

Well, I think part of it is getting ready for [defast].

So I just didn't know if there was any change in what you guys have seen in the last month or two and in preparation for that.

No.

We are on top of what they want us to do.

We try to stay one step ahead of them.

We try to anticipate what the regulators are going to want and try to get into them so they are happy with our performance.

Okay.

That was all I had.

Thanks, guys.

Thank you.

Thank you very much.

(Operator Instructions) Next in queue is Matthew Kelley, with Sterne, Agee & Leach, Inc.

Please go ahead.

Mr. Kelley, your line is open.

Please check your mute key.

Again, Mr. Kelley.

Can you hear me now?

Thank you.

On the loan yield and the margin during the quarter were there any impacts from accretable yield or transactions that might have benefited the margins?

Nothing that wasn't in the quarter before.

Okay.

Got it.

And then on the expenses, a bunch of one-team items, mark-to-market gains, amortization of tax credits, rental expense, can you just reconcile those again so we are clear on where we should be starting the first quarter from a base level of expenses?

Yes, I think we gave you a little bit of guidance there that we had about $7.1 million of those varying items.

Netting out, they were additional expenses during the course of the quarter.

We only expect about $2 million of that to repeat itself in the first quarter of 2014.

Okay.

Got it.

So $5 million?

So approximately $5 million [inaudible].

Got it.

I wanted to make sure on that.

As you transition this first third of your branches into the new model, more technology, pushing people toward the self-service, or offering that, and staffing comes down, on this block of one-third of your branches, is there a net savings on total expenses?

Over time, yes.

Yes.

I think initially you start to see, for example, with the cost of the modernization, if you will, you've got equipment you have to buy; you've got to put it into place.

You have depreciation on that and it is going to take time to work through the system until you start to see staffing changes, et cetera, et cetera.

Got it.

And last question.

I want to be clear.

So the securities book ended at $2.6 billion and was up about 6% in 2013.

Where do you see that at year-end 2014?

How is that going to progress?

It may be up slightly, but it is really going to depend on loan growth, I think as Jerry pointed out before.

If the loan volume comes in the way we hope it will come in, then we don't have a need to increase the portfolio.

Thank you.

Thank you very much.

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