Valley National Bancorp (VLY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, we'd like to thank you for standing by. And welcome to the Valley National Bank Corporation third quarter earnings teleconference call. (Operator Instructions)

I would now like to turn the conference over to one of your cohosts and your facilitator, Ms. Dianne Grenz. Please go ahead, ma'am.

Good morning. Welcome to Valley's second-quarter 2014 earnings conference call. If you have not read the third quarter 2014 earnings release that we issued earlier this morning, you may access it 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 8-K, 10-Q and 10-K, 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.

For the quarter, Valley generated net income of $27.7 million, the equivalent of $0.14 per diluted common share. For the year to date, net income was $91 million, or $0.45 per diluted common share. Non-covered loan growth for both the quarter and year to date continues to provide the catalyst for improved earnings momentum.

For the quarter, Valley generated over $800 million in loans, albeit the majority of the activity was skewed to the latter part of the quarter. For the year, the number is even more gratifying, as new loan originations have nearly eclipsed $2.1 billion, which on an annualized basis would amount to over 20% of the Bank's entire loan portfolio.

Of the total 2014 originations, commercial lending volume comprised nearly $1.5 billion, or 70% of all originations. The commercial activity is almost evenly split between traditional C&I and commercial real estate.

Within the C&I portfolio, approximately two-thirds of the current quarter originations were derived from Valley's New York-based commercial lenders. To facilitate further growth within this market, during the quarter, Valley hired a new commercial lending team to service the Bronx. Activity within the New York market remains brisk yet extremely competitive. The average yield on new C&I loans originated during the quarter was approximately 3.7%, with a weighted average re-pricing period of less than 36 months.

Commercial line usage during the quarter remained consistent with the prior quarter, as outstandings were equal to approximately 39% of total committed lines. For certain New York customers, September represents the low point in their line usage, and we anticipate a slight increase in outstandings during the fourth quarter as a result of the aforementioned seasonality.

Commercial real estate closings during the quarter were strong as organic loan originations of approximately $230 million were augmented by a bulk purchase of a third party-originated multifamily loan portfolio totaling approximately $102 million. The purchased loans were at market interest rates to borrowers within Valley's current footprint and contain a large portion of low- and moderate-income apartment units. Valley re-underwrote each of the loans prior to purchase to ascertain that they met our underwriting criteria.

The market for commercial real estate loans remains intense, as credit spreads continue to tighten and term extensions are prevalent. That being said, our pipeline continues to be strong, and we anticipate solid origination volume to persist at least through the end of the year.

Commercial lending wasn't the only bright spot for the Bank in the quarter as consumer lending origination activity was brisk. Total non-covered consumer loans expanded over 21% on an annualized basis during the quarter, and strong, indirect auto originations were supported by growth in other consumer lending products.

Valley continues to maintain an extensive indirect dealer network throughout New Jersey, New York and Pennsylvania. Activity for the quarter was strong in all geographies, and we continue to see similar volumes as we enter the fourth quarter.

In fact, last week, we saw the highest volume in recent memory. Unlike consumer lending, residential volume was tepid at best during the quarter, as originations of approximately $70 million were more than offset by principal amortization and prepayment activity. As a result, the portfolio contracted just over 4% on an annualized basis from the balance outstanding on June 30th.

Residential mortgage activity for homeowners purchasing properties increased nearly 50% from the prior quarter. Yet the purchase market remains weak throughout the quarter. As we have seen in the past few years, refinance activity outpaced purchases by a ratio of approximately two to one during the third quarter.

That said, we anticipate the ratio to further expand in the fourth quarter as market-level interest rates are nearly 40 basis points less today than those witnessed in early July 2014. As a result, Valley has begun to expand product-specific radio and TV advertising, focusing on the Bank's $499 residential mortgage refinance program. The initial response has been favorable, as Valley refinance application volume has doubled from the activity witnessed in the second quarter.

We do not anticipate a recurrence of the refinance boom experienced in the early half of 2013. However, should application volume remain at current levels for even the next few weeks, we expect to maintain at a minimum the portfolio's outstanding balance at September 30th. This would be noteworthy, as the portfolio has contracted for four straight quarters.

Also worth mentioning is the fact that at quarter end, our loan delinquencies, nonperforming loans, criticized and classified loans dropped to levels both in dollar and percentage not witnessed in recent years.

On October 20th, we announced that we had received all necessary regulatory and shareholder approvals required to complete our merger of Florida's 1st United Bancorp with and into Valley. We expect to close the transaction this weekend, effective November 1st, 2014.

1st United provides a tremens opportunity to grow the Valley franchise. While organic loan growth within Valley's core Northern New Jersey and New York footprint is paced to grow between 6% and 8% on an annualized basis, it is our belief that by entering the Florida market, we will expand Valley's growth opportunities both organically as well as from a merger-and-acquisition perspective.

The Florida footprint in which 1st United operates reflects a particularly strong growth market. Approximately 68% of Florida's population resides in their footprint, and much of the business growth is taking place in this area.

The market shows continuing population growth, and Florida now ranks as the third most populated state, just this year having passed New York. The average age demographic within 1st United's footprint is impressive, as it reflects a population with a median age in their late 30s, further demonstrating the future potential of 1st United's strong footprint.

As an example of the area's growth, Zillow Analytics recently reported that currently 280 condominium development projects are slated to be built in South Florida, with a total of over 36,000 units, a volume not currently seen in Valley's other markets.

Furthermore, we believe we are entering the Florida marketplace at an opportune time in the business cycle. And we are further motivated by 1st United's strong, ambitious and well-seasoned management team to drive Valley's expansion efforts in this marketplace. To the 1st United's customers and employees, we provide the opportunity to garner increased growth through the traditional benefits realized by merging a smaller institution with that of a larger organization.

In addition to a greatly expanded lending limit, Valley's diverse product set should provide immense ancillary benefits. As a commercial bank, 1st United rarely focused on consumer products. With Valley's strong automobile and residential mortgage lending programs, we feel there is significant opportunity to enhance revenue through 1st United's branch platform as well as their existing lending base.

We also believe that we can leverage the strength of the current 1st United's franchise with additional M&A targets to build a strong regional commercial banking franchise in Florida. We would like to see this part of our franchise grow to approximate one-third of the entire organization in a reasonable timeframe. We expect to be opportunistic and identifying additional merger partners with which we can grow the combined franchise, while remaining steadfast in maintaining Valley's credit risk profile and earnings prowess.

As stated earlier, the closing is scheduled for this weekend, with the operational merger anticipated to occur by the end of February 2015. Due to the timing in which the systems conversion will occur and the date of closing, we do not anticipate to recognize the majority of the cost saves until the second quarter of 2015.

That being said, we have been proactive in meeting with many of 1st United's larger commercial customers and have held numerous integration meetings with their staff to introduce Valley's consumer products and other services immediately. We believe synergies will occur on the loan side almost immediately and anticipate a seamless transaction.

In summary, we are excited about the forthcoming opportunities to expand our franchise to a third attractive state. We firmly believe that our company operates in three of the most attractive markets in the country, and we look forward to the continued strong growth in each of the states in which we operate.

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

Thank you, Jerry.

Net interest income in the third quarter totaled $114.7 million, a decrease of approximately $2.8 million from the second quarter. The linked-quarter decline is both the result of a contraction in total interest income and an increase in interest expense. The decline in sequential quarter interest income is attributable to increased premium amortization within the taxable investment portfolio, a slight increase in liquidity, the impact of lower yields on new loan originations, and the linked-quarter decline in recovery in prepayment income.

As Jerry mentioned earlier, the Bank originated over $800 million of new loans during the quarter, and point-in-time non-covered loans increased over $360 million. However, average loans outstanding only increased $136 million, as many of the new originations closed in the latter half of the quarter.

Due to the disparity in loan closings throughout the quarter, the linked-quarter increase in interest income attributable to expanded volume was mitigated largely due to continued interest rate pressure from declining yields on new and refinanced loans.

During the quarter, the average rate on new loan originations was approximately 3.5%, an increase from the prior quarter, yet considerably less than the average loan yield of 4.54% for the third quarter of 2014. We anticipate continued pressure on the loan portfolio's average rate. However, if loan volumes continue to expand, we expect total interest income to escalate in the coming periods.

In addition to the aforementioned, increased premium amortization within the Bank's taxable investment portfolio negatively impacted both total interest income and the average rate on taxable securities. Principal cash flows within the Bank's mortgage-backed securities portfolio expanded by nearly 15% from the prior quarter.

As a result of the uptick in amortization, coupled with the blended new rate on purchased investments during the quarter of 2.92%, the average rate on taxable securities portfolio declined from 3.08% in the second quarter to 3.02% in the third quarter. Based on initial cash flows received in October, we anticipate a further increase in premium amortization and, accordingly, further contraction in both portfolio yield and investment interest income in the fourth quarter of this year.

Total interest expense for the quarter increased approximately $1 million due to a slight shift in the Bank's funding profile, as certain short-term borrowings costing on average 25 to 35 basis points were replaced with longer-duration deposits. In addition, we are beginning to witness an increase in market competition for certain deposit categories, specifically certificate of deposits and money market accounts. The increased demand for core deposits throughout the industry will likely persist as new regulatory requirements surrounding liquidity and leverage become effective.

Largely as a result of the above, Valley's cost of deposits and total cost of funds increased 2 basis points from the prior quarter, to 41 basis points and 1.11 basis points respectively.

For the quarter, total deposits increased nearly $450 million, or almost 16% on an annualized basis, from June 30th. Valley's deposit profile remains strong as over 30% of the Bank's total deposit base is comprised of non-interest-bearing deposits. At September 30th, 2014, Valley's non-covered loan-to-deposit ratio stood at 102%, which provides both a solid funding base for both the current portfolio and a sound foundation to support continued loan growth.

Total noninterest income increased approximately $1.7 million from the prior quarter, as the negative impact resulting from the change in the FDIC loss share receivable contracted from the second quarter. As of quarter end, the FDIC receivable equates to just over $16 million in the aggregate.

The commercial portfolio of Valley's loss share with the FDIC expires in the first quarter of 2015, after which a small percentage will be left to cover future exposures arising from the single-family component of the loss share arrangement. As a result, the quarterly amortization related to the receivable will materially contract after the first quarter of 2015.

Total noninterest expense during the quarter was $90.8 million, a decline of $3.4 million from the prior quarter. The second quarter included approximately $2.7 million of infrequent items related to the acceleration of amortization related to tax credits and merger expenses associated with the 1st United Bank transaction. Exclusive of those charges, second quarter noninterest expense would've equaled $91.5 million.

The further contraction during the third quarter in operating expenses reflects management's continuing efforts to improve operating efficiency throughout the organization. Valley's full-time equivalent employee base as of September 30th equaled 2,628 employees, a decline of 33 employees from the prior quarter and nearly 6.5% of the Bank's workforce from the same period one year ago. The salary and employee benefit expense of $45.5 million for the period reflects the lowest aggregate expense since before Valley's entry into Long Island with the State Bank transaction in 2012.

We continue to be mindful of the external pressure being generated on Valley's revenue stream and actively manage to the lowest operating expense base, being cognizant of both customer service and regulatory requirements.

Our branch modernization program, which we previously announced, continues to [include] dividends as we've now installed nearly 80 teller cash recycling machines throughout our branch network. We anticipate further reductions in headcount as the rollout is completed in 2015.

Further, we are presently in the process of piloting five branches with enhanced ATMs. Assuming the customer is receptive, we intend to accelerate the integration throughout the Bank's branch network during 2015 and 2016. Although this initiative will not immediately recognize the same employee cost saving reductions as those that materialized as a result of implementing the teller cash recyclers, the initiative will allow for improved staffing inefficiencies.

Additionally, during the fourth quarter, we intend to complete the reconfiguration of our third full-service branch facility. The modernization of each location allows for reductions in operating expenses, enhancing the aesthetics of each location while providing a more inviting experience to the customer. We intend to accelerate the introduction of Valley's branch modernization program in 2015 and beyond, as the customer acceptance appears positive. And we believe there will be a benefit to both the revenue stream and expense line.

It should be noted, currently there are no one-time expense items associated with achieving the modernization initiatives I just discussed.

Credit quality for the quarter was excellent, as net charge-offs of $615,000 included $433,000 of net charge-offs from covered loans. The resulting net non-covered loan charge-off amount equaled just $182,000, which is a negligible amount of total non-covered loans. In addition, both nonaccrual loans and total nonperforming assets declined 12.5% and 8.4% respectively from the prior quarter, as credit quality and the aggregate improved broadly across Valley's entire lending portfolio.

Largely as a result of this better credit quality, coupled with improved economic conditions, Valley's provision for losses on covered loans was zero for the quarter, with only a slight reduction in the provision for unfunded letters of credit directly resulting from a decrease in outstanding's for this category.

As of September 30th, Valley's allowance for credit losses equaled $104.6 million, which equates to a ratio of 0.86% against total loans. Although the ratio includes the outstanding balance attributable to loans recorded as purchase credit impaired loans, the allowance does not reflect any of the remaining fair value marks specifically ascribed to these portfolios. Had the purchase credit impaired loans been excluded from the calculation, the ratio would've been approximately 4 basis points higher.

At quarter end, the unpaid principal balance for Valley's purchase credit impaired loan portfolio equaled $696 million, against which approximately $66 million of fair value accounting marks remain. While these fair value marks are specifically earmarked against various loan pools, it is appropriate to incorporate the balance when assessing Valley's overall reserves for potential bad debts.

Valleys regulatory capital ratios remain strong, although the Tier 1 capital ratio declined from 9.43% in the second quarter to 9.22%. The decline is largely the result of growth in Valley's loan portfolio greater than the increase in retained equity. During the same period, Valley's Tier 2 equity declined from 11.89% to 11.44%, in part due to the aforementioned growth in risk-weighted assets, but also resulting from the reduction of $20 million in qualifying sub debt.

We believe Valley's capital ratios are appropriate to the Bank's risk profile and provide a solid foundation to support the continued growth efforts.

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

(Operator Instructions) Ken Zerbe, Morgan Stanley.

First of all, in terms of the margin -- you guys sound fairly, I guess, negative on the outlook from the runoff in the loan yields, just given your new origination yields versus your portfolio yields. Can you just talk a little more broadly about how you see the loan yields declining? But at the same time, I think you have a lot of high-cost liabilities that re-price or that mature over the next couple of years. At what point do those maturities on funding costs actually start offsetting the decline in loan yields, so you actually may end up with more of a stable NIM?

The borrowings begin coming off the middle of next year, of 2015. So we have about $100 million coming off around July of 2015. And then we have another $300 million coming off in the fourth quarter of 2015.

We also have, in addition to that, some derivatives on the books that we've disclosed. That's about $100 million in the second quarter that will disappear. So in addition, through 2015, we have about $260 million-odd of CDs, many, many of which are fairly high cost, that we put on years ago, at the same time we put the borrowings on, in anticipation of locking in some spreads, protecting ourselves against rising rates. So they will also begin coming off all throughout 2015.

So in total, you've got about $600 million to $700 million next year that will be coming off.

And is that applied NIM stability, assuming no rate hikes by the end of the year? Or --?

I'm sorry, repeat that. I apologize.

Sure. I guess I'm just saying -- that number that you just mentioned, is that broadly implied NIM stability in your models by the end of 2015, or --

I don't think we want to project that yet.

Sure.

We have not decided exactly how those fundings will be replaced. And I think depending on what we do and how we do it will determine how that impacts the NIM.

In addition, by the way, one of the things which does not affect that is the FDIC receivable, which I mentioned, which we're also writing off. And while that doesn't have an impact directly on the NIM, it does have an impact on the noninterest income line.

I see. Okay.

And then, just the other question I have -- in terms of the loan growth, specifically on the bulk multifamily purchase -- could you just go into your rationale, like why did you purchase the loans, do you anticipate to do it again in the future? But also, is this, whatever, $100 million that you closed at the end of the quarter -- is that also what you're referring to when you say you had a lot of loan closings at the end of the quarter?

That was part of it -- this is Jerry Lipkin. That was part of what closed very late in the quarter. It was opportunistic. Another bank, for whatever their internal reasons were, wanted to sell it. They were offered to us at a good price. And they also helped meet some of our Community Reinvestment Act needs, since they did contain a fair volume of low-/moderate-income homes, apartments. So it worked out very well.

We re-underwrote, as I mentioned in my remarks, the entire portfolio. We were very satisfied. The loan-to-values were no more than 75%; in some cases, they were lower than that.

So it was a good portfolio. Like I say, it was opportunistic. That opportunity presented itself again, of course, we would look at it.

Yes, I think we've done this before. This is not what I want to call a one-off, per se. We have done it two years ago, we bought some rezi loans as well as some commercial mortgages. So, as Jerry just said, we're opportunistic. If something comes along -- it seems to make sense relative to interest rates, term, et cetera -- then we're going to look at it and maybe take advantage.

Sounds good. All right, thanks a lot, guys.

Yes.

All right.

Steven Alexopoulos, JP Morgan.

I wanted to start, maybe drill into the deposit cost a bit. In terms of the CDs, what was the incremental rate that you paid on CDs in the third quarter? And with rates coming down, are you seeing more customers migrate to longer-duration CD products?

To some degree, yes. We're not doing the 30-day, 60-day CDs. We're primarily looking at year and a half, two years, two-and-a-half-year CDs.

And I see where the rates are on those. Okay.

And on this increase in the rates paid on savings deposits -- is that from a campaign that you guys had been running to attract those? Or are you just seeing more folks put money in the higher-balance products where you pay a higher rate?

Yes, a lot of that is really the money markets that we talked about. So we have been looking at some brokered deposits. But the brokered deposits, to a large extent -- I would say half of what we've put on we've locked in for longer terms -- three, four and five years. While the cost is not what we would consider to be high, it may be higher than the cost of what we have on the books at the moment. So it has a negative impact on the overall cost of the deposit structure. While we think that it helps protect the Bank, a lot of it is floating-rate instruments.

So Alan, putting this together, do you expect the cost of deposits to continue to trend upward here?

I think it's a slight trend upward. I didn't see that as a huge set of numbers. Remember, built into that are the derivatives I talked about. And over the next couple of years -- beginning next year, we have in total about $400 million built into our interest expense line that is hurting us at the moment, where we anticipated rates rising. Beginning next year, as I said before, we have $100 million coming do, which is going to help to bring down that cost of deposits.

Again, if short-term rates do not rise -- and I don't think we see that happening really at the moment -- we should be fine with this. You may see a basis point here or there, but I don't see any major upticks.

And on the auto portfolio, what's the yield of the auto loan book? And what's the yield you're adding new loans? I'm looking at the website, and it looks like your offering yields of 2.40% and 3%.

That's approximately what they're coming on at.

So, mid-2s?

Yes, they're in the low to mid-2s.

Yes, low to mid-2s.

One of the things again, Steve, which I think we've talked about, is that we like the shorter duration of those. There's huge cash flow that comes out of that portfolio. We've always liked it, we've always been in it for that reason. So kind of helping us to offset some of the longer-term assets we've put on our auto loans, which are much shorter in duration. And while the interest rates are low right now, we know that we have the ability, as rates hopefully -- whenever rates should increase, to see higher yields on that portfolio.

Yes. I didn't include it in my remarks about the portfolio, but I know there's a lot of talk about auto lending today and how crazy it's becoming as far as terms and conditions are concerned.

We limit the loan pretty much to 100% of the invoice, not the list price on the car. We see competition lending 150% of the list price on the car, which is crazy. And we run an average FICO probably in the 760s.

So the quality of what we're putting on is very strong. It has an average duration of under three years. So it is a liquid instrument. As rates rise, the cash flow that comes out of it is phenomenal. So we would be able to redeploy those funds at higher numbers. It has always been a great source of liquidity at our bank. And we're really pleased with what we're seeing coming in.

Jerry, maybe just a final question -- C&I loan growth -- I would call it relatively sluggish. Can you talk about the production you're getting out of the State Bancorp platform that you acquired? Thanks.

Well, it's coming out of New York as a whole. We don't breakout between what came out of the State Farm, what came out of Merchants, what came out of the new branches we opened. It's generally all coming out of that New York market.

We're quite pleased with it. I think -- I wouldn't quite call it sluggish; I think it's -- considering all things being equal, I think we're doing quite well in that marketplace.

Steve, just as an aside on that, we are seeing some reduction in some of the original loans. That doesn't mean we're not seeing a lot of new loans coming on the book. I think as Jerry talked about, there's been a lot of new C&I lending going on throughout New York, Long Island, et cetera. However, some of the original loans that we had -- you know, they tend to disappear over time. It's a couple of years in. Yes, Park and Liberty as well.

So you're seeing a reduction in Park and Liberty, a reduction in some of the original State loans. Remember, those were PCI and covered loans that we keep in a separate bucket. As new loans go on, they are not going into that bucket anymore; they're going into the new total portfolio of Valley.

So while the net may look a little sluggish, we're putting on still a lot of volume of loans.

Yes, the Park and Liberty is something that you really have to focus on. Because that was a portfolio of loans that almost entirely we did not want to keep on the books. They were of a quality that didn't meet up to our standards. They had a guarantee from the FDIC, which made them attractive at that time.

Yes. And the other thing you should be aware of, which is affecting the C&I portfolio, is we had the aircraft portfolio, which we still have. But we made a decision a couple of years ago to get out of that portfolio. As you get out of it, and there's no new loans coming on, there's runoff of those loans.

So we have a lot of -- a lot of it is running in place to get ahead, if you will. And we are getting ahead. Sometimes it may not seem as much. But again, because of some of the old portfolios that we have, some of that runoff happens. And it's a huge cash flow that has to be reinvested.

Okay. That's really helpful color, I appreciate it. Thanks, guys.

Sure.

Joe [Finnick]. Please state your company name, followed by your question.

Question for Alan or Ira, I guess. Covered loans just being such a small percentage of the overall balance of loans at this point, guys, would you say the impact to the margin, either positive or negative, is likely to be pretty minimal from here? Or could there still be some distortion, even at this small balance level?

Yes, it's very small, because the portfolio itself is pretty small. So it doesn't have a lot of impact anymore.

And then, for Jerry on M&A -- Jerry, we just saw an acquisition the other day in Florida, the pretty healthy multiple for a small bank. Has the landscape changed at all in terms of M&A pricing in Florida, just even in the last few months, where the bar is now set even higher for the franchises of value that are left? Or just how would you characterize the overall M&A landscape in the markets that you want to be bigger in in Florida?

It's very difficult. That's a situation-by-situation answer. I don't know -- Rudy, who is on the call with us, would be even more familiar with the Florida marketplace. Rudy?

Yes, thanks, Jerry.

Yes, a couple of comments there. I think that to some extent, it's an net-seller estate. I think there's opportunity for opportunistic buyers. I do think it's true that the better performers, particularly in the $1 billion or more category -- whether for-sale deliberately or not yet -- are looking in the range of price to tangible book of [170] to [185]. They might dream about expectations higher than that, Joe, but I think that is a range that they talk about.

The State, as you know, is more likely comprised of institutions that are in the sub-$1 billion category. And I believe there's a lot of net selling interest there, to some extent. And I think those shops -- you saw a transaction in Tampa that I think was more like [126] to tangible book. I think that was price-appropriate. So I think it's a broad range, as Jerry said, depending on the individual case -- their qualities, their market power and so on.

So as you guys think about acquisitions going forward, just given what you just laid out, Rudy, would you say you have relatively more interest than you had before maybe, in the sub-$1 million category, just because of the pricing advantage there?

Jerry, if you want -- my view on that is of course, we would love to just focus on the $1 billion-plus institutions. But there are certain markets where the more likely candidate would be sub-$1 billion, and also the worthy candidate. So I think it's just fair to say that when we kicked off the effort, will be taking a look at institutions that do, in fact, range sub-$1 billion to $1 billion-plus.

Fair enough.

And then, relative to when you guys first laid out your assumptions for the 1st United deal, any fine tuning you'd like to do here in terms of your initial -- relative to your initial assumptions as you're about to close the deal, with market conditions evolving in Florida? Anything you think is better than you initially expected or, on the flipside, has been tougher than you initially thought?

Jerry Lipkin -- I was excited when we got into the transaction; twice as excited today as then. Everything we've seen to date has been as good, if not better, than we had anticipated in all areas.

Okay.

And then, last one for me, I guess -- Alan, setting aside the impact of 1st United, can you talk a little bit more about your expectations for expenses from here for the legacy company, taking into account, obviously, the cost and the expected benefit from some of the initiatives you talked about in your prepared remarks?

Yes, I don't see where our operating expenses are going to go down dramatically. So I don't think you should be building in any kind of major cost decline there. I think we continue to review and look at those expense lines. I indicated in my comments about the installation of some new equipment at the branches that's been helping us with [retaining] people.

So overall, I think we're at a good place, and we'll continue to monitor closely.

Great. Thank you, guys.

Frank Schiraldi, Sandler O'Neill.

Just a couple of quick questions, actually. On multifamily, on the purchase portfolio -- is that all five-year fixed term? Or is it anything longer than that?

Majority is five-year; most of it's balloons. There may be a few seven-year. But the majority of it is in the five-year category.

And it seems like there wasn't a lot, other than that, given comments in the release. But in terms of the CRE originated in the quarter, about what percentage of that, outside of the loans purchased, was multifamily?

Very little.

I don't think a lot.

Very little? Okay.

And then, just another question on expenses, as we think about this branch modernization program -- is there a benchmark to think about, costs saved per branch? Or is it more -- are gains more revenue-related at this point with that program?

I think it's more -- I think when we originally went into this, we told everybody this was going to be kind of neutral, if you will. So we're going to have some additional depreciation for new equipment coming on, we're going to save FTEs. And I think you're kind of starting to see that now. Our FTEs are down, our salary expense has come down. And a lot of that is relative to the changes we've made in the branches. I don't think we're making major reductions in expenses as a result of this. I mean, it's coming down. But it's not going to be dramatic.

Got you.

We've also seen some occupancy savings, because we've been able to move some of our branches next door, so to speak, or across the street from their current location to a smaller location. That's been, and I think will become, material. We own a lot of our branches. So we can downsize a branch, printout half of the branch, move next door. Most of the branches have been on the books for many, many years, so their cost is relatively low. So we move out, we actually end up sometimes with a gain.

Yes. And I think we've talked before about rightsizing the branches. And we continue to look at that and determine what is the right size for each location. And I think as Jerry just pointed out, it's possible. We have a lease, we have to wait for that. Maybe we own the building, we sell the building. Whatever it is, we're going to take advantage and do what we have to do.

And I think as we also pointed out, we have not been taking any charges relative to this so this is an ongoing project. And it continues to help us as we move forward in changing some of the structure.

Okay.

And I guess, just finally, on 1st United -- given when it's closing, I wonder if you could just remind us of realizing cost saves, how that gets timed in over the next couple of quarters.

Yes, you're not going to see anything, obviously, in the fourth quarter. You're probably going to see very little, if anything, in the first quarter. Because remember, as Jerry said, we're not going to do a conversion until the middle of the first quarter. So until the conversion is done, it's very difficult to come up with major savings. There'll be some savings right away. But that being said, they're not going to be some of the major ones we're going to see when you get -- when computer systems disappear, or when maybe some staffing gets reduced, et cetera. That'll start to really occur, I would say, in the second quarter of next year.

Great. Okay, thank you.

Collyn Gilbert, KBW.

You guys have said a lot. And if we think about kind of all the moving pieces here, what should we be assuming for loan growth? I mean, it sounds like you feel optimistic, certainly in your legacy New York market, Florida market. How should we be thinking about loan growth projections for 2015?

I would say in the 6% to 8% range. That's numbers seem to be. Now, I'm not sure that's going to take into account fully what could happen in Florida. I mean, we may see more. But again, that portfolio is relatively small to the total portfolio. So it's going to have an incremental increase. I just don't know if I can give you the percentage of the moment how it's going to increase.

Yes. I think they themselves have been showing nice loan growth on their own. They're going to be able to make larger loans than they had in the past, so that'll help broaden the market they go after. As a result, that should help us.

The consumer area should be significant. We do plan to go down there and try to introduce our $499 refi program. The residential market in Florida went down more than it did in this part of the country. And it made refinancing up until now more difficult. But that market is starting to rebound, and the price of homes have come up. I just saw a number that in Miami they were up 9%. As that market improves itself, a lot of people will have an interest in the refi. If it's anything like we've had up here in New Jersey and in New York, it should be substantial.

Rudy has been instrumental in introducing Al Engle, who heads up our consumer area, to a number of car dealers in that area. And they're excited about the fact that that's a product that they can offer the staff down there. So I would anticipate that in the not-that-distant future, we would sign up some auto dealers, start to buy paper down there.

So none of that has been factored in in the numbers that we've released to date, or in our projections when we bought the company. We always factor that in afterward. And we are optimistic, at least at this point, that that should be beneficial to the Bank.

Okay. And is it safe to assume that that growth would still be skewed more towards consumer versus commercial?

Well --

I'm not talking about in Florida, but for the total portfolio.

No.

No.

I don't know why you would think that it --

No.

Well, just from a growth rate perspective. I mean, auto and consumer have been kind of some of the --

From a percentage standpoint are you talking about?

Yes.

Consumer had strong growth.

Okay.

And then, just a second question on provision -- obviously, credit's been pretty strong these last couple quarters. Are we seeing a bottoming in net charge-offs? I mean, how should we think about kind of further provisioning and net charge-offs from here?

Well, I'm not sure net charge-offs will go much lower than zero.

Yes.

We did have a recovery quarter last quarter of a couple million dollars. We had this quarter, where our net charge-offs on our regular non-covered portfolio, was almost nonexistent. So I'm not sure how many quarters in a row we can get to zero or in total recoveries. But we're very comfortable with what we're seeing right now. We're not seeing any upticks in credit quality. In fact, if anything, we're seeing it just get better as we continue to move forward.

Okay.

So it's a little hard to tell you what you're going to see in provisioning. Obviously we take into account loan growth. A lot of people say -- well, the portfolios growing, and we're not -- well, we are taking that into account. We take into account everything. Jerry talked about the [fact] criticized and all classified loans, and all those categories are coming down. So when you put it all together into a ball of wax, the model comes out and says that we should be where we're at, and we're pretty comfortable with that.

And I think we did indicate as well that there is included in there almost $700 million of loans that are separately covered by a fair value mark.

Right. Okay, that's helpful.

And then, Alan, I know you had said that as you guys think about sort of the borrowings and derivatives and CDs that are re-pricing next year, that you haven't figured out exactly how you're going to replace those. Can you just tell us a little bit, though, of kind of what's going into the discussion or thought process as to what the strategy might be there?

Collyn, this is Jerry. Remember, the borrowings were mostly 10-year borrowings. They were done at a time to offset loans that we were putting on of a longer duration. A large block of the borrowings, in fact, were done to when we leveraged up our investment portfolio in and bought, I don't know, somewhere in the $600 million range worth of single-name trust-preferred securities, which always performed well. A lot of them were bought in the mid-1990s. And those were yielding us 7%, 8%.

When the Collins Amendment came in, they no longer counted as capital. The people who issued them paid us off, without a penalty. And we were stuck with the borrowings. And the borrowings, unfortunately -- where we bought them in the mid-1990s, in the mid-2000s is when they renewed the 10-year borrowings. And those 10-year borrowings are now reaching the end of their life. We wouldn't have need to go out and take on 10-year borrowings in the future. So we could easily replace them with a shorter-term borrowing, which would be at a much lower cost to carry the portfolio.

So when we say we anticipate a significant savings, that savings, I think, will take place almost irrespective of where interest rates are at that time. Because we're not going to run out and do 10-year borrowings again to replace the ones that expired.

Even the loans that have come on are already moving through the cycle, if you will.

Right.

So if we put on, for argument's sake, a 10-year loan four years ago or five years ago, I don't have a need to cover it for 10 new years. So we're going to look at it a little bit differently going forward. And we have told everybody, the average cost next year coming due is almost 4%. Now, that's average. There's money out there that I can tell you that is in the mid-4s and even as high as 5%. So that is going to start to come due. And I can tell you, we're not going to pay anywhere near 4.5% or 5% for those borrowings.

Okay.

Can you just remind us what percent of the portfolio today, the total loan portfolio, is tied to prime or three-month LIBOR?

That is prime-based, I would say, how much -- about 30%.

Okay.

For commercial. That's not of everything. I mean, Al's portfolio -- we have residential, but we have a lot of, again, consumer, home equity -- 30% of everything. Never mind.

Of everything. Okay.

And then, just one final question -- a lot of what decisions you guys need to be making or thinking about, obviously -- well, although to your point, Alan, that the rate environment doesn't affect how you're thinking about these borrowings -- just in general, what is your interest rate outlook?

We don't see anything going up right now.

(Laughter)

I think we're seeing, you know, a deflationary environment. We're seeing a lot of pressure from around the world. And I don't see where the Fed is going to do much to move things for quite some period of time. So once again, oil, as Al just mentioned over here, is way down.

So all that being said, we think, at least from the standpoint of the fundings that are on the books today that are going to begin maturing in 2015, 2016 and probably even as far out as 2017, are going to be redone at much lower rates.

Okay.

It's our position, Collyn -- at least, our belief -- that when the Fed does begin to raise rates, it's going to be a very slow and very long process. I don't believe you're going to see a sudden spike up in rates.

Okay. All right, that's helpful. Thanks, guys.

Okay.

Okay.

Matthew Kelly, Sterne Agee.

Before you start to get some of the benefits of re-pricing the borrowings and the CDs, and with the closing of 1st United, it looks like on a standalone basis that should benefit the margin by 12 to 15 basis points, just using a weighted average of their margin and earning assets. Do you think we'll see that run through at that level? Or will there be more organic compression offsetting that 12 to 15 by the time we get to call the second quarter of next year?

Yes, organic has to affect it. But again, they're only 10% of our balance sheet. So that's going to be a positive, but it's going to be impacted by our continued origination of loans that are going to be at lower rates. So there has to be some negative impact.

One encouraging thing that I've observed, though, is they seem to be able to get a little bit higher rates in Florida then we're able to get here in the metropolitan area. So that could be a benefit to some degree also.

And in the promotional deposit pricing that you've seen out there -- maybe just talk about that a little bit more, what you've seen? And has that been a phenomenon just quite recently, last couple of weeks and months? Or what types of things are you seeing?

We're seeing CDs and money market pricing which is pretty competitive, with a 1% and maybe even a little over 1% range, depending on term.

Got it.

Any update in your tax rate we should be using for next year, with (multiple speakers) --

Not at this point.

Still around 28.5%, I think, is the last guidance you provided.

Yes, right around there --

All right.

-- right around 28.5%, even as high as possibly 29%. As Florida comes on, we may see a slight shift in our effective rate. But it'll be right around the 28% to 29% range.

Okay.

And then, the purchased multifamily loans -- what was the average yield on those loans? And I guess the second question would be, why not just go directly to Meridian or Eastern yourselves, instead of buying them from somebody else who had already done the deal with those brokers?

This was again -- and I think Jerry pointed out -- it's an opportunistic kind of a situation. The yield's in the -- it's above the mid-3s. We were comfortable with it.

Okay.

And then, last question -- what's driving the year-over-year decline in the insurance business? And what should we expect there? It was down 14% year-over-year.

Well, part of it is the title business. So remember, we had last year -- as well as we had a huge amount of gains on the sale of loans, we had a lot of title business come through. That's included in the insurance.

Now, our regular insurance business has done reasonably well and continues to increase. However, we don't always see quarter over quarter increases there. But the title business is down as a result of residential refinance business.

Fair enough. Okay, Thank you.

All right.

Dan Oxman, Jacobs Asset Management.

I'll make this quick, I know it's been a long call.

My question's on capital -- your Tier 2 capital ratio fell 11.4%, which, while it's well capitalized, or considered well capitalized, is below what I believe regulators prefer to be 12%. So could we potentially see a sub-debt raise? Looks like you might need between $75 million to $100 million to get you comfortably over that 12%.

Well, we'll continue to review that as we move into next year, and we continue to look at our loan growth and what's happening there, and whether or not we feel we need it.

Okay, great. That's it, thanks.

Yes.

Chris Jackson, Sterne Agee.

All my questions have been asked and answered, so I'm all set.

Okay. Thank you.

All right, thank you.

Ladies and gentlemen of the panel, there are no further questions in queue at this time. Please continue.

Thank you for joining us on our conference call today, and have a great day.

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I'd like to thank you for your participate and thank you for using AT&T. You may now disconnect.