Valley National Bancorp (VLY) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Earnings Release 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) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Dianne Grenz. Please go ahead.

Good morning. Welcome to Valley's Second Quarter 2015 Earnings Conference Call. If you have not read the second quarter 2015 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 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-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 second quarter earnings conference call. Valley's second fiscal quarter was highlighted by a second Florida bank acquisition announcement, earnings expansion, balance sheet growth, and continued cost containment measures, all giving rise to our enthusiasm for Valley's future.

In May we announced the strategic continuation of our Florida expansion efforts with the acquisition of Orlando-based CNL Bank. CNL, when merged with Valley's existing Florida franchise will expand Valley's Florida presence to 36 branches with deposits in excess of $2.5 billion of which nearly 40% will be non-interest bearing and $2.1 billion in gross loans.

Specifically, CNL provides Valley an entre into the Jacksonville and Naples/Fort Myers marketplaces, while exponentially expanding Valley's Orlando and Southeast markets. From a financial perspective, the transaction is expected to be accretive to earnings within the first 12 months of consolidated operations, exclusive of expanded consumer lending revenue opportunities.

The announcement comes on the heels of Valley's successful systems integration of the former First United Bank of Florida, which was completed during the first quarter. We have a talented and dedicated team of individuals who have repeatedly administered systems and cultural integrations in connection with Valley's past acquisitions. We are excited about the opportunity to grow our Florida franchise and believe we have identified an excellent institution and, most importantly, which will add highly qualified people to our management team.

Subject to regulatory and CNL's shareholder approval, we continue to anticipate a fourth quarter close of the CNL acquisition. To date, the necessary regulatory applications have been filed, and the Form S4 was submitted to the SEC earlier this week.

While we desire to continue diversifying the bank's geographic presence in creating what we like to refer to as a three-legged stool consisting of the best markets in New Jersey, New York, and Florida. This desire is a goal not an obsession. The bank remains steadfast in its acquisition criteria that each transaction should be accretive within the first year, tangible book dilution must be manageable, and, most importantly, the business combination must make long-term strategic sense for our shareholders.

For the quarter, Valley reported net income of $32 million, an increase of $1.7 million from the first quarter. The increase was largely attributable to expanded net interest income as loan growth continued to be a bright spot throughout all categories and geographies.

During the quarter, we purchased participations in approximately $480 million of mostly multi-family real estate loans in our marketplace. These loans have interest rates that will generally reset in the next three to five years, and were all thoroughly examined by Valley under its normal underwriting criteria prior to their purchase.

Additionally, many of these loans will assist us in leading our CRA commitment. Exclusive of this purchase, linked quarter non-covered loans also increased over 9% on an annualized basis as organic loan originations equaled nearly $945 million, an increase of more than $250 million when compared to the prior quarter.

That being said, in part, due to the liquid nature of Valley's loan portfolio, net loans exclusive of the acquired portfolio, expanded by approximately $300 million from the first quarter. Commercial activity was brisk across all of Valley's geographic locations as each of Valley's areas experienced significant expansion of new originations from the prior period. CNI origination volume increased approximately $100 million from the prior quarter, although net outstandings only increased 1.5% on an annualized basis in large part due to a decrease in line usage. The CNI pipeline both in New Jersey and New York continues to be strong.

In Florida, the commercial pipeline continues to expand, reaching over $200 million, a direct consequence of maintaining the legacy First United team coupled with Valley's increased lending authority and additions to staff.

Consumer lending origination volume in the second quarter was strong, reflective of increased activity both in Valley's indirect auto and residential mortgage business lines. That being said, application activity within residential mortgage business line has slowed in recent months as we continue to experience a decline in refinancing activity. However, we are encouraged by an increase in purchase activity and moving into the third quarter, we anticipate this will help to mitigate some of the decrease in refinancing.

Indirect auto loan originations grew approximately $35 million from the prior quarter as second quarter originations exceeded $155 million. Activity coming out of Florida has been growing and is in line with our expectations. During the same period, Valley also turned down a large volume of indirect auto applications, of which nearly $100 million reflected FICO scores in excess of 700.

While the current yield on new originations is accretive due, in part, to the short duration of the portfolio, the spread remains thin as the bank maintains its stringent credit and loan-to-value criteria. While indirect auto is a distinct business line within our organization, one in which Valley has been an active participant for over 60 years, we do not intend to dramatically increase the portfolio until the market turns and pricing improves.

We continue to believe that maintaining Valley's diverse balance sheet comprised of both consumer and commercial loans remains the prudent approach for the long-term success of the bank, as each portfolio contains unique cash flow and interest rate characteristics in varying interest rate environments and economic cycles. Although loan growth continues to be strong, the level of market interest rates creates a challenging environment, one in which increased volume alone will not generate sufficient shareholder returns.

The bank must continue to manage operating expenses in a manner consistent with both meeting regulatory expectations and the changing delivery channel dynamics.

During 2014, the bank initiated a branch modernization strategy, which introduced new technology into many of our locations ultimately reducing annual direct operating expenses by approximately $4 million. However, enhancing technology alone will not achieve the desired reduction in operating expenses.

During the third and fourth quarters of 2015, we intend to close 13 branch locations, or approximately 6% of our branch network. Of the 13 locations, 12 are situated in New Jersey and reflect approximately 8% of the New Jersey branch footprint as we continue to assess the appropriate balance between technology and branches, we anticipate further branch closings during 2016.

During the quarter, we raised $215 million of additional capital comprised of $115 million in preferred equity, and $100 million in subordinated debt. The increase in capital did not fill an immediate need as we believed, based on the risk profile of the bank, we had sufficient capital. However, as the bank continues to grow using both organic and acquisition methods, we thought it was appropriate to provide a stronger capital base to support the expansion of the franchise.

We believe that acting now is prudent, particularly when we consider the historical low cost of capital and what we were able to accomplish because of today's low rates.

The banking industry today is as challenging as we can remember from a competitive interest rate and economic perspective. To succeed and generate improved financial performance, we must effectively manage our operating expenses and grow the balance sheet in a responsible and profitable manner cognizant of both the long-term interest rate risk and credit cycles.

We believe the steps Valley has taken in the second quarter support this approach through expanding the bank's footprint to generate additional loan volume, de-emphasizing the branch as a delivery channel, and providing capital to support future initiatives.

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

Thank you, Jerry. For the quarter, Valley's fully tax equivalent net interest margin was 3.22%, an increase of 2 basis points from the first quarter. The linked quarter expansion is largely attributable to an increase in fee income, which positively impacted the yields on new loans coupled with a redeployment of excess short-term liquidity.

As part of the bank's asset liability risk management program, Valley actively enters into derivative contracts on behalf of customers as a means to enhance the bank's future asset sensitivity. During the quarter, approximately $2 million, or 5 basis points on the effective loan yield was recognized as income. In addition to the derivative program, the bank is proactive in managing the composition of new loan and investment originations to further mitigate extension risk.

During the second quarter, the yield on new loan originations was slightly less than 3.5%, as a significant portion of the bank's organic originations are derived from indirect auto and CNI loans, which either encompass short durations or immediately reprice with the change in market interest rates.

Further, as Jerry alluded to in his prepared remarks, the bank acquired approximately $480 million of CRE loans during the second quarter. The purchase of the season loan portfolio while in isolation will expand the bank's interest income as a dual function of effectively reducing future extension risk as principal amortization from the investment portfolio was redirected to fund part of the purchase.

The investment portfolio, as of June 30th, contracted approximately $140 million from March 31st, and we anticipate a further reduction as new investment alternatives available in the marketplace do not provide a suitable return for either the interest rate or credit risks assumed.

We expect the loans recently purchased to have an average life of approximately three years, which is significantly less than viable alternatives within the investment portfolio. We currently believe extending duration to capture additional yield within the investment portfolio is an imprudent approach at this juncture in the interest rate cycle.

In part, as a result of Valley's previous investment portfolio management strategies, the current period premium amortization within the portfolio increased $1.5 million from the prior period as MBS cash flows expanded 43% from the first quarter. The increased amortization negatively impacted the yield on taxable investments by 27 basis points during the second quarter.

Based on actual cash flows received in the month of July, we anticipate the level of premium amortization to be elevated in the third quarter but less than the absolute expense recognized in the second quarter.

On the funding side of the balance sheet, the cost of funds remain flat with that of the first quarter at 93 basis points. Total deposit costs were similarly unchanged at 40 basis points as approximately 30% of the bank's total deposits are non-interest-bearing. Non-interest income during the period increased $1.6 million from the first quarter as positive change in FDIC lost share receivable was in part mitigated by the declining gains on security transactions equal to $2.5 million.

The remaining non-interest income categories remain relatively flat from both a linked quarter and annual period perspective. Non-interest expense declined approximately $700,000 from the prior quarter as anticipated linked quarter reductions in compensation and snowplowing expenses were largely offset by increases in other expense categories. Some of the increases were attributable to the volatility in certain line items such as REO and professional fees. However, as Jerry indicated earlier, we intend to focus efforts on reducing our expense base.

The closing of 13 branches will likely reduce non-interest expense by approximately $4 million on an annual basis. As possible further branch closures are evaluated, we anticipated there would be incremental savings from any additional closures.

Credit quality as of June 30th was solid in spite of an increase in linked quarter net charge-offs. Total non-accrual loans declined to approximately $55 million, or 0.38% of total loans. In part, as a result of the decline, the ratio of the allowance for losses on non-covered loans as a percent of non-accrual loans increased to 188% from 178% in the first quarter.

The provision for loan losses during the quarter equaled $4.5 million compared to no provision in the first quarter. The increase is largely attributable to the rise in linked quarter net charge-offs coupled with significant growth in loans including those acquired during the quarter.

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

(Operator Instructions) Ken Zerbe, Morgan Stanley.

I just want to start for the purchased loans. I guess simple question -- were these purchased from NYCB? But, also, do you expect to continue purchasing loans, going forward?

No, we don't discuss who we buy loans from. That's not public information, number one; and number two, we continue to look in the marketplace both on the origination side, the acquisition side, et cetera, and so as we deem it necessary, we'll do what we believe is prudent for Valley.

All right, fair enough. In terms of the branch closures, it seems pretty straightforward. You close branches, expenses go down, you don't take any meaningful impairment charges. But what do you give up? Where's the offset to that?

Well, for one thing, we don't just, helter skelter, close branches. We focus primarily on areas where we have overlap. As the amount of traffic in a particular area drops, we find that by closing one branch where we had another branch a mile or so away, or two miles away, we don't really lose accounts. We pick up a greater volume in the branch that remains open, so it doesn't hurt us from a transaction standpoint. We try not to displace as many customers as possible, that's always taken into consideration.

But, overall, like the rest of the industry, our floor traffic, our foot traffic coming in and out of the branches is down significantly. It's over one third of the volume that we used to see. It's probably closer to 40% even today. So I think that in the future, you're going to see continued closures. We also own about half of the offices, so we focus on that as well when we make a decision as to which is more prudent for us to close -- the one we own or the one we're leasing.

Okay, and then just the last question, more of a numbers issue. I think you mentioned that just over $1 million of premium amortization, which was a negative. But in the release you mentioned, I think, swap income and income from the PCI loans, could you quantify those pieces? I just want to know kind of what was sort of unusual in the quarter? Thank you.

Well, the one we talked about was the amortization, and that's just a net change between quarter-to-quarter of $1.5 million. The swap income we talked about was about $2 million. The PCI loans -- that's all part of the accretion and cash flows that goes on every single quarter, and it's really hard to give you specifics as to what happens because pools close or things like that change.

And the $2 million swap, that's $2 million unusual higher that would reverse? Or do you expect to continue getting that same level of swap income?

I think we're constantly getting an amount of swap income. It's one of those things that I don't think we can project clearly exactly what we're going to get quarter-by-quarter. It was a little higher this quarter, and we continue to sell those swaps to customers as we believe we want to make sure that we're not sitting with longer, riskier assets with long duration instead of a floating rate.

Steven Alexopoulos, JP Morgan.

I want to start by following up on some of your comments were on loan purchases, too. Alan, what was the yield on those and what's the term? I thought you said three-year useful life, but then I thought Jerry said they reset in three to five years.

Yes, they have a three to five-year reset and they're also season. Because they're season, some of them will come due shorter and some of them a little bit longer. But, overall, we expect the average life on those to be in about the three-year range when you mix it all together. The yield on those was slightly below our yield that we indicated of 3.5 for the quarter on all of our originations.

Okay. Is there any cross-sell opportunity with those? Or are they simply an earning asset for you guys?

No, they're earnings assets for us.

Okay. And then on First United, what are the cost saves realized, so far, as of 2Q and how much is remaining?

Yes, we only had, maybe, about $0.5 million less. Everything else has been recognized at this point.

Okay, how much has been recognized so far, Alan?

It was about 28% of whatever their operating expenses were. I don't have the number in front of me, Steve. So we've recognized most of those at this point.

Okay, and how have the one-time costs paced relative to the original $26 million forecast?

I think it's pretty much in line. The one thing, if you remember, we had to move the data processing conversion even though we would like it to have happened sooner, because it fell over at year-end. We moved that to February. And so most of the cost savings, by the time we got to the first quarter, I think we had indicated it had all taken place. So there may be some still remaining but most of it has all been taken care of.

Okay, and then, Jerry, just one final one with the CNL bank shares deal still pending. Safe to say the M&A strategy is on hold for now?

We're always looking. I would not want to say that if a good opportunity came along that we would turn our back on it at this point. We are looking, we are meeting with other banks. And M&A activity doesn't usually happen overnight. It's not quite a light switch. It takes time, it takes getting to know the other party, it takes time for the other party to know us. Unless it's an FDIC type of transaction, it just doesn't take place overnight. There's a lot of time and effort involved before we can make a decision, before we'd even present it to our Board.

But we are constantly looking. Rudy's doing a real fine job for us down in Florida. He knows a lot of the folks down there, and we're keeping our name on the street.

Frank Schiraldi, Sandler O'Neill.

First, I just wanted to ask on the branch closures. I think you mentioned in the release that it's a mix of owned and leased branches. Just wondering if it's reasonable to assume here that you might have some gains attached to those owned branches, and that that might make it easier to perhaps take a prepayment penalty on the borrowing side and prepay some of these higher-cost borrowings that still remain on the book.

That's always a possibility. Keep in mind that the ultimate date of maturity on those is getting closer and closer. At one point we were talking we had seven years to go on and now the bulk of them are probably going to be coming due by this time two years from now.

I think that's something we'll just continue to look at along with other opportunities if gains, in fact, materialize from these transactions.

It would also help mitigate some of the closure cost if we close a branch and had a gain.

Sure, okay. And I guess that's, kind of, my follow-up. I'm wondering -- I think you said that closure cost would be, sort of, immaterial. Is that because there's potential offset on gains or is that just a standalone, you know, sort of immaterial?

No, that's standalone. That's by (inaudible).

Okay. And then just wondering, in terms of -- given the strength of the reserve to non-performing ratio, and also just given the low relative loss expectations that you reported even under severely adverse scenario in DFAS. Is it reasonable to assume that there's still going to be a contraction on that reserve-to-loan ratio, sort of, all else being equal?

We review that again. I think I've said this many times. We review it every quarter. We use a methodology. We continue to look at our portfolio very carefully relative to where we see potential losses and risks in the various categories of loans that we have. And it's certainly possible that that could go slightly further down, but I don't want to project where that number is going to be. We don't like to project that, and it will be what it will be from quarter-to-quarter.

We take, again, everything into account -- our criticized loan category internally and where that's gone. Our loan growth and where that's gone. And we had, obviously, a substantial amount of loan growth this quarter and, again, I think our -- as you just pointed out, the ratio to non-accruals is extremely high. So it kind of tells you that we have plenty of reserve, but we evaluate it every quarter.

Okay, and then, just finally, just given what a CNL acquisition -- it seems like you might have all the geographies in Florida that would be most attractive to you? First of all, is that the case? Is there any other specific area of Florida that you haven't gotten that you might be interested in? And then is there an area that maybe you're already in that might be attractive to -- most attractive to build out further through a potential acquisition?

We've been analyzing all the different areas, both the ones that we're in as well as some of them that we're really not in yet. Florida is a very large state -- 36 offices certainly doesn't blanket the state. There are areas that we are in now where we probably could backfill in with additional locations. And part of the acquisition, as I mentioned in my remarks, is the talent that we get when we get do an acquisition.

We're always looking at that. That's probably far more important than the location. And we go out of our way to make sure that when we do come up with an acquisition that we make it sufficiently attractive to the lenders and the talent and the staff that are there to remain with the bank. I mean, we really want them all to stay, at least the customer contact people all to stay. That's critical.

So you may have an acquisition show up where it's in market, but it brings us some additional talent, brings us more customers. It makes it very attractive.

Joe Fenech, Hovde Group.

Most of my questions were answered but just a couple more here. First, there was a comment in the release. I guess Alan suggesting that the rolloff of some of the higher-cost borrowings would partially alleviate margin compression risk. But just to be clear on how you all are thinking about this, based on what you see today, it sounds like you're not expecting the lower borrowing cost to be additive to them. If that's right, has that changed relative to what your expectation may have been a year or so ago.

I don't think it's really changed. I think what happened, if you remember, if I go back a year ago, is we hadn't prepaid a whole bunch of this debt already. We paid a bunch of it in December. So now whatever is rolling off the rest of this year is very small. So the next bunch of it that rolls off isn't until 2016, mostly in the first quarter, I would say.

So we still expect the benefit that we're going to get from that, and the same with 2017 and 2018. So I don't think our mindset has really changed at all.

Okay, so the longer-term expectation of it being additive to [NIM] hasn't changed?

Correct.

Okay. And then the only other one I have -- what was the percentage growth of the Florida portfolio and how large is that portfolio now in absolute dollar terms -- in terms of loans?

Let Rudy.

Thanks, Joe. We grew about 4.4% in commercial purpose loans in the quarter. And the total portfolio stands at, roughly, $1.1 billion, give or take, depending on payoffs, paydowns, and so on. And as Jerry reported earlier, and Alan, our contribution to the whole company's pipeline stands over $200 million now, so we are steadily growing our pipe. And, candidly, all markets are weighing in. So we're pretty darn happy here in the Florida division.

Assuming that's unannualized, the 4.4%?

That's correct.

Joe, just to follow up on what he said -- the originations have literally more than doubled between the first quarter and the second quarter. So we started to see much more resi loans than we saw in the first quarter, more auto loans, and then the commercial loans really grew quite substantially compared to where it was in the first quarter.

David Darst, Guggenheim Securities.

Alan, I guess on the first quarter call, you indicated there's about a $7 million improvement that we might see in expenses. This quarter it's a little bit more closer to flat. Is this the right run rate? And are there other investments that you need to make that might offset the savings you get from the branch consolidation?

We probably said it was $7 million. I think we said we were going to get to a number like $103 million to $105 million, if I remember, and we're at $107 million, I guess, now quarterly. And I think one of the things we indicated in the release and maybe even in my remarks is the fact that we did see some of the savings that we expected, and none of that changed. However, there were other expenses that came on. Things like I indicated here -- REO costs and professional fees and certain other costs that came about during the quarter. And we just announced that we're going to do branch closures, and that's going to help save some.

On the other side of the fence, we're always adding costs, whether it be technology costs, staffing costs, et cetera, to keep a $20 billion bank running the way it should be running. So you can anticipate that there's going to be two sides to this thing, and I can't give you an exact number.

Collyn Gilbert, KBW.

I just want to start with a quick follow-up on Rudy's comment about the Florida franchise contributing about $200 million to the pipeline. Where did the pipeline stand for the consolidated bank at the end of 2Q on the commercial side? And then where was that relative to first quarter?

It's Rudy. We were under $170 million at that time.

And that's for the whole portfolio or the commercial part? That's commercial, right?

Commercial purpose.

Okay, so $100 million at the first quarter and then $200 million now?

That's correct, over $200 million.

Okay, and then what was it for the full Valley, Alan? Do you happen to have that?

We don't really report pipeline. What we do is we can give originations but not pipeline necessarily. We did about $2.1 million in total of loans during the second quarter. Oh, I'm sorry, that's for -- yes, it's six months, I apologize. Not the quarter, $2.1 million for the first two quarters.

And that's just commercial again, as well?

That's an increase of about, let's see, commercial loans by themselves are about $1.5 billion and change for the first six months.

Okay, okay. And then just going back to the loan purchase discussion -- so the strategy here is really, is you -- I think you indicated in the first quarter, and I'm assuming it's still the same, is really to replace the securities portfolio. So just a couple of questions there -- I guess I didn't realize that the securities portfolio really had much duration risk. What is the, sort of, the duration of the securities portfolio today and what was it, say, a year ago?

The duration may not look at lot longer today than it did, but as you know, if interest rates begin to rise, and we've seen the long end go up and down on a number of occasions, that extension risk is going to be there. So you're buying mortgage-backed securities that you think have a duration today of three years, that could be six or seven years if, all of a sudden, rates to go 5%.

Now, I'm not telling you it's going to go to that. In my opinion, we're better off if we're buying things that we know reprice and/or have a duration that actually is going to end one way or the other.

Okay, okay. And then just the comment on the CRA component of it -- can you just help me understand that a little bit more? I guess I would have thought that you could have easily originate CRA credits within your own franchise footprint. Just help me understand a little bit of what's driving that?

The CRA is a multi-faceted program. It envisions Valley putting on small business loans, loans to companies with sales under $1 million a year. It envisions Valley putting on single-family, one to four residential loans. And it envisions Valley doing multi-family. All three categories, though, require us to do loans that fall within specific MSMAs that we cover. It isn't always easy to get each category filled, each bucket category filled in each respective MSMA that we need to fill. So this sometimes helps us if we're finding difficulty filling a particular MSMA, we can put on loans that fill that bucket.

Okay, okay. Is there opportunity to purchase loans in the Florida market?

I don't know, we're doing pretty well on our own. I'm not sure that we have to purchase more loans in the Florida market. They have a very aggressive CRA program underway in Florida, one that we're all proud of. And while envision continuing, the fact that we're able to introduce some product that they didn't have before in Florida, just helps us grow that. For example, we're not a big residential mortgage lender. We put on a lot more product on the table. Their staff has been amazingly receptive to those products, and we're very happy with it. So I don't think they have to go out and buy the loans.

Okay, okay. And just want to making sure that, too, that I understand what's happening on borrowing side. So, Alan, you guys added borrowing this quarter. What was the structure of those? And was that -- did you add those to pre-fund this July maturity? Or maybe if you could walk through a little bit what -- ?

The only borrowing that we added this quarter that was there at the end of the period was the sub-debt for $100 million. That sub-debt was put on, and the sub-debt that was coming due July 15th, I believe, was the date, of what we put on 10 years ago, and that sub-debt, by the way, had no capital treatment anymore, because in the last five years you lose it. We were in the last year, and we had zero capital. So we put on a new sub-debt, and that -- one replaced, really, the other. It came on at a slightly lower rate -- 4.55% versus 5% that we had out there before.

Now, during the quarter, I think we indicated we did some short-term advances just to cover the acquisition of that large CRE portfolio, but that's been paid back. That was paid back by the end of the quarter, actually. That wasn't outstanding as of June 30th.

Okay, that's helpful. And then just one final question, all right? You know, I know you had indicated -- obviously, you didn't think rates are going to shoot up, whatever, 400 or 500 basis points or whatever, but what is your view on rates? I mean, there's a lot of sensitivity here, obviously, on the balance sheet, a lot of the decisions that you guys are making are kind of rate-driven. How are you sort of thinking about the rate environment for the next 18 to 24 months?

I listen to Janet Yellen and pretty much agree that we have to follow what she's projecting. She says there's a strong likelihood that rates will rise in the second half of this year, particularly in the third or fourth quarter. So I believe that's going to happen. She says it's going to be very measured. I take her at her word, so I believe it's going to be very measured. I don't think you're going to see, by January 1st, a 100 basis-point increase in rates. That, to me, would not be a measured increase. I certainly think that between now and the end of the year there will probably be, based on her statement yesterday, at least one if not two increases, and historically when the Fed moves, they usually move in quarter point increments. So, Collyn, your guess, though is good as mine.

I'm just curious. And do you have thoughts on the longer end?

Pardon me?

And, again, I'm only asking this because the movement going on here within the business that really is rate-dependent. So I just -- do you have thoughts on the longer end? On what the long end does?

I think that rates are going to move up. I think they're going to move up probably across the board, initially. How much they move up -- I think time is going to be a better judge of that. I think if we hold this conversation in January, as I'm sure we will, we'll all have a better feel for what the Fed is doing and to what degree they're moving. None of us, really, outside of -- I don't sit in on the Federal Open Market Committee. I have no idea what goes on in that room other than what we hear from Janet Yellen.

(Operator Instructions) Mark Schlecker, HoldCo Asset Management.

A quick question -- so 25% of your trust preferred securities still count as tier 1 capital, but they'll be fully phasing out of tier 1 and into tier 2 starting January 1 of 2016 it looks like. And given the sub-debt raise, the successful sub-debt raise that you guys had last month, do you plan on refinancing your callable trust preferreds with lower-cost tier 2 qualifying sub-debt like the ones you issued last month?

We've been looking at that. First of all, it's only $40-odd million, I think, $41 million, and they are actually trust preferreds that came onboard from other institutions. And a lot of them are tied to -- the majority of them are tied to LIBOR, and they are actually reasonably inexpensive, even though they moved from tier 1 to tier 2. So we continue to monitor that as we do all our other borrowings, and we'll continue to watch it and decide what we want to do. But right now I don't see a refinance. It's a LIBOR-based product, for the most part.

Understood, but I guess the rate that you issued it at, it was, like, 4.5% -- 4.55%. That implies a spread of 200 basis points, and the coupons that are callable are, like, 3.45 and 2.85, so I figured it would be a source of cost savings.

I don't think it's enough of a cost save. It's really kind of a small item for us, in all honesty. But that doesn't mean we won't look at it, so a good point.

Matthew Breese, Piper Jaffray.

The $477 million of purchase loan participations -- was there a cost of those loans? And, if so, what was that cost, and is that included in the yield you provided of slightly less than 3.5%?

It's included in the yield. That's what you need to know is what the yield is.

And then kind of the follow-up to that -- could you give us a sense of how competitive it is right now in New York City for five-year, seven-year, multi-family commercial real estate loans? What are the going rates for those kinds of -- ?

Extremely competitive in every area of the bank. All lending areas are extremely competitive in the New York area. In fact, I think they're extremely competitive across most of the country. I haven't heard any part of the country where rates are not competitive today.

One of the ways to make up for the drop in yield is, of course, to build volume. So everybody is looking to build volume. It is very competitive, and the yield would vary from type of loan to type of loan. We see some ridiculous loan rates coming out. Those we don't participate. We try not to play in that arena.

Okay. And then you referenced some promotional deposit activity this quarter. Can you go into that a little bit further? What was the promotion rate and terms? And then with the loan-to-deposit ratio above 100% now, should we expect more of this kind of activity?

It was a CD promotion plan. The rates vary, depending upon the length of the product. The multi-year product, I think, caps out at 1.6%. It's still way cheaper than what we've been seeing historically on our CD and our borrowings. (multiple speakers) has been brisk, too. We're really pleased with what we've been able to generate in that.

Okay. So should we expect to see more reliance on CD-type funding, going forward?

We're open -- depending upon what market conditions are. Our number-one preference is always to fund the operations of the Company with deposits from -- particularly from our customers as opposed to borrowing the money. But if you can borrow the money for a third of the cost of the CD, it's kind of difficult, particularly when your NIM is under enormous pressure to go out and pay up for the CD when you can fund it for a lot less. So it's a balance.

And I think our commercial lending activity brings in a lot of non-interest-bearing deposits, whether it's up here or it's in Florida, and that number continues to grow. So we're very pleased with that as some offset to any time deposits we raise.

So I pointed out in my remarks, close to 40% of the deposits coming out of Florida between the two banks are demand deposits.

Do you think the loan-to-deposit ratio here at 101 is kind of a high watermark or are you comfortable taking that a little bit higher?

We've been at that level for decades.

Yes, we're comfortable where that is.

Okay. And then my last question -- you mentioned traffic -- brand traffic down 30% or 40%. What's the timeframe? Is that year-over-year or over the last five years?

It's been building over the last several years -- or decreasing over the last several years. I guess there's more and more of the population look for alternative banking methods. The use of home banking, Internet banking, mobile banking using an iPhone to do their banking. People just don't come into the branch as often as they used to. They have ATM machines for the amount of cash they want to carry.

We also have remote deposit capture, which is being used. So there's a lot of other vehicles that are causing less traffic in the branches.

David Straub, Cornerstone OnDemand.

From a talent or a human capital perspective, Jerry, you had mentioned earlier in the call that you have both system and cultural integrations that are in place with acquisitions like CNL. From a cultural integration perspective, can you expand on what you mean regarding program initiatives that you may either have in place today or you're looking to put in place to identify things like higher employee engagement, identifying high-potential employees, reducing overall turnover, things like that?

Well, for one thing, we do try to keep in the face of everybody. It's very important on an acquisition because they tend to take a six-month or longer period of time between the announcement and the closing. So we try to be in constant contact with the staff. We meet with the staff. We've already met with all of the senior staff at least once if not -- and I don't mean the number 1, 2, or 3. I'm talking about the lenders and the key market people.

Several times we give them incentives when we do an acquisition. We give cliff vesting stock grants to the large number of key people there to keep them into the game with us. We try not to turn everything upside down in the other organization. We didn't buy it because they made bad loans. We made it because they knew what they were doing, because they had good relationships, and we want them to continue with those relationships. We don't want to take away all the authority that they've had in the past, so we try to work with them to blend their procedures into our procedures.

There's a lot of time and effort spent by senior management as well as large numbers of our staff working with the acquisition candidate so that they feel that they're part of Valley. They're not just somebody from the outside.

And at this time no one is in queue with a question. I'd like to turn it back to the speakers for any closing remarks.

Okay, well, thank you all for joining us on our second quarter conference call, and have a wonderful day.

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