Valley National Bancorp (VLY) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Release Conference 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, Senior Vice President, Public Relations, Mr. Marc Piro. Please go ahead.

Good morning. Welcome to Valley's Third Quarter 2015 Earnings Conference Call. If you have not read the third 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 relating 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, Marc. And good morning and welcome to our Third Quarter Earnings Conference Call. This morning we are excited to announce Valley's third quarter operating results, a multi-faceted plan designed to improve Valley's immediate and long-term financial results as well as details surrounding the recently approved CNL Bank acquisition in Florida.

For the quarter, Valley generated net income available to common shareholders of $33.9 million, an increase of $1.9 million or 6% from the second quarter. Loan growth was strong across all categories and geographies as the bank opportunistically purchased $429 million of residential mortgage and multifamily loans, augmenting strong organic loan growth.

For the first nine months of 2015, organic loan growth exclusive of purchases and participations, was approximately 6% annualized with total loan originations exceeding $2.3 billion, an increase of approximately 10% from the same period one year ago.

Valley's strategy to supplement organic loan growth with loan purchases is in large part simply a redeployment of short-term liquidity and cash from the investment portfolio to earning assets with shorter duration and higher yields than those prevalent in the marketplace. Since the beginning of the year, cash and investments have declined nearly $800 million with the investment portfolio now comprising approximately 14% of the bank's total gross earning asset portfolio. We believe the current size and composition of the investment portfolio to be appropriate based on current interest rates and economic conditions.

In addition to the multi-family loans acquired during the quarter, Valley purchased a significant portfolio comprised in part of adjustable rate one to four family residential loans. During the quarter, Valley sold approximately $40 million of fixed rate organic loan originations, recognizing approximately a $2.0 million gain on sales. We anticipate continued loan sale revenue coupled with a contraction in residential mortgage balances as much of the new fixed rate production is expected to be originated for sale.

As we have stated in the past, many of the purchased loans assist Valley in meeting its CRA obligations. While we strive to meet those obligations through organic originations, the limited supply of high quality CRA qualified loans is somewhat limited and competition for them is intense.

From a macro perspective 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. The new origination yield on certain portfolios may exacerbate net interest margin compression. However, we believe extending asset duration at this point in the economic cycle is analogous to subprime lending pre-2008.

As if the interest rate environment wasn't demanding enough, the competitive landscape remains difficult as competition's liberalization of lending terms and conditions within our market is the most dramatic we have witnessed since prior to the financial crisis in 2008. Combined, these external forces create a challenging environment for Valley to deliver sustainable long-term shareholder value while most importantly maintaining the bank's credit culture and risk profile.

Today we announced steps we are taking to enhance our cost reduction initiatives in conjunction with a restructure of the bank's borrowing portfolio which should give rise to improved earning results and more importantly position the bank for continued long-term success. During the second quarter we announced our intent to close 13 legacy branch locations during 2015, largely within the bank's New Jersey footprint. Today we are expanding the planned closures by approximately 15 additional legacy branches representing a 13% reduction in total branches by the end of 2016 as compared to the start of the third quarter. The right sizing of Valley's branch network through closing or downsizing branches is a major component in the bank's organization-wide cost cutting initiatives.

At this point we wish to emphasize the fact that we still believe in the value of a well-structured branch system positioned to serve the needs of our current and potential clients both living and working in our marketplace. What we are focusing on is eliminating redundancy and oversized branches throughout the network. With alternative delivery channels lowering foot traffic at branches, it has become apparent that multiple offices in close proximity to each other is not a winning approach.

Strategically positioning our offices within a few miles of each other accomplishes our objective to service customer needs while better controlling expenses. Also we wish to note that many of the branches we are closing were the result of mergers where overlaps were tolerated. Most notably, none of the branches selected for closure are located in low to moderate income areas as we do not wish to diminish our CRA efforts.

In total we plan to reduce non-interest expense by approximately 4.2% comprised of $10 million in specific branch savings coupled with an additional $8 million attributable to non-branch staff reductions and enhancing the utilization of technology to streamline various aspects of by's business model. We anticipate recognizing a significant portion of the costs saved in 2016 with the remainder realized the following year. As to the costs saved, Alan will provide additional detail in his prepared remarks.

While the reduction in non-interest expense generated from the costs saved is significant it alone will not bring our bottom line to the level we find acceptable. To that end, this month we prepaid $795 million of borrowing with an average cost of 3.78%. Valley will incur a pretax prepayment penalty in the fourth quarter equal to approximately $50 million. The laddered replacement funds have a duration of approximately one year and an average fixed rate cost of 0.56%. We anticipate a boost to the bank's annual net interest income of approximately $26 million or approximately $0.07 per share as a result of the transaction.

We also note that even after recognizing the prepayment charge, we still anticipate showing a profitable fourth quarter maintaining Valley's record of never reporting a losing quarter. Also at this time we anticipate subject to board approval that we will continue to pay our normal quarterly cash dividend at its current rate of $0.11 per share.

Waiting until now to prepay the debt is justifiable in our thinking because as we have begun to approach the normal maturity of the debt, the prepayment penalty has shrunk to a more manageable level. Had we prepaid the debt much earlier the impact to capital would have been significant and the common stock cash dividend may have been dramatically impacted. In addition, in March and April of 2016, $182 million of additional borrowings costing on average 4.69% will contractually mature requiring no prepayment penalty to be taken and further improving the bank's net interest income. Another $75 million at 5% will mature on July 25, 2016.

As I mentioned earlier, the interest rate and economic environment remain challenging. The steps we are announcing today will enable Valley to expand net income while not denigrating the bank's conservative credit culture and risk profile. Instead we intend to lever these core competencies to further expand the bank's operating footprint and capture greater market share.

Valley is a growth story. In addition to lifting our organic loan growth, we acquisitively entered the Florida market in late 2014 with the First United bank acquisition. Since that time the Florida franchise has produced double digit loan growth consistent with our desire to make a more important difference, Valley embraced a dual strategy to grow Florida both in organic and in an acquisitive manner. In May of 2015, just seven months after closing on the acquisition of First United, we announced the agreement to acquire the $1.4 billion asset, CNL Bank.

On October 23, 2015, we announced Valley had received final OCC approval to merge in CNL which will be closed later this quarter. Combined with our Florida operations under Valley's single charter, CNL will help us significantly grow our Florida banker team through the addition of many seasoned and highly regarded bankers, give us a new or reinforced presence in Florida's major population centers and cause Valley's Florida operations to be an even more important contributor to Valley's earnings and market share. As with the First United acquisition, we anticipate having CNL completely integrated onto our data systems within a few months following the closing.

We are excited about the initiatives announced today. We believe each will provide an opportunity to generate improved financial performance while enabling Valley to grow the balance sheet in a responsible manner, cognizant of both long-term interest rate risk and credit cycles.

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

Thank you, Gerry. For the quarter, Valley's fully tax equivalent net interest margin was 3.09%, a decrease of 13 basis points from the second quarter. The linked quarter reduction is largely attributable to a decrease in customer swap fee income, contraction in loan recovery income, combined with a decrease in accretion to Valley's legacy covered loan portfolio. In total, the sequential quarter decline as a result of these items was approximately $5 million.

Valley's core margin, exclusive of the aforementioned declined approximately 2 basis points from the second quarter as Valley's cost of deposits increased by 1 basis point to 0.41% and the yield on interest earning assets declined 2 basis points, once again exclusive of the $5 million in items previously referenced.

For the period, the yield on taxable investments increased 17 basis points to 2.67% as premium amortization declined by $1.3 million, largely due to a decline in MBS pay downs of 19%. As Gerry referenced earlier, in October the bank prepaid approximately $800 million of borrowings with an effective cost of 3.78%. Replacement funds were comprised of term fixed rate brokered money market deposits and term fixed rate repurchase agreements.

The average duration of the new funds is equal to approximately one year with a weighted average cost of 0.56%. We anticipate Valley to recognize approximately a two month benefit in the fourth quarter due to the restructure, ultimately being fully recognized in the first quarter of 2016. For the fourth quarter we expect a reduction in borrowing costs equal to $4.3 million, lowering the bank's total cost of average loan and short-term borrowings to 3.1% from 3.72% as recognized in the third quarter.

The full net interest income and margin impact of the prepayment would be realized in the first quarter as we anticipate the cost of borrowings to decrease an additional 31 basis points. In addition during March and April of 2016, approximately $182 million of additional borrowings is scheduled to mature. These borrowings currently have a weighted average cost of 4.69%. Based on the bank's current interest rate risk profile, we expect to replace these funds with a duration similar to that of the funds used to replace the prepaid borrowings.

Non-interest income for the quarter increased slightly from the prior period as increases in gain on sale of loan revenue was in part mitigated by the moderate level of losses on assets largely recognized in conjunction with the branch right sizing initiative announced in the second quarter. As Jerry alluded to in his prepared remarks during the third quarter, Valley acquired approximately $334 million comprised in part with adjustable rate residential mortgages.

As a result of the purchase coupled with the bank's asset liability risk management program, Valley intends to originate and sell most of the new fixed rate residential mortgage production. Non-interest expense for the quarter was $108.7 million, an increase of $1.3 million from the prior linked quarter. The increase is largely attributable to valuation adjustments on certain REO properties equaling $1.1 million. $700,000 of additional amortization expense attributable tax to tax credits and approximately $200,000 of professional and legal fees associated with the impending CNL acquisition.

During the quarter, seven branch locations were closed in conjunction with the bank's previously announced branch right sizing program. In conjunction with a macro assessment of bank-wide expenses, we now intend to increase the total branch closings to approximately 28 or roughly 13% of the entire branch network from when the strategy was initially announced. We expect to reduce annual operating expenses by approximately $10 million once all 28 locations have been closed. Further, $8 million of additional annual cost saves have been identified, largely resulting from reductions in staff and improved use of technology throughout the organization. We anticipate recognizing a significant portion of the prorated cost saves throughout 2016 and the remaining savings would be realized by the end of the first quarter in 2017.

Of the total annual savings, approximately $12.5 million or 70% of the total saves will be recognized through salary and benefit reductions. We intend to recognize severance expense of less that $1 million in the fourth quarter as a result of the reductions in staff. Approximately $4.3 million of the total annual cost reductions will be recognized in occupancy and equipment expense largely attributable to branch closings. We expect to recognize approximately $3.5 million in non-recurring expenses during the course of 2016 as the branches are closed.

The remaining $1.2 million of annual cost reductions will be recognized in the other expense category with the majority realized by the second quarter of 2016. The total completed cost saving initiatives when combined with the borrowing restructure are expected to increase annual pretax net income by approximately $44 million. The effective tax rate for the quarter was 22%, a decline from the 28% rate recognized in the second quarter. In the fourth quarter, the effective tax rate directly attributable to the $50 million prepayment penalty will be approximately 35% while we anticipate the effective rate on Valley's ordinary operating results to range between 25% and 27% once again exclusive of the prepayment penalty.

Asset quality as of September 30 was solid as gross loan loss recoveries of $3.7 million exceeded gross charge offs by $1.7 million. We recognize $94,000 of provision expense for credit losses during the quarter when combined with the net recoveries increase the bank's ending allowance for credit losses from $104.9 million in the second quarter to $106.7 million as of September 30. Total non-accrual loans increased slightly from the second quarter yet still only represent 0.39% of the bank's total loan portfolio.

In conclusion, we are excited about the bank's future prospects. We look forward to consummating the CNL Bank acquisition in December. We believe the growth prospects for the bank are solid, combining both synergies from CNL with improved net income metrics spearheaded by today's announced cost savings and balance sheet restructure.

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

(Operator Instructions) Frank Schiraldi, Sandler O'Neill.

Hi, guys. Good morning. Just a few questions. First I just want to make sure I understand. So, you talked about the expense saves, both the branch and non-branch cost save initiatives. It sounds like the message is that these saves you talk about are basically falling to the bottom line rather than a portion being reinvested into things like technology. Is that the right way to think about it, that most of this is falling to the bottom line?

A little bit of both. Most of it will fall to bottom line. However we are investing in technology to grow the bank technologically. That is also built into our budget. But what we're talking here is saves.

Well, it does include some of the technology expenses that we will incur as a result of what's going on in the cost saves. Some of that is already built in.

Okay. And then just on the -- when you guys talk in the release about 45% -- I think it says 45% of the $10 million in saves from branch rationalization will be in the run rate by the end of 2016, does that include some of the one-time charges you talked about, Alan? Is that the reason why only 45% we'll see by the end of 2016?

Yeah. Because otherwise it would've been higher.

Right. Okay. Great. Just on the NIM, I guess you talked about the core NIM compression obviously being fairly modest compared to the reduction of the reported NIM, just wondering if things like swap income that's running through -- or fees from swap income that's running through the margin, is that unusually low in the quarter or is this a reasonable starting point for 4Q, obviously excluding the restructuring announced.

You know, that number kind of goes all over the place. It was high probably more in the second quarter than anything else.

The second quarter was high? Okay.

Second quarter was high. Yeah.

Okay. And then I just want to make sure I heard you guys right on asset purchases or loan purchases. So, is the message here now that we'll likely see a slow down there as the securities portfolio is more right-sized?

To some degree there will be a slowdown. Whereas I mentioned, we're under an obligation to meet our CRA targets as we come closer to the end of the year. If we are short as a result of organic originations we're going to have to look to buy. It's a very difficult number to predict.

I think, Frank, just as Gerry said, on the CRA we will continue to be looking at that on the resi side. There are definitely things we will continue to look at to make sure we meet the requirements that we have and goals that we set for ourselves in order to meet the CRA requirements.

The bank is acquisitive. We're looking to do other additions. We have to maintain our CRA rating in order to do that. We also feel as good corporate citizens we should be maintaining that rating. But it's difficult in our particular market at time to generate organically the total amount of loans that we need. So, we have to reach out to buy them.

Okay. And then just finally, I don't know if you gave it, I think you've given it before, just the size if you have it of the Florida -- the commercial pipeline at this point I guess versus three months ago.

Okay. So, it's Rudy Schupp. We were running about $90 million for the aggregate pipeline and it was about 60% approved pending closing and then 40% in credit. Today we tend to toggle between about $170 million to a little over $200 million on any given day with about the same mix.

Okay. I thought it was around the same level three months ago but you're saying now it's increased significantly from the three months ago period?

It was a stepwise increase. Quite candidly, coincidentally after we merged and we've been able to sustain it in that range.

Okay. Great. Thanks, guys.

Ken Zerbe, Morgan Stanley.

Great. Thanks. Actually first question on the CRA again. Of the loans that you were actually purchasing over the last couple quarters, how much specifically relate just to -- you're buying them just for CRA purposes versus buying extra loans for growth or other reasons.

We don't really disclose that amount.

Okay. Maybe a different question then. Obviously with the loan purchases stepped up recently over the last couple of quarters, was there something that happened on the regulatory side that -- I don't want to say that you fell short somewhere but I'm trying to understand like what's changed with your CRA compliance that's actually driving the meaningful amount of loan purchases that you're doing?

When we applied to buy First United, a number of community groups expressed a displeasure with the volume of loans, CRA loans, even though they were high enough to get an OCC satisfactory evaluation, they were not happy with it. In order to satisfy everybody, we agreed to enhance our efforts along those lines significantly. And we have been doing that.

Got it. That makes it very clear.

Ken, let me make sure we're clear though. Not everything we're buying is because of CRA. We have other rhymes or reasons of why we do things. For example, the residential, a lot of what we bought in residential is because we like the asset mix, we like the fact that we had some seasonality in some of those loans, there were adjustable rate loans in there. For the most part Valley seems to get mostly fixed rate loans.

It also was more of a little bit of a prefunding if you will of what we expected to see during the course of the year and as a result we were able to prefund it to help our net interest income if you will and at the same time come up with some gains on the sale of some of Valley's portfolio and they're still more attractive than what we're finding in the investment portfolio.

So, the investment portfolio I think was down about $106 million during the quarter. We were down $130-odd million the prior quarter and we need to continue to grow the bank and we would rather grow it by buying loans or originating them that fit our needs.

Understood. That helps out tremendously. The other question I had, just in terms of the $795 million debt that you prepaid, I ran some of the numbers, sort of back of the envelope and it looks like the present value of the charge that you're taking is pretty much equal to the present value of the savings that you're going to get over the next two years or so? Is that the right way to think about it? Or are there other benefits that we're not -- ?

It's close. It's not exact. But you know what? I think as Gerry pointed out, number one, if you're doing this way too far from maturity, of course that penalty is huge and it's precluded us historically from doing anything. As we got closer it made more and more sense. You also take a little bit of interest rate risk off the table, waiting until '17 for it to happen to see where the rates will be in terms of locking in some kind of a rate. We know where we are. We know we've done it.

And we don't have to wait until '17. But generally speaking we also look at it in terms of like an acquisition. You wouldn't want to create tangible book value dilution in an acquisition that went out five to seven years or whatever that number is. This is only a two year, if you will, dilution or approximately two years and we are much more comfortable with that, just like we're comfortable doing an acquisition like that.

I emphasize also -- it's Gerry again. I emphasize also the fact that had we done this four years ago the hit to our capital would've been immense. We probably would have had to go out and raise more capital. If we would've gone out then and raised additional common equity, you'd be paying for that forever. The hit to our equity was small enough now that we'll just take it back to earnings without causing a problem to our capital.

Also, if we would've done it then and took this huge hit, we probably would've had to do something with our dividend that was far more dramatic than we would like and the way the regulators operate today, if you lower your dividend below a certain level threshold, it's very difficult to once again raise it above that again. So, we don't have that issue now.

I think also, Ken, that we've become a little bit of an outlier because of the fact that we had this debt that is so expensive on our books. So, when somebody looks at Valley and they think about the fact that the debt will come down, the debt will come down, the debt will come down, when we look at ourselves relative to our peer group and when others are valuing the company, they need to look at us in light of what current cost of funding is, not what it was 5 to 10 years ago and that we're still stuck with. We think this puts us in a different light on a go forward basis, internally, against our peer group, et cetera. So, we think right now is a good time to be able to do this and continue to look forward to '16 of more of this prepaying or maturing I should say.

I also, as I mentioned in my remarks, we had two more pieces -- several more pieces that come due both in March and April and then again in July which further helps us as we go through 2016.

Thank you very much.

David Darst, Guggenheim.

Good morning. So, great. It sounds like you've been busy with some good things. Alan, you talked about last quarter some of the technology investments. I guess it felt like then we would not see much benefit from the cost savings of that first round of branch consolidations. I guess now -- can you kind of frame what your technology and kind of internal compliance requirements and investments are relative to the second wave of branch savings and then the total other initiatives?

We've been spending a lot of money on technology, on a whole bunch of different areas of technology. I think our press release indicated all the different changes that are going on in our branches throughout the system to attempt to make them much more technology driven and less individual driven and that we would have probably less tellers and less staffing going on in a lot of those and that's really what you're seeing and what's going on.

Are those products kind of built into your run rate today? Or is that going to continue to build for next year?

No. A lot of that's already been built in.

Okay. Got it. And then just based on your ALCO profile, once you get the acquisition completed and then say you get to the first quarter, do you think you're becoming more neutral relative to how you'd benefit in a raising rate environment? Or could you become asset sensitive by mid-'16?

I think we're becoming more neutral.

Okay. Great. And just with this, do you have any long-term ROA targets or a long-term efficiency ratio that you might like to aspire to?

A lot higher than where we've been. How about we start with that? We're not happy with it. It's one of the reasons again I think when you look at the borrowings and you look at the cost saves and the branch closures, we're attempting to get those up to a much higher level than where we've been. We're not happy with the efficiency of running near 70% and we think you'll start to see that come down somewhat. The fourth quarter will be a little bit off kilter if you will because of the prepayments, et cetera.

So, it will be a hard quarter to use as a measurement but I think beginning in the first quarter you'll start to see the benefits of some of the things we've done and you'll see some ROAs pick up. You'll see efficiencies go down. So, we're working -- that's exactly what we're working towards, higher levels than the levels we've been showing. And I think again, if you take just the borrowings alone, it's what I said. You can't match up against the peer group when you're still dealing with what happened 5 to 10 years ago. We need to get rid of it.

So, is 60% an unreasonable goal for the fourth quarter of 2016?

No. For efficiency? No.

Great. Okay. Thank you.

(Operator Instructions) Collyn Gilbert, KBW.

Thanks. Good morning, gentlemen. Alan, if we could start off with just going through some of the expense thoughts here. Okay. First, if you could help us understand, I think you guys were guiding to an expense level of about $103 million for this quarter and it came in at about $108 million. Where I'm ultimately wanting to go is what the net effect really will be of this $10 million. So, work with me if you can.

Collyn, let's go backwards. We thought we would've gotten to $103 million about two quarters ago and that never really materialized and we've been running more in the $107 million range. This quarter we had a couple of items as we indicated, some REO write downs, et cetera, that we didn't really expect. And they came through unfortunately and they hurt us a little bit. There will be some costs in terms of CNL that are going on.

There's some additional costs relative to buying tax credits that we utilize to manage our effective tax rate. But all that goes above the line and the tax rate is below the line. And I think we've talked about that before. We are definitely starting to move that downwards with what we're doing and we expect we're going to get down more like the $106 million level and we're working towards creating a better efficiency on expenses than we've had.

Okay. If I just again sort of think big picture here for a minute just to understand the flow, let's say $108 million, that's kind of a normal run rate perhaps. You have $7 million coming in with CNLB and I'm just looking obviously on a quarterly basis. That's $115 million. And then you've got say $2 million or so cost saves through CNLB. So, you're at $113 million. That's still a big drop from $113 million to $106 million, more than what you're indicating.

No. No. No. $106 million is -- I didn't indicate that CNL was part of that did I? $106 million is where we are now. Whatever CNL is going to be is going to obviously add to that. But $106 million now, because if you take out some of these nonrecurring items, we'd get to $106 million. Then we're going to have the cost saves that we're working on for ourselves, going through '16 and into '17.

So, when you factor in those numbers, and then CNL I believe we're going to have about $13 million of cost saves off their run rate of about $30-odd million of expenses and so those could obviously be added on. You'd have to factor in $106.5 million today, not $108 million. And then you'd have to take into account in addition to that CNL which would be about $20 million I think. I think it's about $20 million then which is net of cost saves I'm pretty sure.

That's the full year?

Yeah. That's a full year number. And then in addition to that you would have the cost saves we just told you about this morning which are another $20 million, $18 million.

Okay. With some of that being offset by just investments within the business?

Right. Absolutely.

Okay. Can we just talk a little bit about -- I just want to understand the dynamics within the core NIM and kind of where that's trending. I know in the press release you've indicated you expect it to go lower. But just want to understand that a little bit better. Do you have what the yield was on the purchase loans, how that compares to the yield you were originating and then how that compares to the existing yield?

The yields, our own yields that we put on this quarter were about $335 million of our own originated loans. So, obviously with a higher number than that in our portfolio, so that has a negative impact as we've been saying all along. In addition, some of the loans we bought were also I would say in the low to mid-3s.

Okay. You're talking about the resi ARMs were low to mid-3s?

Yeah. No. I'm combining the fixed rate that we acquired and so the entire portfolio had say 60% ARMs, 40% fixed rate. The fixed rate obviously was at a lot higher level, the ARMs were a lot lower level. So, I would say they're probably in the low 3 range.

Okay. How are you guys thinking about the reserve from here and how that is likely to build. Obviously if you're pointing to stronger loan growth and how you're thinking about that going into next year?

I think we're thinking about it in terms of credit quality. We think about it in terms of types of loans and the exposure we have on those loans. We go through -- I think we've talked about this before. We go through a complete methodology and I don't think we have a target. I think the methodology takes us to where it takes us and so we've extended our LAP period if you will which looks back at loss, the experience factor of how many years. We keep going back in time and it doesn't drive us to any higher reserve at this point.

Okay.

Again, Collyn, I think you have to look at the pieces of the reserve as well. And I think we've talked about this before. We have a lot of resi loans out there. We have a lot of coop loans. We have some multi-families besides coops. All of those drive to a lower reserve than let's say true C&I loans. That's reflected in our charts where C&I, if you look from last quarter to this quarter went up. The allocation of the reserve went up. So, that takes into account a higher risk of C&I loans.

Okay. I'll leave it there. Thanks. Wait -- I'm sorry. Just one thing on the prevention fees. They've been in kind of a big upward swing. Could you talk about what's driving that?

You know, I just think in general there's a lot going on. There's acquisitions going on. There's -- we have law suits like everybody has. That drives it. You have work out and all kinds of things with loans that we've acquired. I don't think there's anything in particular that we can point to. It's expensive, consultant fees.

Very good. Thanks, guys.

And compliance. Yeah.

Matthew Breese, Piper Jaffray.

Good morning, everybody. In the press release you disclosed that you had $159 million in taxi medallion loan exposure. I was hoping you could give us an update on the performance and the credit metrics and some more detail?

Sure. Like historically I guess this sort of flows back to the loan loss reserve on how Valley handles things. We artificially put a cap on taxi medallion loans going back some time, for years, of $850,000 --

Taxi medallion values.

Values. I'm sorry. Excuse me. We put a cap on the value of $850,000. We then lent a percentage and in most cases they were like a two-thirds advance rate against that. So, our ceiling on taxi medallion loans was significantly lower than that of our peer group. At least from what I'm reading in the paper about the amount that they lent on them. The performance on our portfolio as of today remains absolutely perfect. We have and I'm told as of yesterday we had no delinquencies. I don't know if we had any today.

But as of yesterday when I raised the issue we had zero delinquencies. We have most of the have personal guarantees and they also carry amortization that we require most of them to amortize and most of the portfolio is, about 90% of it is in New York City.

At this point while we're monitoring it closely and keeping a close eye on it, it's all performing, it's all current and we believe that the value would have to drop substantially from the level it's at now before we would even reach 100% loan to value on the loans. We did feel it was important to disclose it because we're not trying to hide anything from anybody and in the sense of transparency we put it into the press release.

And obviously that is evaluated as part of our loan loss reserve. We review that every quarter. That's one of the things we look at.

It sounds like your cap is in or around where appraisal levels are for these medallion loans. There's a range but it sounds like it's within that. So, for the portfolio, what would you say is the average LTV?

Averages are very misleading.

It's probably less than 50% on average.

And I agree, the average LTV can be misleading. Do you have any detail as to what percentage of loans are above call it an 80% LTV?

No. I don't think we're going to disclose that. I think we've given you a fair amount of information. The average is around 50%. We really don't go that high, as Gerry said, based on the caps we use and so forth.

Understood. That's all I had. Thank you.

At this time there are no further questions.

Thank you for joining us on our third quarter conference call. Have a good day.

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