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Valley National Bancorp (NYSE:VLY)

Q1 2013 Results Earnings Call

April 24, 2013 11:00 AM ET

Executives

Dianne Grenz - Director, Shareholder and Public Relations

Gerald Lipkin - Chairman, President and CEO

Alan Eskow - SEVP and CFO

Analysts

Craig Siegenthaler - Credit Suisse

Ken Zerbe - Morgan Stanley

Steven Alexopoulos - J.P. Morgan

Dan Werner - Morningstar

Donald Destino - Harvest Capital

Collyn Gilbert - KBW

Matthew Kelley - Sterne Agee

David Jacobs - Private Investor

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the Valley National Bancorp First Quarter Earnings 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)

I would now like to turn the conference over to your host, Dianne Grenz. Please go ahead.

Dianne Grenz

Thank you, Greg. Good morning. Welcome to Valley’s first quarter 2013 earnings conference call. If you have not read the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules for the first quarter from our website at valleynationalbank.com.

Comments made during this call may contain forward-looking statements relating to the Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings including those found on Form 8-K, 10-K and 10-Q for 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.

Gerald Lipkin

Thank you, Dianne. Good morning and welcome to our first quarter earnings conference call. The economic and interest rate environment continue to present significant challenges with traditional spread banks like Valley. This coupled with the enhanced regulatory costs continue to create a less than ideal operating environment.

That said, it is imperative during this difficult time that banks maintain both the credit due diligence and interest rate risk profile. At Valley, our credit culture in the hallmark of the bank.

We attempt to resist short-term market pressures, which only create additional hurdles in future periods. During the last few quarters, we have witnessed a general denigration of credit churns and many other financial institutions have become overly flexible on traditional lending standards and covenants.

Specifically, the relaxing of personal guarantees coupled with expanding an acceptable loan-to-value and duration thresholds. Within the geography in which we lend, economic expansion has been somewhat subdued.

As a result, much of the growth in loaner outstandings within the industry primarily reflects the movement of borrowers between financial institutions as opposed to what increase in lending activity resulting from true economic expansion. The catalyst for refinance of many of these loans has been the expanded maturities, relaxed terms and/or rates offered by impeding financial institutions.

Expanding the loan portfolio merely to demonstrate growth is not and should not be an objective at Valley. Generating positive returns priced appropriately for both the inherent credit and interest rate risk is the focus at Valley.

Putting on large volumes of loan term, low-interest rate loans or investments at this time will ultimately place undue pressure on bank capitals and future earnings, a lesson that seems to have been forgotten by many in our industry. In spite of the aforementioned challenges, the Valley generated significant new loan originations of nearly $1 billion during the first quarter.

However, to mitigate the potential future interest rate risk, Valley sold a considerable percentage of the originations into the secondary market. The sale of these loans combined with increased refinancing activity and a small expansion in deposits led to higher levels of liquidity during the quarter.

As of March 31st, we had over three quarters of a $1 billion in cash that was earning between 0 and 25 basis points. A large portion of this excess liquidity was the result of tiny differences between loan payoffs as sales and loans in our pipeline are weighting closely. The success of liquidity directly impacted the bank’s net interest margin and more importantly contributed to the $8.5 million contraction in net interest income.

Shortly, Alan Eskow will discuss the linked-quarter change in more detail. However, prior to Alan’s review of the quarter, I want to discuss the steps we have undertaken to strengthen the bank’s net interest income while not increasing our interest rate risk exposure.

We do not intend to sit by idly and watch our net interest income contract. Initially, we have reemphasized and expanded our marketing efforts for our low-cost fixed rate residential mortgage refinanced program.

During the quarter, we closed over $575 million of residential mortgage loans, an all-time record at the bank. Nearly, 22% of the originations were derived outside of the New Jersey compared to approximately 10% in the same period one-year ago.

We anticipate continued geographic penetration in both New York and Pennsylvania. As with prior periods to mitigate the interest rate risk, we will continue to sell a majority of these originations. However, to further augment beyond balance sheet portfolio, we have purchased and continue to purchase loans which meet both Valley’s stringent credit criteria and desired duration.

Many of these loans are floating rate assets and should provide some boost to net interest income, both in the current interest rate environment and in future periods. Unfortunately, these loans only begin to command to our balance sheet during the first week in April and were not reflected in the first quarter results.

Next, we have started to further enhance our use of derivative and introduced a new adjustable rates commercial real estate loan product to garner a larger percentage of the refinance activity transpiring in our market place. Preliminarily, we have seen a very positive reaction to this product by some of our clients.

As I stated earlier, we will not diminish our strict credit criteria simply to grow the balance sheet. However, we believe there are opportunities to grow the commercial loan portfolio at attractive short-term rates layered with structures that reduce the future interest rate exposure.

During the first quarter, we originated over $300 million of commercial loans. With the introduction of new pricing structures and a renewed emphasis on expanding the portfolio in a manner consistent with the bank’s macro asset liability strategy, we anticipate improved new commercial lending volume as the year progresses.

Also we intend to reduce a proportion of the bank’s excess liquidity to direct purchases within the investment portfolio. Historically, we have focused on higher coupon mortgage-backed securities with short duration. Without altering our risk profile, we have begun to expand our investment strategy to capture a large array of investment alternatives which provides similar duration.

Finally, we continue to be vigilant in controlling expenses and improving the operating efficiency of the bank. During the past few quarters, we have implemented many significant cost-cutting items that will contribute to strengthening our bottom line and we continue to explore all of our activities to seek out further saving.

We continuously review customer activity at all of our branch locations and have put in place a strategy designed to right size the branch network to aggressively meet both changes in technology and customer activity. Branch staffing levels have declined. The hours of operation at each location have been reviewed and adjusted to more efficiently aligned with customer and customer usage.

Under performing branches have and will continue to be closed. Throughout the entire organization, staffing levels are being evaluated and processes developed to improve operational efficiency. In just the last quarter, the full-time equivalent employees have declined over 1% and we anticipate continued progress in the future.

In summary, we have a well diversified balance sheet and operate arguably in one of the most desirable geographic footprints in the country. We continue to manage the balance sheet within asset sensitive buyers which we believe is prudent based on the current economic and interest rate environment.

We are optimistic about the future largely through Valley’s mortgage banking activities. We have infrastructures to generate additional revenue in the current environment. We continue to evaluate all aspects of our balance sheet and we are prepared to make appropriate adjustments wherever management and the board deem it to be appropriate.

As commercial activity begins to rebound in our footprint, Valley’s history in market place scale and community bank culture provide a wonderful platform to service the needs of the community. We operate customer focus service, generally only obtained at a small bank with the lending expertise to scale over larger regional bank.

Valley’s diverse in solid balance sheet should provide a vehicle for growth in future periods. Alan Eskow will now provide some more insight into the financial results.

Alan Eskow

Thank you, Gerry. The net interest margins declined to 3.18% from 3.41% in the fourth quarter. As a result, net interest income in the first quarter was approximately $8.5 million less than the prior period. The decline in both the net interest margin and net interest income is largely attributable to the low interest rest environment, the decline in numbers of day in the period, the contraction in linked-quarter average earning assets and a few infrequent items.

The low interest rate environment continues to pressure asset yields as the competition for high-quality credits has intensified throughout the market place and as a result, tightened spreads and ultimately reduced loan yields…

During the quarter the weighted average yield on new loan held in portfolio was less than 3.5% which impart led to the declining yield on average loans to 4.82% in the first quarter.

Further compressing the loan yield was both a contraction in pre-payment fee income and accretion on the fully repaid FDIC covered loan pools as compared to the fourth quarter of 2012. The decline in these two items alone accounted for approximately 6 basis points of a linked quarter 23 basis point decline. Additionally, less days during the quarter further negatively impacted the margin by approximately 4 basis points.

As Gerry mentioned earlier, duration extension is a significant concern and left uncheck will prove an interminable hurdle when interest rates eventually begin to rise. At quarter end Valley had nearly $1 billion in cash due from banks and interest bearing deposits with banks. The effective yield on these funds is less than 25 basis points. This increase liquidity, although a hedge against rising interest rate had a negative impact on Valley’s net interest income and margin.

Beginning in the second quarter of 2013 we anticipate a sizable amount of this excess liquidity will be deployed into loans and alternative investments to enhance the net interest income of the bank while still maintaining Valley’s interest rate risk profile.

Over the last nine months Valley operated and originate and sell model to the majority of originations within the residential mortgage portfolio. Although the yield on these new originations is greater than other loan type placed into portfolio, the unknown extension risk out ways the short-term benefit to net interest income.

Similarly, within the investment portfolio the tax equivalent yield of 1.43% on new purchases during the quarter reflects the Bank’s interest rate risk concern and strategy to reduce duration where possible, many of the new purchases are on either mortgage back securities with higher coupon and short average lives with corporate securities with short to intermediate stated final maturities.

The absolute yields on new loans and investments are razor fit and the incremental benefit to net interest income by extended out the curve provides only a marginal benefit to net interest income. We have began to enhance our utilization of customer derivatives which although reduce current interest income provide future asset sensitivity. Additionally, we have expanded our purchases of other investment alternatives. These steps will enable the bank to reduce the current excess liquidity, enhance lending opportunities and most importantly maintain the bank’s target duration of interest earnings assets.

Valley’s first quarter total cost to fund was 1.21%, a decrease of 4 basis points from the prior quarter. The cost of deposits declined 3 basis points, 0.46% as on average the composition of non-interest bearing deposits the total deposits increased approximately 1% and the average composition of time deposits to total deposits declined approximately 1%.

The decline in funding cost is expected to continue as loan terms certificate of deposits repriced at current market rate and Valley continues emphasizing the importance of non-interest bearing deposits throughout the bank’s entire branch network.

As a percentage of total deposit, non-interest bearing DDA account for approximately 31% of the entire base. Although skewed slightly by the low level of market interest rate, these funds should provide additional duration protection in rising interest rate environment. Although, we anticipate continued improvement in the cost of funds the compression on asset yields is far quicker and greater and consequently we anticipate continued margin compression.

The scale of the decline in the margin is anticipated to improve considerably from the decrease recognized between the fourth and first quarters. The elimination of certain and frequent revenue items previously recognized in the fourth quarter coupled with the decrease in number of days and excess liquidity in the first, largely drove the linked quarter contraction.

Many of these variables are expected to have little impact next quarter and such we anticipate the margin to respond accordingly. The provision for non-covered loan losses and unfounded letters of credit for the first quarter equalled $3.9 million, while the total allowance for non-covered loans decline slightly to $114.7 million from $120.7 million in the prior quarter.

The $6 million linked-quarter decline is attributable to an increase in net charge-offs largely the result of a $5 million loss on one commercial loan. The loss was the result of fraudulent employee activities at the borrower. The facility was in Valley’s geographic operating vicinity and represented a long time relationship acquired in the State Bank acquisition in 2012. While we do not believe this loss is represented by the quality of the required portfolio but rather an isolated incident.

In determining the appropriate provision for loan losses a multitude of internal and external fact is effected decision. Garnered the days is simply matching net charge-offs with provisions regardless of GAAP guidelines rather alternative variables such as the period-over-period variance in risk ratings, changes in impaired loans and required reserves on those loans and lastly, both current and anticipated economic condition and their portfolio impact. All the aforementioned combined with the lit née of other factors provide the bases for the quarterly provision for loan losses.

Loans currently charged off may have already been in a previous quarter’s reserve calculation and additional reserves may not be necessary when a charge-off occurs as we witness this quarter.

As of March 31st total non-accrual loans declined by $6.2 million or nearly 5% from the prior quarter end. As a result, total non-accruing loans as a percent of total loans declined from 1.20% in the fourth quarter to 1.16% as of March 31st, largely the result of an increase in market value of non-accrual debt security of $7.8 million, total non-performing assets increase slightly to $200.3 million as of March 31, 2013 from $195.5 million as of December 31, 2012.

Exclusive of the change in market value on this security non-performing assets would have contracted from the prior period. In the aggregate exclusive of the aforementioned fraud credit remains stable.

Valley’s total non-performing asset numbers remained elevated largely for two reasons. One, the average time required to complete the foreclosure in the State of New Jersey which now stands at 1002 days, a second highest in the country and over two times the national average.

Secondly, unlike some financial institutions Valley really liquidates non-performing assets through both sales or other secondary market activities, as in the past we have found a significant increase in often recoveries by working the problem asset internally. This methodology thus have its drawbacks as the net interest margin negatively impacted by an estimated 5 basis points due to the balance of non-performing assets and elevated short-term operating expenses due to collection and maintenance costs.

However, we feel the future benefit net income in the former recoveries out ways the short-term drag on income. As a result of the stagnate economy and absolute low level of interest rates Valley makes a conservative effort to monitor and where possible improve the capital efficiency of the organization.

During the fourth quarter, Valley’s regulatory capital ratios improved as both the balance of risk weighted assets decline and regulatory capital level expanded. Valley’s Tier 1 regulatory capital ratio as of December -- as of March 31st was 11.08% compared to 10.87% in the prior quarter and 10.59% in the period one year ago.

The increase in regulatory capital is largely due the bank’s efforts to both rationalize the return on net income and similarly substantiate the return to capital. Although, Valley’s total assets outstanding have remained relatively flat during the last year, the banks risk weighted assets have declined nearly $335 million. In this environment, rationalizing the return on both current and perspective regulatory capital under Basel III is essential and from Valley standpoint just a significant, to streamlining the bank’s operating efficiency.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Craig Siegenthaler from Credit Suisse. Please go ahead.

Craig Siegenthaler - Credit Suisse

Thanks, guys. Good morning.

Gerald Lipkin

Good morning, Craig.

Craig Siegenthaler - Credit Suisse

One lever that you haven’t pulled yet from the earnings perspective is restructuring the $2.7 billion of long-term debt, including the $2 billion from the FHLB. If you were to restructure this balance and let’s just say in a perfect world, there were any capital charges. What do you think the optimal level of debt for banking of your size for current deposits and assets are to have?

Gerald Lipkin

Well, it wouldn’t be that different from where we are today because if it was said to your long-term loans. All right. You can get long-term financing from your deposit base and if the customers increasingly are demanding longer-term financing that’s the place to go. If we were to do it today, obviously the interest rate we would be paying on that long-term debt would be much, much lower. It would probably be sub 2% as opposed to nearly twice that level for us.

Alan Eskow

Craig, we think we have -- I think as Gerry has already said there. We have the right amount of debt. We are not concerned that the debt level was inaccurate or whatever. We’ve had a tremendous change in interest rates over a five-year period of time and that debt was outstanding for a specific reason to cover duration of longer-term commercial real estate loans, residential loans, investment securities et cetera. Any of the things that we kind of matched it up again and it all provided a fabulous Fred. That being said, will certainly the world has certainly changed and I don’t think the level of the debt is the issue. It’s the rate on the debt.

Alan Eskow

Yeah. We did not use the debt to lever up the bank. We were using the debt to offset the interest rate risk.

Craig Siegenthaler - Credit Suisse

Got it. So then my follow-up is, if you’ve got the right amount of debt, can you give us some perspective on what it would take for you to refinance a lot of that debt? I’m looking at this schedule here in the K, but what would it take you to really restructure that, incur some near-term expenses but reduce that rate from about four, two, as you said, maybe somewhere around or even below 2%?

Gerald Lipkin

It would probably closer to $350 billion pre cash to pay it off. I’m not sure if that -- it’s not linear, so you wouldn’t earn it back. It would take a long time to earn back $350 million. You figured that out. And it does start to burn off in larger amounts, starting in the latter part of the 2015, ’16 and ’17. It will take care most of the debt. So, unfortunately, something you have to write out. The question is that we took the hit that we earned back in the three-year period that it would take here, $300 million, $350 million.

Craig Siegenthaler - Credit Suisse

Jerry, do you focus on the portion that’s 2017 or later…

Gerald Lipkin

Yeah.

Craig Siegenthaler - Credit Suisse

…are $1.6 billion. Have you looked at what the payback on that would be?

Gerald Lipkin

Yeah. It’s in excess of probably four years. It could be probably less than that. It’s not something we don’t look at, Craig. I mean, we do look at it. We do grapple with it. It’s a very expensive proposition. It is a significant hit to earnings and to capital. But we understand your question.

Alan Eskow

So we paid it off, do you think over the next three years, we would earn back that $350 million on that spread.

Craig Siegenthaler - Credit Suisse

Well, I think on the 2017 and later that would be the primary focus on, not the sub that’s obviously maturing in the next five years here.

Alan Eskow

I don’t know. We are looking at everything.

Craig Siegenthaler - Credit Suisse

I got it. Well, guys. Thanks for taking my question.

Alan Eskow

All right. Thanks, Craig.

Operator

Your next question comes from the line of Ken Zerbe from Morgan Stanley. Please go ahead.

Ken Zerbe - Morgan Stanley

Great. Thanks. It sounds like you guys have a lot of initiatives that you're putting in place to keep your earnings up. But if can just talk about the dividend just for a second. If for example, those initiatives don't playoff or play out as much as you expect, how committed are you to the dividend, understanding of course you don't want to cut it. But how should we be thinking about dividends sustainability and so what are your contingency plans if these initiatives don't work out exactly right?

Gerald Lipkin

I have to give you my standard response, which is that every quarter, our Board of Directors analyzes whether or not they should do anything with regard to the payment of the dividend. They will look at our earnings, what they believe our future earnings will be and it would be a very hard thing to reduce. You may not -- as hard is that maybe, it maybe beyond a wise decision not to do something. So it will be looked at each quarter. It would not be taken lightly. According to dividend, it would not be taken lightly. We have to see what the quarter develops and what earnings look like.

Ken Zerbe - Morgan Stanley

Okay. Understood. And then just a little clarification on the derivatives. Is this basically that you're putting on more longer-duration loans where you are just swapping fixed flow down?

Gerald Lipkin

Yeah. So we’ve taken a hit on your current interest income in order to do that. But you are leaving the sensitivity out there as a floating rate instrument.

Ken Zerbe - Morgan Stanley

Got it. And the way we think about the second quarter resi balance, I don’t know if you gave guidance on that or not. But is that enough to offset the reductions, so basically we should be looking at flat to growing balances?

Gerald Lipkin

No. I don’t think you will see growing balances in the resi area. I think they would be flat, if anything flat to down. I think flat is a better way to look at right now.

Ken Zerbe - Morgan Stanley

Okay.

Gerald Lipkin

The management of this company looks at everything in the long-term. And I think that’s really critical. We avoided subprime lending, mortgage lending because we felt that even though some banks were reaping in big profits and making us look bad because we were not enjoying those profits, that in a long way was only going to come back and bit everybody, which we prove to be true.

The same thing here, you can put on a lot of loan growth, if you don’t really watch the ratio, then you don’t really care about it. But I do believe that rates are going to go back up. I just can’t tell you when. And when that happens though, will that long-term lending, if it is not protected it’s just going to work against you.

Ken Zerbe - Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from the line of Steven Alexopoulos from J.P. Morgan. Please go ahead.

Steven Alexopoulos - J.P. Morgan

Hey. Good morning, guys.

Gerald Lipkin

Good morning, Steven.

Steven Alexopoulos - J.P. Morgan

I want to start -- I was looking for more color on the loan purchases. You referenced that you started in April, if you could talk about just the collateral that’s securitizing the loans, the yield, the amount you expect to purchase, stuff like that?

Gerald Lipkin

It is a residential portfolio that’s really floating rate, which is not something that we find typically in this market, pretty much where rates are today. Everything is fixed rate that we are seeing. So this gives us an opportunity to put on some floating-rate assets. They are in the general level of interest rates that you are seeing today relative to fixed rate loans. So they're not like teaser rates that are of 1% to 2%.

Alan Eskow

I will also point out that we have a very strong third-party guarantee.

Steven Alexopoulos - J.P. Morgan

Would this be jumbo mortgages?

Alan Eskow

I don’t want to get involved. Discussion was going to end up, involving who and where they are coming from. But if it happens, it will be a very good opportunity for us, at least we believe.

Steven Alexopoulos - J.P. Morgan

And could you just talk about the size, the amount that you are looking to purchase, maybe on a quarterly basis.

Alan Eskow

We booked so far in April. I think it was $70 million.

Steven Alexopoulos - J.P. Morgan

Okay. Because that maybe a monthly run rate, Jerry.

Alan Eskow

No.

Gerald Lipkin

No. Not at all.

Alan Eskow

But are looking at some additional loans, whether they come about or not it’s hard to say. But we're very pleased, this was a very good opportunity that came our way.

Steven Alexopoulos - J.P. Morgan

Okay. All right. So maybe it’s more one-off.

Alan Eskow

There maybe more but we have nothing in the pipe right now.

Steven Alexopoulos - J.P. Morgan

Right. And then Alan, I appreciate the commentary on the margin pressure being less in this quarter. But given how much pressure you saw, is your balance putting more liquidity to work with asset yield compression? Most of your regional peers are talking about 5 to 10 basis points of margin pressure into 2Q. Are you somewhere in that range?

Alan Eskow

I think we are probably, more likely in the lower end of that.

Steven Alexopoulos - J.P. Morgan

Okay. Okay.

Alan Eskow

That’s what we were modeling at this point. But again, I think one of the things we indicated is we’ve seen a fair amount of prepayments still. And so with those were to escalate higher than anybody projects in this quarter, that could impact us more. But at this point, we are not seeing it.

Steven Alexopoulos - J.P. Morgan

And then, one final one regarding the 1000 days you referenced to close on a foreclosure. What's the expected increase in the state-level G fees and can you talk about timing of that potentially?

Gerald Lipkin

There has been no specific announcement as far as guarantee fees most of our loan sales were executing with through the cash window, so we were not creating securities and the key therefore does not directly impact us, but right now we have no announcement from Fannie Mae or Freddie Mac as far as changing loan level pricing premiums, adverse marketing fee et cetera. And to my knowledge they have not announced exactly where their fees are going if there is a securitization execution.

Steven Alexopoulos - J.P. Morgan

Okay. Yes. Back in Connecticut so that their stay level fees are now going higher, so okay but nothing on New Jersey.

Gerald Lipkin

No they think that they have threatened based upon extended foreclosure timelines that they hire loan level pricing premium might be possible, but they have not announced anything specific and they have not announced what they specifically would be incorporated into that strategy.

Alan Eskow

Relative to what we hear on the street, the number of loans that we have in foreclosure relative to the size of our portfolio is minuscule.

Steven Alexopoulos - J.P. Morgan

Okay. Thanks for the colour.

Gerald Lipkin

Okay.

Operator

Your next question comes from the line of Dan Werner from Morningstar. Please go ahead.

Dan Werner - Morningstar

Good morning.

Gerald Lipkin

Good morning.

Dan Werner - Morningstar

In terms of the net interest margin and what you are doing with that, are there any large buckets of CDs that are going to be re-pricing this here.

Gerald Lipkin

No really not. They are on a an ongoing basis. We do have CDs that are out there that originally was done over a five year period and they run off literally every day of the week. We do see large CDs going down and I think that's part of why you are seeing the -- even though it's a small drop, you are seeing a drop in the cost of time deposits. So that will continue from probably two to three period.

Dan Werner - Morningstar

Okay. And then secondly on the branch rationalization that you guys are going through, can you kind of give us an idea of kind of net count what you are thinking in terms of the franchise over the -- through the end of the year are going to be five of your branches. You are going to be about even because you opened up a few in New York, can you kind of give us some idea what your thoughts are there?

Alan Eskow

...which probably is a low single digit that we are talking about; however, we have done other things. We are trying to focus on using more part time employees. We have at least 25 of our branch managers who now supervise more than one office.

Dan Werner - Morningstar

Okay. All right.

Alan Eskow

And that's a significant cost saving there.

Dan Werner - Morningstar

Okay. Thank you.

Operator

Your next question comes from the line of Donald Destino from Harvest Capital. Please go ahead.

Donald Destino - Harvest Capital

Hey guys. Actually I thought I took myself out, but you had enough of the question anyway. Gerry the -- just could you help me make consistent that your true philosophies in terms of the dividend and how conservatively you are running your bank, we appreciate how conservative you've been on credit and structuring and interest rate management, but it just seems a little inconsistent with the capital management and not accreting any capital in such a tough environment.

Am I right to think of those two things as kind of inconsistent and that it would be more conservative to just the dividend and start adding capital to the balance sheet?

Gerald Lipkin

We have more capital than we need and we are very well capitalized by all the measures of capital. If we don’t need any more capital and we are having difficulty expanding the franchise through new loans, then you manage will reward the shareholders by paying them a dividend. I think you do other things, you can do share...

Donald Destino - Harvest Capital

Let me ask it another way? Would you -- if your dividend for whatever reason was lower in this current environment, would you want to be increasing it to kind of 100% payout ratio in the current environment?

Gerald Lipkin

Probably not, but we would do whatever we could not to punch the shareholder by cutting him back if we don’t have to or if we don’t have a better use of the funds.

Donald Destino - Harvest Capital

No totally understood and then the second question was just on mortgage banking, you guys put up some impressive numbers relative to a lot of the banks that we've seen both on margin and volumes, charge off to look at other banks not yours, but can you may be distinguish why you did better than most others.

Gerald Lipkin

I think we have a great staff and we have a great product. I am not going to talk about the marketing of it but not as I did with disposals. I think we came up with a very unique product that has been very well received in our market place. We have been expanding the geography in which we do it, only in the last six months or so have we really made an aggressive push into New York in Long Island and that is now really bearing fruit.

As I pointed out, last year we had 10% of our loans coming from there and now we are getting 22% of our loans coming from there. We are also in Pennsylvania. We find that it's an attractive product along the Delaware River. We've opened up two offices, loan production offices to help facilitate that.

It's very heartening, I listened to some of the giant banks when they talk about mortgage banking and having the difficulties they are having maintaining their levels but remember that in our bank, we don’t need as many loans to move the needle because of our size. So if you are taking one of the gigantic national banks, they may need 100,000 mortgages a month to keep everything running.

In our case, we get a couple thousand in a month. We are a real happy campus. So it's easier for us to maintain the level that we are operating at even if some of the refinance activity slows down nationally.

Donald Destino - Harvest Capital

So -- and that's a great explanation for the volumes, any difference in the gain on sale of margins, which was just down a little less than most others.

Gerald Lipkin

It's down a little bit. We earn a little bit less on the New York mortgages than we do on the New Jersey and Pennsylvanian mortgages because we have some other expenses in putting through the loan. They are still profitable but it does pull down to some degree our profitability on the overall product.

Donald Destino - Harvest Capital

Oh, I was thinking the other way that your was down a lot less than others, in others that we've seen kind of gain on sale of margins come down 25% to 35% and I think your was down may be 14%. There was nothing in there in terms of a mark on the pipeline or anything like that that's held up the gain...

Gerald Lipkin

The latter has to do with pricing too that you -- when we sell them to just to some...

Donald Destino - Harvest Capital

Got it. Okay. Thank you very much.

Operator

Your next question comes from the line of Collyn Gilbert from KBW. Please go ahead.

Collyn Gilbert - KBW

Thanks, good morning, gentlemen.

Gerald Lipkin

Good morning, Collyn.

Collyn Gilbert - KBW

Just to follow up on Don's question, did you guys and if you offered this, I apologize for missing it, did you give some sort of guidance or gross expectation range for mortgage banking for this year?

Alan Eskow

No.

Collyn Gilbert - KBW

Can you...

Alan Eskow

No. Next.

Collyn Gilbert - KBW

All right. Because I guess the concern obviously is that so much of your business is the result of re-fi and in the even re-fi slows what's the implication. I know you talked about going into expanding into different markets and such, but it just seems conceptually like it's going to be a tough, it's going to be a challenge to keep it at that $15 million, $16 million run rate or so on a quarterly basis.

Alan Eskow

Going into areas where we haven't really been before, I think it's still quite fertile as far as the potentials to continue doing re-fi. At the same time, we are spending a considerable amount of effort right now in gearing up our staff to go after purchase money, purchase mortgages. I think when the re-fi dries up, it's going to be the purchase market that's going to carry forward.

There are pockets of business that we really haven’t gone after. As I to you about a few minutes ago, it doesn’t take very much in the way of activity to move our needle. It's not like we are putting on a 100,000 mortgages a month. So if we can pick up an extra 100 or 200 mortgages on their product that we weren’t doing before, it really comes into you are really talking about less than one mortgage for every branch that we have opened and operated. So it's -- they are doable numbers to keep it going.

Collyn Gilbert - KBW

Okay. Okay. And then just to kind of ask a broader question on just where you guys sit from a business perspective and I guess I am struggling to understand, Gerry I totally here you on duration risk that many of your competitors are putting on and the risk that's associated with the real estate assets at this stage of the cycle, I get that. I guess though given your position in the market, given the brand, given valued reputation, why is it that you are not able to grow C&I loans more?

Alan Eskow

We have to ask the industry. I am not just about seeing a lot of new C&I expansion. Collyn you live in right in the middle of our market, so you see people opening up factories, you see people opening up new shopping centres and in growing stores it's not happening. Unfortunately people just are scared. There is uncertainty in the environment down to the business environment out there and they are not going aggressively.

Collyn Gilbert - KBW

So, then it comes to taking share then on the C&I side and if it means, I guess, I’m just try to understand, tell me it seem like there is a lot more value that will ultimately be created on maybe getting more aggressive for C&I credit, where you get the totality of the relationship, maybe you get some fee leverage, because I think that’s one area to where there is potential upside for Valley versus and if there is $70 million resume portfolio was one-off at time, but I just, it seems like, you are getting, the confection could be major getting customers or getting a variable rate product to just get more aggressive on C&I, even if it means going in a different businesses, I mean, just to me it seems like the more obvious moves?

Gerald Lipkin

I’ll tell you this, yesterday, we had a decision at our Board meeting about the volume of calls that are going out and we’ve added more commercial lenders to our staff, we larger commercial lending staff today than we had three months ago, six months ago, almost any major, right.

The number of calls they are making is up something like fourfold, 400%, all right. It’s not for one, we are not trying to find the business, you have to be careful, sometimes the guy will say, well, why should I leave my present bank to go to your bank, that’s the typical.

So we’re going to have to offer something that is present bank isn’t doing, either we’re going to have to cut the interest rate or we are going to have to lend the money for a longer period of time. People just don’t move unless you give them something.

Collyn Gilbert - KBW

Yeah. Okay. Okay. And then turning to maybe more of bright spot, I think, in Valley’s future M&A. How are you guys seeing M&A right now, opportunities kind of just sort of remind us or gives us an update of your thoughts on that at this point?

Gerald Lipkin

I think we’re going to see more M&A developing as the year progressive. I’m starting this year from smaller banks the fact that they are just they can make it, I keep talking about this regulatory burden, it's enormous. You add to that in the interest compression and I don’t know how they can survive, I don’t know how a bank under $1 billion today can meet all of the regulatory requirements in this interest environment and still make money. So, I think, we are going to see a pick up in M&A activity.

Collyn Gilbert - KBW

As you guys look at though, do you in terms of prioritizing targets, would you prioritize a costs efficiency type of partnership or revenue enhancement, because it seems like the revenue any kind of revenue enhancement?

Alan Eskow

The combination that makes the bottom line move.

Gerald Lipkin

Yeah. If we, the think I look at and M&A transaction is what its going to do for our shareholders and the only thing to make our shareholder file is to see our bottom line go up. So doing transaction does in cost our bottom line to go up within one year, we shouldn’t be doing it. If our bottom line goes up, we make more money then we are happy campus.

Collyn Gilbert - KBW

Okay. Okay. All right. Thank you.

Gerald Lipkin

Thank you, Collyn.

Operator

Your next question comes from the line of Matthew Kelley from Sterne Agee. Please go ahead.

Matthew Kelley - Sterne Agee

Hey, Alan. Last quarter you gave us a pretty good breakdown of the components of mortgage banking just seeing a sale loan evaluation gain on loan held for sale and reversal of the mark-to-market. Could you give us sufficient points again for this quarter?

Alan Eskow

Yeah. I think the end of last quarter we had about a $4.7 million mark it gets reverse. We have about 3 point, what’s the current market, that’s -- the current mark I would say was about $3.5 million. So anything in between that was the actual gain, so actually loss about $1 million relative to the swing between the mark-to-market in what we sold.

Matthew Kelley - Sterne Agee

Okay. Got you. And then question for you Gerry, change in terms rates structure, underwriting, what market or asset class that you operate in, are you seeing the most aggressive behavior on each of those fronts, if you have to...

Gerald Lipkin

I think real estate lending is clearly the most aggressive.

Matthew Kelley - Sterne Agee

What say it again?

Gerald Lipkin

Real estate.

Matthew Kelley - Sterne Agee

Real estate, yeah.

Gerald Lipkin

Yeah.

Matthew Kelley - Sterne Agee

Multi-family or commercial real estate?

Gerald Lipkin

Everything, across the board, across the board.

Matthew Kelley - Sterne Agee

Okay. Got you. And how much of the market do you think is moved beyond five year structure from multi family and commercial real estate and the deals that you see and you’re turning way?

Gerald Lipkin

It’s enormous. It's rare that you'll get a real estate person who will come in, who be willing to accept a five or sub five year duration unless they have the products and the property sold. They only need interim financing which is rare. Mostly people are looking for 10 or 10 plus years.

Matthew Kelley - Sterne Agee

Okay. Got you.

Gerald Lipkin

It is the lowest level of interest rates that these people have ever seen. And they are going to try and lock it in for as long as they can on the borrowing side. The banks are struggling to put products on. And so it's forcing banks to do things that maybe they shouldn’t be doing but it’s forcing everybody into this mode.

Matthew Kelley - Sterne Agee

Where are you seeing kind of multifamily commercial real estate origination yields today coming live?

Alan Eskow

In that interest rates wise or…

Matthew Kelley - Sterne Agee

Yeah.

Alan Eskow

Low threes.

Matthew Kelley - Sterne Agee

Yeah. Okay.

Matthew Kelley - Sterne Agee

Low to mid threes.

Gerald Lipkin

Depends on the product in term.

Matthew Kelley - Sterne Agee

Okay. And then as we just think about the balance sheet progression, you got securities, earning assets that I think like is 18%. Where do you see that ending up the year? How much do you want take that up?

Gerald Lipkin

I’d like to pick it up more but I’m not going to pick it by buying 1.6% 30-year paper.

Matthew Kelley - Sterne Agee

Yeah.

Gerald Lipkin

It’s just crazy. It makes no sense.

Matthew Kelley - Sterne Agee

How much of billion dollars in excess cash you think will be deployed over the next 12 months?

Alan Eskow

I’d like to see about 40% if it

Matthew Kelley - Sterne Agee

Okay. Got you. And any change in tax rate, what tax rate should we use in the model?

Alan Eskow

Tax rate amount to 29%.

Matthew Kelley - Sterne Agee

Okay.

Alan Eskow

It’s currently what we’re running.

Matthew Kelley - Sterne Agee

All right. Thank you.

Gerald Lipkin

You’re welcome.

Operator

Your next question comes from the line of David Jacobs, a Private Investor. Please go ahead.

David Jacobs - Private Investor

Thank you. Two quick questions, to what extents and where would the regulators get involved with respect to your dividend. If your initiatives don’t because your earnings go up a little from where they are now?

Gerald Lipkin

Well, the I think the regulators number one would look at our capital structure. Whether or not, we were depleting our capital beyond the point that they be comfortable.

David Jacob - Private Investor

That we cannot do of course now.

Gerald Lipkin

Right.

David Jacob - Private Investor

So basically, they’d be more concerned about the capital then the earnings if you drop the penny more this year?

Gerald Lipkin

Yeah. That’s -- it's hard to see -- now you ask me to give you an answer that's into somebody else's head.

David Jacob - Private Investor

I’m asking to go back to your old position. Let me ask the second question.

Gerald Lipkin

They won’t be happy here. If for an extended period of time, we’re not earning those dividends regarding those capitals.

David Jacob - Private Investor

Yeah. Okay.

Alan Eskow

Capacity, we already will capitalized during the day.

David Jacob - Private Investor

Yeah. I see that. Second question again, what extent if you have haven’t already answer this. Does M&T coming into your area through this acquisition of Hudson city, indeed they finally get approval? How does that affect your business strategy if it thus?

Alan Eskow

They are a commercial banks. Hudson city is …

David Jacob - Private Investor

Is not.

Alan Eskow

…is not. So obviously you can’t deny that there will be increased competition. There is increased competition, any commercial bank comes into more areas.

David Jacob - Private Investor

Will there be less competition on the mortgage side?

Alan Eskow

I don’t know

David Jacob - Private Investor

Needed it but I thank you for your thoughts.

Alan Eskow

All right.

Operator

(Operator instructions)

Dianne Grenz

Thank you for joining us on our first quarter conference call and have a nice day.

Operator

Ladies and gentlemen, this conference will be available for replay after 1 o’clock Eastern Time today, through May 1st. You may access the AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 287234. Those numbers once again are 1800-475-6701 with the access code 287234. That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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