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Valley National Bancorp (NYSE:VLY)

Q4 2013 Earnings Conference Call

January 30, 2014 11:00 AM ET

Executives

Dianne Grenz - Investor Relations

Gerald Lipkin - Chairman, President and CEO

Alan Eskow - Chief Financial Officer

Analysts

Ken Zerbe - Morgan Stanley

Steven Alexopoulos - JP Morgan

Nick Karzon - Credit Suisse

Dan Werner - Morningstar

David Darst - Guggenheim

Collyn Gilbert - KBW

Matthew Kelley - Sterne Agee

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). Also as a reminder this teleconference is being recorded. And at this time I will open the conference call over to your host Ms. Dianne Grenz. Please go ahead.

Dianne Grenz

Thank you good morning. Welcome to Valley’s fourth quarter 2013 earnings conference call. If you’ve not read the earnings release we issued earlier this morning, you may access it along with the financial statements and schedules for the fourth quarter from our website at valleynationalbank.com. Comments made during this call may contain forward-looking statements related to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K and 10-Q 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.

Gerald Lipkin

Thank you, Dianne. Good morning and welcome to our fourth quarter earnings conference call. We are pleased with the Valley’s fourth quarter results as the financial performance and credit metrics continue to improve markedly from prior periods. During the quarter we originated over $700 million of new loans despite a considerable contraction in residential mortgage activity. Commercial lending was once again the bright spot generating over $500 million in new originations an increase of over 50% from the same quarter one year ago. Valley’s commercial mortgage portfolio comprised the bulk of the originations accounting for over 60% of the new commercial volumes recognized in the fourth quarter. For the year, Valley originated over $1.3 billion of new commercial mortgage loans representing nearly a 150% increase from the same period one year ago.

Many of the originations in the commercial real-estate portfolio were 10 year adjustable rate loans with interest rate resets occurring after 36 and 72 months. For the fourth quarter the average rate on new commercial real estate originations was approximately 4%. To a great extent, a sizable amount of the new volume originated was within the New York City geography as both the New Jersey and Long Island markets continue to slowly rebound.

Competition within the CRE marketplace remains pierce as large money center institutions, local community banks and even credit unions compete for the traditional middle market customer. At Valley, credit quality remains absolute and while we may modestly relax on pricing, we remain steadfast on credit churns and conventions.

Although not as sizable as commercial real estate originations, C&I activity was brisk for the quarter as Valley originated over $200 million of new loans, nearly 25% more than the prior quarter. However, the portfolio contracted slightly as pay-offs within Valley’s purchased credit-impaired loan pools and legacy loans remain substantial, specifically, within the C&I market, fm our borrower financial conditions have improved. Profitability and liquidity continue to expand for many of our customers. However many appear unwilling to take the risks necessary to expand their businesses a disproportion a percentage of origination volume as a byproduct of refinance activity.

That being said, we are guardedly optimistic about the opportunities prevalent in the commercial lending space. Overall economic conditions appear to be improving and fundamentally our borrowers have the capacity to expand operations.

Within the consumer lending portfolio loan originations declined significantly both on a linked quarter and annual basis. The decline in residential mortgage outstanding during this period accounted for the entire contraction as pay-offs outpaced originations retained in portfolio. However, other consumer lending originations particularly autos were strong. Residential mortgage volume continues to be negatively impacted by the decline in refinance activity. Although purchase applications have nearly tripled since the beginning of 2013, the share number is worth in comparison for the refinance activity we experienced in 2013. During the quarter we closed approximately $95 million in new originations and process nearly $25 million in applications. Unless market interest rates declined considerably we anticipate 2014 residential loan volume to be consistent with the levels recognized in the fourth quarter.

Other consumer lending activity was strong in the fourth quarter as closings exceeded $120 million. For the full year of 2013 total consumer lending originations were slightly less than a $0.5 billion which reflects nearly a 60% increase from the level of originations realized in 2012. Largely as a result of the increase in origination volume, total consumer loans outstanding excluding residential mortgages increased nearly 16% on an annualized basis from the third quarter period-end balance. We anticipate continued strong origination volume throughout 2014.

During the quarter, Valley recognized a gain of $11.3 million related to determination of a branch operating lease associated with a sale lease fact transaction entered into during 2007. Although, the gain reflects an increase of events, the occurrence should be considered a one-time event.

Valley, owns over 100 properties almost all of which are carried at below fair market value. This hidden value has been discussed for years at various investor conferences and included in regulatory filings. As we evaluate our traditional branch network in an effort to rightsize the branch footprint similar opportunities may manifest producing gains in the future.

In that regard, as announced via press release in the fourth quarter we have embarked on a branch modernization initiative, which will incorporate new digital delivery channels and self service banking platforms. As a result of this plan, Valley intends to introduce new technologies that will enhance the customer experience while simultaneously reducing overhead expense overtime to reflect the new reality of retail banking.

As part of this modernization initiative, when appropriate we have begun to design new branch interiors which both incorporate the latest technologies being employed while simultaneously updating the interior layouts to encourage even more personalized service, as a result of the increasing use of mobile banking and remote deposit capture put traffic in most branches has shown in the significant decline over the past few years.

Accordingly for the majority of our branches, the square footage required has declined, as an example, we were able to reduce the square footage by nearly 50% at the location in which we terminated the lease and recorded the gain on sale of assets in the fourth quarter. In addition to the gain on sale future period occupancy expense should decline as a result of the decrease rent expense.

In 2014, we intend to begin the installation of new technologies at approximately a third of our branches. We do not anticipate an increase to expense as immediate savings should be achieved with staff reductions attain margin through attrition and occupancy savings, the speed at which we integrate additional technologies and upgrade further locations will largely be driven by customer acceptance and the equipment installation timeframes.

Although the emphasize in which I just mentioned is focused on reducing bridge overhead expense greater prominence is directed towards reducing Valley’s total core expenses, the branch monetization initiative is merely a microcosm of a tightened effort throughout the organization to reduce total non-interest expense.

Earlier in 2013, we announced a series of initiatives to reduce benefit expenses including the suspension of both the employee and directed defined benefit pension plans. We have also implemented strategies to reduce Valley’s FDIC insurance expense just to name a few. In-spite of the additional regulatory requirements we must and will adjust the entire non-interest expense throughout the bank.

As I mentioned earlier, asset quality improved appreciably from the prior quarter as the ratio of non-performing assets to total assets declined from 1.22% as of September 30th to 0.77% as of December 31st. The decline is largely attributable to the liquidation of impaired trust preferred securities issued by the one deferring bank holding company. As a result non-accrual debt securities declined from $52.3 million in the third quarter to $3.8 million in the fourth quarter.

In addition non-accrual loans declined $21 million or nearly 18% during the same period. The improvement in asset quality is significant as it allows the bank to redeploy funding to new performing assets, reduce Valley’s FDIC insurance expense and unlock capital to leverage the institution.

In addition to the improvement in non-performing assets, the levels of net charge-offs recorded in the quarter was an improvement from the third quarter. The reported figure of $5.4 million or 19 basis points as a ratio to non-covered average loans included approximately $2.9 million of charge-offs related to valuation adjustments of certain impaired loans. Exclusive of these adjustments the annualized ratio of net charge-offs to average loans would have reflected only 9 basis points.

In summary, we are guardedly optimistic about the continued opportunities in the coming quarters. Expanding the balance sheet via loan growth, coupled with new initiatives developed to reduce operating expenses, should provide the catalyst to both earnings and tangible book value expansion.

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

Alan Eskow

Thank you, Jerry. Net interest income in the fourth quarter expanded $4.5 million from the prior quarter to $116.1 million. The increase is largely attributable to growth in average loans outstanding, reduced premium amortization within the investment portfolio, combined with a reduction in interest expense on most interest bearing liabilities.

Average loans outstanding grew over $500 million during the last six months, as Valley redeployed excess liquidity into higher yielding assets. The increase in average loan balances accounted for approximately $2.0 million or 45% of the total link quarter increase in net interest income. The improvement in loan interest income during the fourth quarter was partly mitigated by a contraction in portfolio yield as the average rate on Valley's loan portfolio declined 5 basis points from the third quarter of 2013.

In the aggregate Valley originated over $700 million of new loans during the quarter, at an average yield of approximately 3.6%. While the loans are accretive to net interest income, the yield is less than the collective yield on total loans. Unless market level interest rates begin to rise beyond current levels, we anticipate continued pressure on the yield on average loans.

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

Principal pay downs on mortgage-backed securities declined nearly 35% from those realized in the third quarter and nearly 45% from the cash flows recognized in the same period one year ago. As of December 31st, the unamortized premiums on mortgage-backed securities were approximately $56 million of which we are scheduled to amortize approximately $14 million over the next 12 months, based on current projected prepayments fees. As a result of the reduced premium, amortization recognized during the quarter Valley’s fourth quarter net interest margin was positively impacted by approximately 5 basis points from the third quarter. Although, we anticipate continued contraction in premium amortization, based on early cash flows received during January of 2014 coupled with the level of current market interest rates, we do not anticipate significant further benefits to both the investment portfolio average rate and net interest margin.

Further benefiting the improvement in linked quarter net interest income was the reduction in interest expense of $1.3 million as Valley’s cost of funds declined from 1.18% to 1.13%. The reduction in long-term borrowing costs largely attributable to Valley’s capital optimization strategy including the early redemption of junior subordinated debentures employed during the second half of 2013 accounted for the majority of the reduction. As a result of these actions, interest expense was reduced by approximately $1 million and the net interest margin was favorably impacted by 3 basis points.

The junior subordinated debentures were not fully redeemed until the end of October. As such, we anticipate a minor reduction in first quarter borrowing expense attributable to the aforementioned capital actions. Valley’s cost of deposits declined one basis point from the third quarter to 40 basis points.

The cost of Valley’s time deposits declined from 1.28% to 1.23% as higher costing deposits either mature or re-price at lower rates. We anticipate continued contraction in this portfolio as nearly one half of the entire balance in time deposits matures during 2014, although most of the maturities are skewed for the latter half of the year. The reduction in current period cost of deposits is also attributable to the increase in non-interest bearing deposits, in absolute dollars and as a percentage of total deposits.

On average, non-interest bearing deposits now account for nearly 33% of all deposits and remarkably over 25% of Valley’s entire funding base. Largely, as a result of the aforementioned linked quarter changes to interest income and interest expense, Valley’s net interest margin improved 7 basis points to 3.27% in the fourth quarter.

As discussed many of the positive benefits realized in the quarter may not be as significant in future periods. When viewed in conjunction with the reduction and number of days in the first quarter, we anticipate a slight reduction to the net interest margin. That being said, we continue to focus our efforts on expanding net interest income as the margin is mostly a parameter of the interest rate environment.

Non-interest income increased significantly from the third quarter, principally due to two large infrequent items. Net gains on securities transactions increased nearly $10.7 million from the third quarter as Valley sold a non-accruing debt security for proceeds of $52.5 million. Additionally during the quarter, Valley terminated an operating lease related to a building sale-leaseback transaction entered into during 2007. As a result of the lease termination, Valley recognized a gain of $11.3 million.

The decision to terminate the lease is consistent with Valley’s previously announced branch modernization initiative to new location, which is located on the same block allowed Valley to right size the facility in light of current branch transaction activity, while integrating a modern platform and delivery channel.

Non-interest expense for the quarter was $96.1 million, an increase of $1.6 million from the prior quarter. Many variables attributed to the increased -- to the increase during the current quarter. Positively impacting the current period expense was a decline in net occupancy expense, essentially the result of the aforementioned lease termination and the amount of $1.7 million.

In addition, changes in the mark-to-market on mortgage banking derivatives further reduced fourth quarter non-interest expense by $1.5 million as compared to the third quarter of 2013. Mitigating the reductions in expense were a few large items which we expect to wane in future periods. Amortization of losses related to the write-down of tax credit investments equaled $5.9 million while salary and benefit expenses increased $1.2 million from the third quarter.

Of the combined $7.1 million, we anticipate only approximately $2 million to impact the first quarter of 2014, a net reduction of over $5 million. As Gerry mentioned earlier, reducing our expenses and enhancing the efficiency of the organization is key to delivering improved profitability in 2014.

Our effective tax rate increased during the quarter to 28.9%, an increase from the 20.8% rate realized in the third quarter. The increase is fundamentally attributable to the shift in composition of revenues generated in the fourth quarter combined with the timing and recognition of tax credits utilized. For the year, Valley’s effective tax rate was 26.35%. We anticipate for 2014 the effective tax rate to range between 26% and 29%.

On October 25th, Valley redeemed substantially our entire trust preferred securities portfolio, largely in response to the new Basel III capital rules. As a result, the Bank’s Tier 1 and total regulatory capital ratios declined from the prior linked quarter by approximately 100 basis points. However, Valley’s Tier 1 common regulatory capital ratio expanded 11 basis points to 9.28%. Presently, this ratio exceeds the fully phased in minimum Basel III Tier 1 common capital ratio including the full capital conservation buffer by 228 basis points or nearly $270 million of common equity. Tangible book value increased from 5.28 cents as of September 30th to 5.39 cents as of December 31st.

During the fourth quarter, Valley’s Board of Directors announced a reduction in the common stock cash dividend. We believe the retention of a higher amount of capital will enable us to leverage the balance sheet to grow net interest income and tangible book value in future periods.

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

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). We'll take our first question from Ken Zerbe with Morgan Stanley. Please go ahead.

Ken Zerbe - Morgan Stanley

Great, thanks. Hey Gerry, just want to follow up on the expense guidance that you're talking about. Obviously you’re selling your properties; you're investing in something smaller. Was -- are we supposed to -- did I hear right that expenses are going to stay flat on sort of a go forward basis as you're investing is offset by cost savings or are we actually looking at a material decline in expenses over the next x number of years?

Gerald Lipkin

It's kind of difficult to measure the long-term benefit. We don't expect -- at least at this point we do not expect any increase in expenses as a result of the steps we're taking. Now, if we can reduce some of the expenses along the way that will be terrific. And I want to make it clear that we’re not talking about a wholesale sale of all our facilities, this is really a rifle not a shotgun approach. We have a situation that appears to be we would be better off if we relocated the branch to a different location, so the branch moved into a smaller facility. That would make sense.

As we've announced over the years that we've had this pent-up stored up value in our branch network, in the buildings that we own and where appropriate, we over the next whatever period of time it takes may decide to sell some of them.

Ken Zerbe - Morgan Stanley

Got you. Just on that a little more specifically, because in your prepared remarks it sounded like out of the 100, this is going to be something that we could see fairly frequently. And just to get that magnitude, are we talking one per year or are we talking five per year?

Gerald Lipkin

I really couldn’t give you a number because it involves a lot of strategic issues. The sale of a building doesn’t mean necessarily that we don’t want to continue a bridge at approximately that location. So, we would first have to find another location that makes sense. In some cases, it may prove that wait a minute; we’re not going to sell the building, we’re going to lease out part of the building. There are number of alternatives and there hasn’t been anything definitively outlined about it. But surely over the next several years, we may see other opportunities coming up.

Ken Zerbe - Morgan Stanley

All right that helps. And then just last question on the non-interest bearing deposit growth you saw in the quarter; was there anything unusual with that? Because I remember before you talked about funding loan growth with securities, but it seems you don’t need to just given the strong deposit growth this quarter?

Gerald Lipkin

To some degree that’s correct.

Ken Zerbe - Morgan Stanley

All right. Thank you.

Operator

Thank you. Our next question in queue will come from the line of Steven Alexopoulos with JP Morgan. Please go ahead.

Steven Alexopoulos - JP Morgan

Hey, good morning guys.

Gerald Lipkin

Good morning.

Alan Eskow

Good morning.

Steven Alexopoulos - JP Morgan

Regarding, Gerry’s opening comments that commercial real-estate originations were up 150% year-over-year which was a great full year, but really made up no growth in the first half and then surge in growth in the second half of the year. Can you just talk about the market dynamic that’s causing such a jump to commercial real-estate originations in the back half of the year?

Gerald Lipkin

A lot of it’s coming as I said in my remarks, out of New York City. The real-estate market in New York City is very aggressive. It’s a very strong marketplace more so than we see in our Northern New Jersey footprint, although I am not ignoring our Northern New Jersey footprint, but this has really been the strongest part we have seen. And if you look at the demographics as we presented actually to our Board yesterday, the growth in greater New York City has outpaced both New Jersey, North New Jersey, Central New Jersey even Long Island for that matter.

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

Steven Alexopoulos - JP Morgan

So Gerry, is that primarily being multi-family?

Gerald Lipkin

It’s -- a lot of it is underlying co-op loans. If you are familiar with that market, it’s a pretty secure market; you’re really only lending a small percentage of the appraised value. Usually on average it’s well under 10%. So, it makes us feel comfortable with that product. We have seen other types of real estate in New York City too that are very attractive.

Steven Alexopoulos - JP Morgan

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

Gerald Lipkin

Well, to some degree we are taking market share, they are not building that many new buildings. So, there was an existing building, we are taking it from somebody else. But we’re fortunate we have a really strong commercial lending staff and they are well known in the community and they are taking advantage of the opportunities that are presenting themselves.

Steven Alexopoulos - JP Morgan

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

Gerald Lipkin

Yes.

Steven Alexopoulos - JP Morgan

Okay. And then just one final one regarding the ten year term loans that you talked about, there we said a 36 and 72 months both be resetting off of, what is the benchmark rate?

Gerald Lipkin

It’s a predetermined rate that we use the swap rate in setting the loan initially. So…

Steven Alexopoulos - JP Morgan

So you’re…

Gerald Lipkin

The first three years are little bit lower for the borrower, the next three years have just about had market for -- in the last four years are somewhat above what the current market would be, so that if rates do move up, we have some comfort that we’re protecting ourselves.

Alan Eskow

Yeah. We had heavy prepayments on those as well. So that we know that we’re going to get the benefit at the backend with the higher rate that we’re entitled to.

Steven Alexopoulos - JP Morgan

Okay. I appreciate the color. Thanks.

Gerald Lipkin

Sure.

Operator

Thank you. Our next question in the queue will come from Craig Siegenthaler with Credit Suisse. Please go ahead.

Nick Karzon - Credit Suisse

Good morning. It’s actually Nick Karzon for Craig.

Gerald Lipkin

Hey Nick.

Nick Karzon - Credit Suisse

I guess just following up on your comments on the investment securities portfolio, if we continue to see relatively strong loan growth, could that decline further? And then also in terms of the rate, wondering what that current rate is on the taxable investment securities and where that might ultimately migrate to with rates remaining relatively constant over the course of the year.

Gerald Lipkin

Yeah. That's the point. Nick, this is Gerry. As far as loan growth is concerned, the bank would certainly prefer to make loans as opposed to investments from an income standpoint. Obviously we need a certain amount of investments for liquidity purposes. But from an income standpoint, we’re far better off making loans. So I’d rather grow the portfolio by putting on more loans.

Alan, do you want to speak to the...

Alan Eskow

Yeah. So the interest rates obviously have gone up mostly as a result of the premium amortization which I think we talked about in the release. But that being said, that was part of our strategy all along. For a number of years, we were buying high premium and high coupon securities. So, in the time of lower interest rates you were getting a much lower return, but we anticipated eventually as rates moved up, we would be able to see a shorter amortization period and interest rates would rise on those particular loans, we did this mostly on all kinds of mortgage backed. And so that’s what actually has happened in the last say six months or so where rates went up to say 3%, the prepayments slowed down, the amortization slowed down and then the yield on the portfolio went up.

Nick Karzon - Credit Suisse

Got it. That’s helpful. And then the second question on the interest-bearing deposit accounts it looks like the rate that you are paying ticked up a little bit quarter-over-quarter. I was wondering if that’s largely driven by mix shift or if there are any changes in pricing in the quarter?

Alan Eskow

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

Nick Karzon - Credit Suisse

Thanks for taking my questions this morning.

Alan Eskow

Thank you.

Operator

Your next question in queue comes from Dan Werner with Morningstar. Please go ahead.

Dan Werner - Morningstar

Good morning. Thanks for taking my questions.

Gerald Lipkin

Good morning Dan.

Dan Werner - Morningstar

Given that you had such significant auto loan growth, could you remind us how much is that from indirect versus direct? And on the indirect side the dealer network has that been expanding, contracting, used versus new, just kind of give me how that business is going?

Gerald Lipkin

Our loan auto volume is predominantly almost entirely indirect. We have grown our network of auto dealers, but I think which is right now is approximately 300 different dealers that we buy paper from, mostly located in our [footprint] Northern New Jersey, Long Island. We try not to just trade too far from that. We do a little bit in Pennsylvania.

It's a mixture of both new and used. Ironically our performance -- I’m being told variety of (inaudible) 60% note. So, it's a business that Valley has been in for many decades. We actually got into the business in the mid 50s and we've never left the business.

The sale of automobiles drop dramatically in the 2008, 2009, 2010 period, as a result our volume went down, but it seems to be coming back again to levels that are not quite where they were at the high, but much, much better than we had seen at the low points.

Dan Werner - Morningstar

Great. And then second question, could you reconcile for me the modernization program with the branch, as you said that you want about a third of them to be modernize. Can you kind of reconcile that with the sale leasebacks that you're going to be doing going forward?

Gerald Lipkin

Let me talk a little bit about the modernization so we all understand it. That's bringing in equipment that enables the customer to have a different experience in the bank. They don't have to use a live teller; they can if they want to or they can also use various automated approaches. This ties into some with my remark that people are using remote deposit capture to a much greater extent. And that people are using mobile banking to a much greater extent. We want to make sure that our branches are designed in such a way to accommodate those clients that would like to have their banking experience handle in that manner.

As a result of that, the size of the footprint of the branch is not required to be as large as it was 15 years ago when many of the branches were acquired. And as a result, we’re always looking to see if we can reduce the size of any specific branch. This is not a shotgun approach though, as I mentioned before, it’s more of a rightful approach. We look at each individual branch, can we move that branch to another location that start the customer flow, the traffic patterns, could we divide the branch and since we all know lot of the branches in some cases that’s the another alternative. We don’t necessarily have to sell it, we may be able to subdivide part of it or sublet part of the branch, generate some revenue from the portion that we’re subletting.

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

Dan Werner - Morningstar

Okay. Thank you.

Gerald Lipkin

Sure.

Operator

Thank you. Our next question in queue will come from David Darst with the Guggenheim. Please go ahead.

David Darst - Guggenheim

Hey good morning.

Gerald Lipkin

Good morning David.

David Darst - Guggenheim

Gerry, I think in the last slot that perhaps gave the dollar amount of your roles stated the unrealized gain; I know this has done a couple of years, but that’s about $200 million?

Gerald Lipkin

In gross it’s about $200 million, yes. This is very hard, because you’re not looking to aggressively sell it and you’re not putting it on in the market, it becomes more of a guesstimate. But in the case of the location that we sold, it actually was sold for more than our initial guesstimate was. So it’s kind of hard to tell. Some may not tell for as much as our guesstimate. But I think your number is probably a good ballpark.

David Darst - Guggenheim

Okay. And then could you comment on C&I pay-offs versus the origination volumes in earlier [appoint], but some of the things that have been cleaned up and criticized in clogged spots that we might see more of that C&I production stick in 2014?

Gerald Lipkin

Yeah, the whole lot of pay-offs that came from some of the acquired institution. So you know that probably had some impact on this and probably larger than what might be normal. We have seen those portfolios, remember they are run down portfolios, meaning they’re run off portfolios. And so they are going down and they are not getting added, and a lot of that was C&I business.

David Darst - Guggenheim

Okay. And then Alan, if you just have to think about when you margin might stabilize, do you think it’s mid-year or end of the year or any idea?

Alan Eskow

Well, I know it’s something (inaudible) and where the competition is going to be pricing loans, I mean that has awful lot to do with everything, the matter what we think if the competition is 50 basis points less than us, we get a price near or at that number just to put the loans out of our books. So it’s a combination of a level of rates and the competition. It’s little hard to tell you when it’s going to stabilize.

David Darst - Guggenheim

Okay. And then just on the caps and swaps and number of other things you’ve done to manage your core position, I think you’ve done that to buy more assets into the -- if some of those are having a negative impact -- any changes with that strategy or when things might roll off?

Gerald Lipkin

I think some of that also have the value, should we issue now, say in ‘15 some of that rolls off.

Alan Eskow

No, no this has been…

Gerald Lipkin

There is this box that we put on. Well, some of them may, but basically the ones I think you saw that are negatively impacting us I believe here in 2015.

David Darst - Guggenheim

Okay, got it. Thank you.

Operator

Thank you very much. Our next question in queue will come from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert - KBW

Thanks. Good morning guys.

Gerald Lipkin

Good morning.

Collyn Gilbert - KBW

I just want to make sure, Gerry I heard you correctly. I think in your opening comments you had made the point that the residential mortgage volume will be consistent in 2014 with what we saw in the fourth quarter, is that right?

Gerald Lipkin

Yes.

Collyn Gilbert - KBW

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

Gerald Lipkin

Not right now. It depends; a lot of it depends on interest rate. If the fed decides they’ve got to juice up the economy again and they are going to drop interest rates, we might see resurgence in some of the refi market. If the economy continues to show signs of improvement, there may be more in the purchase market.

Collyn Gilbert - KBW

Okay.

Gerald Lipkin

(Inaudible) is another issue that qualified mortgage could have a very negative or very positive impact depending on how it’s interpreted.

Collyn Gilbert - KBW

Okay.

Alan Eskow

Hey Collyn I think one of the things also is the fact, in the fourth quarter wasn’t that the volume itself was as low as maybe you seem to be considering, but it’s also the fact that we sold over 50% of loans in our portfolio that came on that quarter. So you didn’t see any real retainage, I think the number we were down is about $35 million. So I’m not so sure we will be down if we retain, if we continue to do the same new volume coming in, but rather it’s a matter of what we decide to hold, and if we hold the larger amount of portfolio, we’ll not continue to go down.

Collyn Gilbert - KBW

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

Gerald Lipkin

We see mostly fixed rate I think it’s more credit quality. We see LTVs that we are a little concerned with we sell the product to.

Collyn Gilbert - KBW

Got it, okay. That’s helpful. And then just to tie back to the NIM question a little bit, I guess given the dynamics that’s going on, I would have thought that the loan yield would have compressed more this quarter than it did. Can you just talk a little bit about that? Was that just timing of when the loans were from the balance sheet or are you seeing better pricing?

Gerald Lipkin

I think we you are seeing a mix of loans coming on the books. The auto loans are obviously coming on substantially lowering yield, however the commercial real estate loans and some other consumer loans are coming in at 4% plus. So even though you are seeing this 360 blended rate, there are still plenty of loans coming on that are at higher rates.

Collyn Gilbert - KBW

Okay, okay. That’s helpful. And then just one last question, we’ve heard from a number of your peers this quarter it seems like there has just been sort of some heightened regulatory pressure demand or whatever that is coming to the market, I would say maybe even in just this past quarter. Are you guys seeing anything on that regard, have you seen any…

Gerald Lipkin

No.

Collyn Gilbert - KBW

No, so in terms of your…

Gerald Lipkin

Let’s say we are running the type of the loan loss percentage that we were they wouldn’t be running into some…

Collyn Gilbert - KBW

No, well I think part of it is getting ready for deafest. So I just didn’t know if there is any change in what you guys have seen in the last month or two in preparation for that?

Alan Eskow

No, more on top of what they want us to do. We try to stay one step ahead of them. We try to anticipate what the regulators want. We try to get it them so they are happy with our performance.

Collyn Gilbert - KBW

Okay. That was all I had. Thanks guys.

Gerald Lipkin

Alright.

Operator

Thank you very much. (Operator Instructions). And next in queue is Matthew Kelley with Sterne Agee. Please go ahead. Hey Mr. Kelley your line is open. Please check your mute key. Okay. Mr. Kelley, can we start? There we go. Thank you.

Matthew Kelley - Sterne Agee

Thank you. On the loan yield and in the margin during the quarter, were there any impacts from accredible yields or transactions that might have benefited the margin?

Alan Eskow

Nothing that wasn't in the quarter before.

Matthew Kelley - Sterne Agee

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

Alan Eskow

Yeah, I think we kind of gave you a little bit of guidance there, but we had about $7.1 million of those varying items netting out that were additional expenses during the course of the quarter. We only expect about $2 million of that to repeat itself in the first quarter of ‘14.

Matthew Kelley - Sterne Agee

Okay, got it. So $5 million?

Alan Eskow

So, approximately $5 million will be there, right.

Matthew Kelley - Sterne Agee

Okay, got it. I want to make sure in that. And then as you transition this first-third of your branches into the new model more technology pushing people towards the self service offering that and staffing goes down. On this block of one-third of your branches, is there a net savings on total expenses?

Gerald Lipkin

Many of the time, yes, yes. Yeah, I mean I think initially you start to see for example with the cost of the modernization if you will, you got equipment, you got to buy, you've got to put it into place, you have depreciation on that. And it's going to take time to work through the system. And so you start to see staffing changes et cetera, et cetera.

Matthew Kelley - Sterne Agee

All right. Then last question, I want to be clear to the [securities] book ended at $2.6 billion was up about 6% in ‘13. Where do you see that at year-end ‘14, how is that going to progress?

Alan Eskow

Maybe up slightly, but it’s only a little bit [depends] on loan growth. I think as Gerry pointed out before, if loan volume comes in the way we hope it will come in then we don’t have a need to increase the portfolio.

Matthew Kelley - Sterne Agee

Thank you.

Operator

We remind you, at this time there are no additional questions in queue. Please continue.

Dianne Grenz

Thank you for attending our fourth quarter conference call and have a nice day.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 01:00 PM Eastern Time today running through February 6th at midnight. You may access the AT&T executive playback service at any time by dialing 800-475-6701 and entering access code of 313903. Once again that phone number is 800-475-6701 using the access code of 313903.

That does conclude the conference call for today. We do thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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