Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Valley National Bancorp (NYSE:VLY)

Q4 2011 Earnings Call

January 26, 2012 11:00 AM ET

Executives

Alan D. Eskow – SEVP and CFO

Dianne M. Grenz – Investor Relations

Gerald H. Lipkin – Chairman, President and CEO

Analysts

Ebrahim Poonawala – Morgan Keegan & Co. 

Craig Siegenthaler – Credit Suisse

Steven Alexopoulos – JPMorgan

Aaron Brann – Stifel Nicolaus & Co. 

Dan Werner – Morningstar

Gerard Cassidy – RBC Capital Markets

Nancy Bush - NAB Research LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth 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). As a reminder, this conference is being recorded.

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

Dianne Grenz

Thank you, Good morning. Welcome to Valley’s fourth quarter 2011 earnings conference. If you’ve not read the earnings release we issued early this morning, you may access it along with the financial tables and schedules for the fourth quarter from our website at valleynationalbank.com.

Comments made during this call may contain forward-looking statements relating to the banking industry, Valley National Bancorp and the recently completed acquisition of State Bank Corp. Valley encourages participants to refer to our SEC filings including those found in our Form 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

And now, I would 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. Valley’s fourth quarter net income of $24.8 million or $0.15 per diluted share was negatively impacted by both non cash impairment charges on investment securities and transactional merger expenses associated with the State Bank acquisition. In the aggregate, those two items negatively impacted our diluted earnings per share by $0.08. For the year, Valley earned a $133.7 million and had solid earnings for each quarter of 2011. Valley in its 84 year history has never reported a losing quarter.

The following comments surrounding loan growth and activity for the full year and quarter do not include the impact of the $37 million short term loan to State Bank Corp. The loan was used to repay their tarp funds and was eliminated at closing on January 1 upon the acquisition of the company.

Total loan growth during both the quarter and full year was extremely promising as Valley originated over $685 million of new loans during the quarter and over $2.4 billion of new loans during the 12 months of 2011. This marks the highest annual volume of new originations ever recorded at the bank. As a result, net new non covered loans at Valley for the year grew by approximately 5.3%. For the quarter, the growth was approximately 7.4% annualized.

New commercial lending originations for the quarter equal $290 million, bringing the full year total to $1.1 billion. Net non covered loan growth for the year in the commercial C&I and CRE portfolios was nearly $200 million despite the enormous amount of prepayments received which partially mitigated the new volume. With the exception of construction loan portfolio, we are experiencing growth in all types of commercial lending.

Commercial Real Estate excluding commercial loans grew approximately $50 million from the third quarter as originations of $132 million were also impacted by both scheduled and non scheduled principal payments of over $80 million.

On average, prepayments in part precipitated by the low interest rate environment during 2011 were approximately 11% greater than the amount recognized in 2010.

The commercial C&I portfolio expanded $8.2 million or nearly 2% annualized from the prior quarter.

Line usage remained at approximately 38.5%. However, the total amount of committed lines from lines of credit grew by nearly $70 million.

Activity in Valley’s New York and New Jersey market place was strong during the fourth quarter as new originations equaled $157 million or 20% greater than new volumes realized in the third quarter.

The current quarter increase in loan activity is promising, yet from our perception does not imply customer sentiments has fully shifted in a positive direction. Much of our growth had come from taking business away from some of our competitors and many of our customers continue to be reluctant to expand their businesses until the economic conditions improve and they can anticipate sustainable business profits.

We remain optimistic about growth in Valley’s commercial lending portfolio and see continued opportunities throughout 2012. However, as is customary as Valley, loan growth is limited based on management’s emphasis on credit quality. Growing the balance sheet simply for the sake of size has never been the focus at Valley. Growing the most profitable and long term sustainable earning stream focusing of credit quality is the hallmark of Valley and ultimately drives the levels of portfolio growth.

As previously stated, many of Valley’s new commercial lending relationships originated throughout 2011 are largely the result of borrowers migrating from other financial institutions as opposed to expanding existing lending relationships due to growth in the economy.

The competition for high quality low loan to value projects remain intense in our market place. Due to the low level of market interest rates, the origination rates on many of these projects are rates considerably lower than similar or originations in prior periods. However, in growing the balance sheet, Valley’s management continues to be mindful of the bank’s asset liability mix and the bank’s aggregate interest rate risk exposure.

As an offset for the lower interest rates we are receiving on our loans, Valley’s management has been diligently reducing the company’s funding cost. We have continued to migrate a larger portion of our deposits away from high cost certificates of deposits and into non interest bearing and other low cost deposit products.

In addition, we actively utilize much funding strategies coupled with interest rate swaps to mitigate the duration risk associated with originating fixed rate loans in the current interest rate environment. We believe these tactics will continue to help us manage our interest rate risk into the future.

During the fourth quarter we continue to emphasize our fixed cost residential mortgage refinancing program which allows borrowers to refinance the New Jersey or Pennsylvania home for $499 including all lending fees, title insurance and recording fees. For the quarter, we processed nearly 4,000 applications and closed approximately $380 million in residential mortgage loans. For the year, we processed over 10,000 applications, a record for Valley, an increase of 25% for the amount processed just one year earlier.

As a secondary benefit of our aggressive marketing plan, our name recognition has soured and we attribute much of our non residential loan growth to this fact. As we enter Long Island we find that we clearly have strong brand awareness which should help us accelerate growth at the 16 offices we acquired on January 1.

With the acquisition of State Bank, we plan on introducing a spirited residential marketing campaign, highlighting a fixed cost residential mortgage refinanced program in New York. State Bank was a commercial bank by nature and for the most part focused predominantly on servicing this customer niche. Now we are able to offer a full suite of both commercial and consumer products via their branch network.

We have commenced training of State branch employees and Valley’s products and anticipate significant activity during the course of 2012. Already, we have hosted several meet and greet sessions with the State Bank customer base. Early indications reinforced our belief that there will be significant opportunity to expand upon many of the existing relationships.

Valley’s larger lending limit coupled with enhanced commercial and consumer product offerings such as cash management and our aggressive residential mortgage program provide a stimulus for us to develop a larger market share in Long Island.

From a systems integration perspective, we are on target for the full data system conversion to take place during the first quarter. Once the system conversion is complete, both Valley and former State customers will be able to transact business at any Valley location seamlessly. This should allow for early recognition of many of the anticipated cost saves. We are excited about the opportunity State Bank offers and are eager to work with our new staff to provide Valley’s relationship focused banking model on Long Island.

Valley now has 50 offices in New York City and Long Island. In an effort to assure these clients of our commitment to them, Valley will be opening executive offices at 1 Penn plaza in Manhattan. Both our senior staff and I will be spending time each week at this location in order to make ourselves readily available to this growing segment of our customer base.

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

Alan Eskow

Thank you, Gerry. As we collected in this morning’s press release and accompanying financial tables, Valley’s fully taxable equivalent net interest margin declined 12-basis points to 3.74% from the prior quarter. The contraction in the margins is due to several factors. First, during the fourth quarter of this year interest income attributable to the recovery interest on nonaccrual loans and prepayments fees on loans decreased by $1.4 million. The reduction accounted for 4-basis points of the fourth quarter decline from the third quarter.

Second, increased purchased premium amortization in the investment portfolio attributable to an increase in principal payment cash flows negatively impacted both the yield and interest income in the taxable investment portfolio. The impact of the increase amortization during the quarter amounted to approximately $1.7 million and negatively impacted the yield on taxable investments by 28-basis points.

Third, exclusive of the decline in interest income we’ve referenced earlier, the yield on the average loan portfolio declined 6-basis points from the prior quarter as the yield on new loans originated during the fourth quarter equaled 4%. The new volume loan yield was impacted by the large composition of residential mortgage and consumer Auto-loans.

In addition, from the third quarter Valley’s cost of deposits declined 5-basis points as Valley’s certificates of deposits continue to re-price at lower costs coupled with the increased reliance on non interest bearing deposits as a funding source. On average, for the fourth quarter, Valley’s non interest bearing deposits now total 28.3% of total deposits compared to 26.7% for the late quarter.

Additionally in the fourth quarter and similar to the third quarter, Valley recognized the additional cash flows on covered loan pools which Valley accounts for under AS C- 320.

During the quarter, the net interest margin was positively impacted by approximately 10-basis points by accretion of covered loan pools. The timing and recognition of this income is subject to a multitude of external factors and therefore we cannot predict whether Valley’s net interest income will benefit from similar adjustments in future reporting periods.

Separately, during the quarter Valley continued to aggressively manage its cost of funds. We have lowered rates on many of our savings and money market accounts. We anticipate the preponderance of savings to begin to be recognized in the first quarter as many of the rate reductions did not go into effect until late December.

Additionally, during the fourth quarter, Valley modified $435 million of long term borrowings resulting in a decline in rate equal to 95-basis points. In 2011, Valley recognized approximately $250,000 of the estimated annual $4 million savings. During January of 2012, Valley further modified an additional $150 million of long term debt.

The estimated annual interest expense savings on the aggregate $585 million of restructured borrowings is estimated to equal approximately $5.1 million. We modified the borrowings with no prepayment penalty or fees and extended the maturity dates on each instrument through more closely correllate with the expected duration of Valley’s re-pricing earning assets while also removing multiple core provisions.

During the latter half of the quarter, Valley liquidated approximately $140 million of investments. Valley intends to reinvest much of these proceeds into a combination of Valley originated residential mortgage loans and investment securities with lower regulatory risk weightings. Although the sale was slightly negatively impact both net interest income and the margin on a go forward basis, the pure economics of the transaction from a total return perspective were very desirable.

During the quarter, Valley recognized $12 million of gains on the securities sold. The gain on the sale of securities was significantly greater than the lost annual interest income net of reinvestment returns. We believe the returns would likely never have materialized had we held on to the securities due to prepayments and amortization.

In selecting which securities would have been sold, Valley analyzed those we believe were at risk of accelerated prepayment speeds in part as a result of the modified government heart program.

The securities liquidated were largely both Fannie Mae and Freddie Mac securities, which although only required a 20% regulatory capital requirement; do not represent an asset class in which Valley is currently interested in maintaining. In addition to the financial merits of the liquidation, the transaction enabled Valley to significantly reduce the bank’s exposure to both quasi guaranteed government agencies. In fact, we have not purchased any Fannie or Freddie mortgage backed securities since mid 2009 and have only seen our outstandings in these securities decline substantially.

For the full year of 2012, should interest rates remain near the current low levels and the reinvestment rate on loans originated and were modified, continue to be less than the current yield on our loan portfolio, we anticipate continued pressure on the margin exclusive of the potential impact due to infrequent items and the likely market rate yield adjustments required through purchase attributable to the State Bank acquisition.

Asset quality during the quarter deteriorated slightly from the prior period largely the result of three commercial credits totaling $22.5 million.

The linked quarter increase of nonaccrual loans of $16.6 million was driven in large part by the addition of the three commercial loans. In conjunction with the movements and non accruals status of these loans, Valley recognized approximately $6.5 million in net charge offs during the fourth quarter on two of the three credits as its collateral position on the third facility was deemed sufficient at December 31, 2011.

On an aggregate basis, total net charge offs for the quarter were equal to $16.9 million which includes $2.5 million of commercial net charge offs attributable to covered loans. Exclusive of covered loans, net charge offs increased on lean quarter basis from $4.8 million in the third quarter of 2011 to $14.4 million in the fourth quarter.

Valley’s provision for losses on non covered loans and unfunded letters of credit during the same period increased from $7.8 million to $11.9 million. For 2011, Valley’s provision for loan losses and non covered loans and unfunded letters of credit equaled $31.8 million, while during the same period, Valley’s net charge offs attributable to non covered loans equaled $29.3 million.

Although total nonaccrual loans increased from the third quarter, early stage delinquencies those defined as loans accruing and passed to more than 30 days declined significantly from the same period. As of December 31, 2011, the balance of $41.6 million is the lowest reported balance at any reporting period since before the financial crisis began in 2008.

Additionally, during the quarter Valley recognized a large other than temporary credit impairment of $18.3 million on a trust preferred security issued by one bank holding company. The issuer has been deferring interest payments since late 2009 as required by an agreement with its regulators. Valley’s analysis and ultimate decision to record the OTTI is largely due to an increase likely time period in which the issuers expected to defer interest. The decision to record the impairment in the current period was not a result of financial performance deterioration at the issuer, but rather an increase in uncertainty as to the timeframe over which Valley could reasonably anticipate receiving the expected cash flows. In conjunction with the credit impairment, Valley stopped accruing interest on such securities in accordance with bank regulatory guidelines. Further annual interest income will be negatively impacted by approximately $3.4 million.

Finally, non-interest expense on a lean quarter basis decreased approximately $925,000 from the prior period. As current expense of $2.3 million attributable to merger expenses associated with the state bank transaction were mitigated by a reduction in the impairment charge, uncertain loan servicing and a decline in salary and employee benefit expenses. We anticipate non-interest expense to increase in 2012 as a direct result of the acquisition.

As Gerry indicated earlier, we are on schedule with our systems integration and from a cost perspective, we anticipate realizing greater than the original estimate of 25% cost saved, most of which will be realized by the end of 2012.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from the line of Ebrahim Poonawala. Your line is open. Please go ahead.

Ebrahim Poonawala – Morgan Keegan & Co. 

Good morning guys. Gerry, I guess question for you. You mentioned in your opening remarks that most of the loan growth on the commercial side is coming from market share gains and I’m trying to reconcile that with if you have I guess increased focus on Manhattan and management of the opening of the new office. How do you see that loan growth in the absence of a big improvement in the economy, given how competitive pricing in that CREs have been in New York going forward? Like if you look out the next few quarters.

Gerald Lipkin

Well, I think a lot of our growth has been taking place across both New York and New Jersey. A lot of our clients still are reluctant as I said in my remarks to run out and borrow to expand their business. I think we are seeing more borrowing from some of our clients, but on the whole it has been relatively tepid. We have enjoyed some larger opportunities that came to us by way of transfer from other companies, other banks where they were not happy with the level of service they were receiving. We did see good growth as I mentioned in my remarks of course from the residential on that side as well. I don’t know that the economy is really heating up in the New York metropolitan area. I don’t see it.

Ebrahim Poonawala – Morgan Keegan & Co. 

Got you. Fair enough. And I guess a question for Alan. Do you see additional opportunities to restructure more debt and bring down funding costs this quarter or going forward? Looks like I guess you’re being able to do that without any pre-payment penalties.

Alan Eskow

Right. Now I don’t really see any other major opportunities at this point. But we’re always going to look at it and evaluate it, but I don’t see that at the moment.

Ebrahim Poonawala – Morgan Keegan & Co. 

Got you. And just the last question. You mentioned the tax rate is going to be 32% first quarter should it fall off closer to again 29% then jump going forward after that?

Alan Eskow

No. We run based on an annual rate. However, there are times when depending on transactions or events that occurred during the quarter it could force rates, a tax rate down as it did this quarter to a much lower effective rate. However, for the year it came in at about 32% and that’s what we’re expecting.

Ebrahim Poonawala – Morgan Keegan & Co. 

Okay, got you. Thank you very much.

Alan Eskow

You’re welcome.

Operator

Our next question is from the line of Craig Siegenthaler from Credit Suisse. Your line is open. Please go ahead.

Craig Siegenthaler – Credit Suisse

Thanks guys. Good morning.

Alan Eskow

Morning, Craig.

Craig Siegenthaler – Credit Suisse

Just looking here at the forward progression of the NIM and there is a lot of moving pieces as you identified on the call, but how quickly should we really get into your longer term target range of loaded mid 360 here?

Alan Eskow

Well, as you noticed I didn’t give you a new target or a changed target at this point. As you said, there’s just a lot of moving parts. I can’t predict things like prepayments and how quickly they’re going to occur, especially on things like the investment portfolio where the amortization kicks in and it causes a reduction in net interest income for the quarter. There’s just no way. So the best I can tell you, the things I’ve been telling you in the call today, it gives you a lot of different pieces to the puzzle that are moving on a constant basis.

Craig Siegenthaler – Credit Suisse

Got it. And then just looking at the growth here in the resi mortgage portfolio. I’m just wondering if you have any internal constraints here in terms of how fast this can grow and also if you have a limit in terms of what’s the contribution of your total portfolio, your loan portfolio from resi mortgage?

Gerald Lipkin

Yeah, this is Gerry. We do have limits, one of which though is the fact that we look at the resi mortgages that we hold in mortgage pools in the former Fannie and Freddie and in Ginnie Mae. They’re not really much different than the loans that we have on our own books. If you look at the performance on our own books, the residential mortgages on our own book, they’re unbelievably strong. As a result, if those portfolios pay down and to replace them, we would get a yield of 2% or whatever and with the same duration, we can put our own product on at 4% or 4.25%. It makes more sense to hold our own than to sell ours and then go into the marketplace and buy those securities. So we could see some modest increase in the residential mortgage portfolio occurring as those loans pay down. We do have controls though and we don’t want to change our complexion from that of the commercial bank to a drift. So most of our production we would probably sell in the future, but that being said, if we want to replace some mortgage back securities we’ll hold those mortgages.

Craig Siegenthaler – Credit Suisse

Great. Thanks, Gerry.

Gerald Lipkin

Okay.

Operator

Our next question is from the line of Steven Alexopoulos with JPMorgan. Your line is open. Please go ahead.

Steven Alexopoulos – JPMorgan

Hey, good morning guys.

Gerald Lipkin

Good morning.

Steven Alexopoulos – JPMorgan

I think I’ll start with mortgage rates seeming to flatten out here. I’m just curious, are you starting to see lower fees from your refi plan?

Alan Eskow

Lower fees?

Steven Alexopoulos – JPMorgan

Or lower – just lower refi activity?

Alan Eskow

No. the activity coming into January is a very strong one. We’ve seen activity in that rotation flow for the last several months in the 1,000 to not quite 1500 applications in a month. The telephones though keep ringing.

Steven Alexopoulos – JPMorgan

Got you. I’m curious too, with the Trump securities being moved to available for sale, do you plan to liquidate this? Is that how you’re thinking in 2012?

Alan Eskow

Not necessarily. We did it for a number of reasons. Number one, once you take an impairment you’re allowed to move it in. That’s number one. Number two, if there’s a recovery it gives us the ability to handle the recovery differently than if it’s in health maturity which would take a – you would recognize over the life of the instrument.

Steven Alexopoulos – JPMorgan

And maybe Gerry, just a final one. Looking at the fed projections that came out yesterday, what’s your take on this and what does it mean to you in terms of how you run the bank this year?

Gerald Lipkin

Well, we’re always cognizant of what the fed says. The fact that they anticipate keeping rates down at their present level till the end of 2014, I don’t know that’s a surprise or a shock. I can’t believe inflation has stayed as low as it has for as long as it has. The fact that they see inflation at 2% range. They say they’re not going to move it, but there’s no guarantee that later this year inflation jumps to 3.5% that they change – they don’t change their mind. We have to balance what we do as I said in my earlier remarks, constantly keeping an eye on our interest rate exposure and we take certain steps along the way to protect that exposure, even if it impacts on our earnings in the short run.

Steven Alexopoulos – JPMorgan

Okay. Thanks for the color.

Gerald Lipkin

Okay.

Operator

Our next question is from the line of Collyn Gilbert from Stifel Nicolaus. Your line is open. Please go ahead.

Aaron Brann – Stifel Nicolaus & Co. 

Good morning. This is Aaron Brann calling in for Collyn. How are you doing?

Gerald Lipkin

Alright. You don’t sound like Collyn.

Aaron Brann – Stifel Nicolaus & Co. 

I don’t?

Gerald Lipkin

Not exactly.

Aaron Brann – Stifel Nicolaus & Co. 

My first question is, after you get through the acquisition state, now that you’ve gotten through the acquisition state, do you have a non-interest expense run rate that we should be thinking about once you go through any of the restructuring charges or merger related charges that you may be incurring this quarter?

Alan Eskow

Yeah. I guess the best way you could look at it is whatever ours has been running plus whatever they had minus I guess whatever they had in their merger expenses less 25%.

Aaron Brann – Stifel Nicolaus & Co. 

Okay.

Alan Eskow

So I don’t have anything else to give you at the moment.

Aaron Brann – Stifel Nicolaus & Co. 

Okay. And in terms of your loan pipeline, it certainly sounds as though activity was strong in the fourth quarter. Any early indications on how that pipeline is shaping up a couple of weeks into the New Year?

Gerald Lipkin

As the rest of the year goes like the first couple of weeks I think we’ll be pretty pleased, but it’s kind of hard to project 52 weeks based upon a three week experience. But we did start out strong.

Aaron Brann – Stifel Nicolaus & Co. 

And is that trend similar to the trend you saw last year which is more of market share gain as opposed to any thinking…?

Gerald Lipkin

(Inaudible) sure. Some of it is – we are – it is coming, like I think of one particular situation which was somewhat significant which we took away from a much larger institution. Part of it is new money going out and part of it they’re refinancing their existing outstanding service.

Aaron Brann – Stifel Nicolaus & Co. 

All right. Well, I appreciate that very much.

Operator

Our next question is from the line of Dan Werner with Morningstar. Your line is open. Please go ahead.

Dan Werner – Morningstar

Good morning.

Gerald Lipkin

Morning, Dan.

Dan Werner – Morningstar

Could you just comment on the remaining balance of the trust preferred that you have and then did you acquire any additional trust preferred from State after the New Year?

Alan Eskow

No. we did not acquire anything from state and when you say the trust preferred, are you talking about the one…

Dan Werner – Morningstar

The one that was impaired…

Alan Eskow

Yeah…

Dan Werner – Morningstar

In addition to the one that was impaired, what’s the total balance of trust preferred?

Alan Eskow

I think it’s 41 million.

Dan Werner – Morningstar

41 million. Okay. And then just kind of generally on the commercial loan book. Did you see any increase in line usage over the quarter from your existing customers or was it pretty stable?

Gerald Lipkin

The line usage was pretty stable, but we are seeing as I mentioned new lines coming on, increased lines coming on. So our expenditure remains constant, the dollars go up.

Dan Werner – Morningstar

Okay. And then as far as the 499 refi program, that’s going to be continuing for the foreseeable future?

Gerald Lipkin

Absolutely.

Dan Werner – Morningstar

Okay, thank you.

Operator

Our next question is from the line of Gerard Cassidy from RBC. Your line is open. Please go ahead.

Gerard Cassidy – RBC Capital Markets

Thank you. Good morning guys.

Gerald Lipkin

Good morning.

Gerard Cassidy – RBC Capital Markets

Gerry, just a follow up on that answer about the increased lines, the new lines coming in. Are the new ones coming in being utilized at a greater or lower percentage of your existing lines?

Gerald Lipkin

It hasn’t changed. It’s pretty much the same.

Gerard Cassidy – RBC Capital Markets

Okay. You talked, Gerry, about opening up the office at One Penn Plaza, an executive office. Do you have any plans for new branches on Long Island now that the State deal is done or for that matter for any branches?

Gerald Lipkin

It is our intention over the next several years to increase the size of our presence in both Long Island and the rest of New York City and to continue increasing it. That is where we are focusing most of our new branch activity.

Gerard Cassidy – RBC Capital Markets

Okay. On the free loans that you identified in the commercial book that were non-performing, could you give us a little color, were they Commercial Real Estate or were they C&I loans and if they were Commercial Real Estate, were they New Jersey, Long Island?

Gerald Lipkin

They were all unique. It was a combination of CRE and C&I loans and one construction, that’s correct. It was a CRE construction, residential construction project and a C&I loan and they were – I’m just trying to think, they were also I think one was in New Jersey. I think one was in New Jersey, one was in…

Alan Eskow

One Rockland, one New Jersey.

Gerald Lipkin

One Rockland County and one New Jersey in terms of deconstruction in CRE.

Gerard Cassidy – RBC Capital Markets

Okay. And on the Trump that you moved into available-for-sale, I just want to make sure I heard you correctly. You felt that the quality of the issuer hasn’t really changed; it’s just that the length of time now is just going to be longer to get that money. What was the cause of the lengthening of the cash flow payments?

Gerald Lipkin

They were regulatory agreement and so we can’t be assured as to when they’ll be allowed to resume payments.

Alan Eskow

Although they do have the funds available in their holding company, they make the payment. At least that’s our understanding. They haven’t paid now for a couple of years and we just decided it was time.

Gerard Cassidy – RBC Capital Markets

Okay. So nothing had changed quarter to quarter that…?

Alan Eskow

No. Listen, maybe next quarter we’ll get pleasantly surprised.

Gerard Cassidy – RBC Capital Markets

Right. No doubt. The six – I think you guys indicated that your cost of deposits were – are now around 66 basis points.

Gerald Lipkin

Right.

Gerard Cassidy – RBC Capital Markets

In view of what the Fed came out with yesterday, keeping rates now at these levels through the end of ’14, what’s the likelihood that you can take the 66 basis points down to 10 over the next 12 or 18 months?

Alan Eskow

10? I don’t know about 10, but they’re definitely going to come down. We had indicated that we already made some movements even prior to the Fed. I think our expectations were that rates were going to be down. We’re seeing loans and investment yields down, and so part of what we had to do was drop interest rates on deposits. And so I think as I said, you’ll start to see more of that as we get into the first quarter in terms of the impact of that movement.

Gerard Cassidy – RBC Capital Markets

Great. Thank you very much.

Alan Eskow

Thank you.

Operator

(Operator instructions). Our next question is from the line of Nancy Bush from NAB Research LLC.

Nancy Bush - NAB Research LLC

Good morning guys.

Gerald Lipkin

Good morning Nancy.

Nancy Bush - NAB Research LLC

Question about State Bank. You said that it’s primarily been a commercial bank and you are introducing the resi mortgage product there and I’m gathering that that’s sort of the first wave of retail product that’s going to be brought into the bank. What, Gerry, is sort of the natural progression in getting an intuition like State to a greater mix of business like yours? Because I assume this is going to be something you do in the future as well.

Gerald Lipkin

Yeah. In State’s situation I think it’s going to come a little bit faster than in most others. For one thing and I give all the credit to the former management, they had a wonderful bridge staff, an extremely enthusiastic bridge staff. We’ve been very impressed here by how enthusiastic they are about taking on these additional products. I have met with just about all of their bridge managers and to a person they tell me how excited they are about being able to offer these products to their client base. So in the past, when we – if we bought a thrift, it’s a total transformation to teach them how to sell commercial. It’s easier to have them marketing retail products in a branch. So I think it’s going to be rather quick that we’re going to see the results we’re hoping for.

Nancy Bush - NAB Research LLC

Okay. And I’d also ask, on the market share gain issue, can you roughly quantify what you see coming – what’s coming to you from the larger institutions versus what’s coming to you from community banks in New Jersey, particularly that are still pretty troubled?

Gerald Lipkin

Most of our activity that comes to us comes from the larger institutions and most of what comes to the larger institutions comes in some way almost at no fault of the larger institution. But the larger institutions took over smaller community based banks and the community based banks, even if they were relatively large in size, they still functioned as a community based bank, were giving one on one service from the CEO of the company, from the President of the company. The larger banks that have moved into our area, simply because of their size and scope of operations, can’t deliver that type of service. That’s one of the reasons that’s prompting us to open up the executive office in Manhattan, because we want to remain close to the client base. And I think that’s going to help us in the future with our acquisition and I think that we’re going to continue to see the flow coming to us. Remember, the mega banks, the crumbs that fall off their plate are a tin size meal to us.

Nancy Bush - NAB Research LLC

Okay. I just have one final question for Alan. Alan, could you just quantify a little bit what kind of runoff you see in the CD portfolio, what kind of rotation out of higher rate CDs you see coming this year?

Alan Eskow

We’ve been seeing it all year long, Nancy. We dropped rates. We continue to keep rates low and depositors, some of them are coming off, believe it or not, still some products from three to five years ago that they locked in some fairly significant rates. So I can only assume that based on the lower rates we’re offering, that many of these people are either going to look for other alternatives or they’re going to just leave it there. So it’s a little hard for me to tell you how much is going to run off. I really don’t know that I have an answer for you there. But I can tell you that we’re going to continue to price down so that it all makes sense.

Gerald Lipkin

Nancy, one of the advantages that Valley has as being a commercial bank is that we can push for compensating balances on our loans and that helps build our demand deposit, our non-interest bearing base.

Nancy Bush - NAB Research LLC

Okay. Thanks very much.

Operator

There are no further questions at this time. Please go ahead.

Dianne Grenz

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

Operator

Ladies and gentlemen, this conference will be available for replay after 12:30 today until February 9th, 2012 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code as 231964. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and entering the access code of 231964. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts