Valley National Bancorp's (VLY) CEO Gerald Lipkin on Q2 2016 Results - Earnings Call Transcript

| About: Valley National (VLY)

Valley National Bancorp (NYSE:VLY)

Q2 2016 Earnings Conference Call

July 27, 2016 11:00 AM ET

Executives

Marc Piro – Senior Vice President, Public Relations

Gerald Lipkin – Chairman, President and Chief Executive Officer

Alan Eskow – Chief Financial Officer

Rudy Schupp – Senior Executive Vice President and President, Florida Division

Analysts

Collyn Gilbert – KBW

Frank Schiraldi – Sandler O’Neill

Matthew Breese – Piper Jaffray

Steven Alexopoulos – JPMorgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Valley National Bancorp Second Quarter Earnings Release Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to Mr. Marc Piro, Senior Vice President, Public Relations. Please go ahead.

Marc Piro

Good morning. Welcome to Valley’s second quarter 2016 earnings conference call. If you have not read the second quarter 2016 earnings release that we issued earlier this morning, you may access it from our website at valleynationalbank.com. Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.

Now, I would like to turn the call over to Valley’s Chairman, President and CEO, Gerald Lipkin.

Gerald Lipkin

Thank you, Marc. Good morning and welcome to our second quarter 2016 earnings conference call. This morning we are pleased to review Valley’s second quarter operating results and provide an update on the Bank’s previously announced strategic initiatives.

For the quarter, Valley generated net income available to common shareholders of $37.2 million, an 8.3% increase when compared to the first quarter of 2016. Top line revenue growth provided the foundation for the linked quarter increase in net income. Non-interest expense was negatively impacted by a few infrequent items which Alan will discuss in more detail during his prepared remarks. Exclusive of these items, non-interest expense materially declined from the prior quarter, as many of the strategic cost savings initiatives materialized.

During the fourth quarter of 2015, Valley outlined an aggressive branch consolidation coupled with a bank-wide cost reduction program, which went consummated, where expected to reduce annual operating expenses by $18 million. Nearly, $10 million of the total savings where originally anticipated to be recognized in 2016.

Today, I’m pleased to announce that we now anticipate the 2016 savings to equal nearly $15 million and the ultimate annual reduction in operating expense to eclipse $19.5 million, which is nearly 10% greater than originally announced. The additional savings are largely a function of further consolidation of our branch facilities coupled with technology enhancements for certain back office operations.

Valley’s 2015 branch efficiency program identified 28 locations to be consolidated based on our assessment of customer delivery channel preferences and branch usage patterns. Based on our continuous evaluation, we have identified an additional three former CNL locations in Florida, which we anticipate closing during the third quarter of 2016. Further of the 28 original locations identified, 27 have been consummated and we expect to complete the entire program in early October.

Another component of Valley’s cost reduction program was the increased utilization of technology and process improvements to decrease the Bank’s reliance on staff expense attributable to transactional activities. During the second quarter, Valley’s full-time equivalent employee level declined by 31 to 2,866. The current headcount not only compares favorably with the prior quarter-end, but for the same period one year ago when the bank had 2,899 full-time equivalent employees. Keep in mind, the reduction in staff has been achieved, while simultaneously we nearly doubled the Bank’s Florida presence to 35 offices and added over $2.5 billion in assets.

This expense reduction has been accomplished despite a significant increase in the Bank’s technology spend to enhance and add new customer facing delivery channels. The aforementioned expense reductions are no small accomplishment considering the expanded regulatory expectations, which have led to new risk management positions. The risk management programs implemented by the Bank over the past few years, coupled with our strict underwriting criteria, have enabled Valley to expand loan originations in categories which others have either been forced to or elected to scale back.

The Bank remains steadfast in its goal of reducing its core efficiency ratio. Excluding tax credit amortization, we are on track to lower the ratio to approximately 60% by year-end. During the second quarter, organic loan originations, excluding purchase loan participation, exceeded $900 million, an increase of over 45% from just the prior quarter. Origination activity was strong across Valley’s multiple business lines.

Residential mortgage activity for the quarter was brisk, as origination volume was strong across all of Valley’s geographies. This activity resulted in closings equal to $177 million, a significant increase from the prior quarter. However in the quarter Valley sold approximately $120 million of residential loans in an effort to manage the level of interest rate risk on our balance sheet.

As a result, the period-end residential loan balance contracted approximately $46 million from the prior quarter. Current application volume is robust and as long as the interest rate environment remains accommodative, we anticipate continued strong volume in mortgage banking originations led mainly by refinance activity. Consumer lending results for the quarter varied as direct to consumer collateralized personal lines of credit increased over 30% annualized from the prior quarter.

Valley’s automobile lending portfolio continues to be negatively impacted by the revised indirect dealer loan level pricing guidelines recommended by the CFPB and adopted by Valley. For the quarter, Valley originated a little over $70 million of which nearly 7% came from Florida. Presently, we have signed up over 100 dealers in Florida and expect the contribution from this geography to expand.

Additionally, the bank continues to focus on implementing sustainable initiatives to improve this business lines profitability. We have in recent – we have recently instituted several technology based improvements into this area, which we believe will have positive long-term benefits. That being said, we continually access – assess the returns of our lines of business, and when appropriate we’ll make the necessary decisions to ensure earns its cost of capital and achieves the Bank’s desired long-term profitability metrics.

Commercial lending was strong across all categories as both traditional C&I and CRE organic originations, each exceeded $300 million respectively for the quarter. In the aggregate, organic commercial lending activity increased over $200 million from just the prior quarter.

The expand volume was reflected throughout all of Valley’s geographies. The approved committed commercial pipeline continues to be strong, equaling approximately $600 million at quarter-end. As a result, we remain optimistic about levels of commercial lending for the balance of the year. Although origination activity was solid for the quarter, period ended C&I outstandings declined slightly from the prior quarter, largely due to a reduction in lines to both Valley’s Florida and asset-based customers.

The decline in balances was principally by design, as certain developer and warehouse relationships were encouraged to obtain alternative banking relationships. As those business lines, although profitable, were inconsistent with the Bank’s credit profile. Also, the reduction in some of our asset-based loans was a function of structure in pricing. This resulted from requests for financing alternatives omitting personal guarantees and/or LIBOR based pricing with spreads below our internal floors.

We have previously communicated growth at Valley is a goal not an obsession. Maintaining the Bank’s credit quality and retain – and returns remain paramount. For the quarter, total non-accrual loans totaled $47.9 million or 0.29% of total loans. The ratio of Valley’s total past due loans to total loans including both non-accrual and accruing past due loans was 0.49%, a reduction from 0.61% as of March 31.

Valley’s underwriting philosophy is unwavering with a focus on requiring borrowers to maintain significant equity in each loan facility. Our underwriting process stresses borrower capacity to pay and collateral values in multiple interest rate and economic scenarios, irrespective of the advance rates currently prevalent in the marketplace. During the quarter, our wealth management divisions moved forward on a number of initiatives which should help to improve our future non-interest fee income.

Under the direction of Rudy Schupp, our Florida President, an entirely new unit was built from the ground up. The division will operate under the umbrella of our trust department and is supported by a very senior and experienced staff of wealth managers and trust personnel. They will be operating from several of our Florida locations and focusing primarily on clients residing either full or part time in our Florida markets.

We are also pleased to announce that Hallmark Capital Management and New Century Asset Management, two of our subsidiary wealth management companies had been combined in an effort to reduce operating overhead. Just prior to combining the two companies, we were excited to report that Hallmark achieved the distinction of having over $1 billion on assets under management.

Before I turn the podium over to Alan, I would like to reiterate our focus on achieving the Bank’s 2016 performance goals. Despite the protracted low interest rate environment and challenging competitive landscape, we remain motivated to achieve our targeted revenue stream and expense initiatives.

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

Alan Eskow

Thank you, Gerry. For the quarter, total pre-provision revenue expanded 14% on an annualized basis, as strong loan growth provided the catalyst for increased net interest income and higher mortgage banking revenue, led the growth in non-interest income.

Valley’s net interest margin expanded to 3.14% from 3.08% in the prior quarter. The increase is largely attributable to a reduction in excess liquidity, which resulted in the total interest earning asset yield expanding by a similar 6 basis points.

The loan yield on a linked quarter basis, increased from 4.15% to 4.17%, mostly due to additional recovery interest and swap fee income. The increase in each more than mitigated the continued margin compression associated with the low interest rate environment. For the period, Valley’s new loan volume of $1.2 billion included both organic originations and to a lesser extent purchase loan participations.

The blended new volume rate was approximately 3.5% which in conjunction with normal principal loan amortization, creates approximately 2 basis points of sequential quarter margin compression.

The increase in the taxable investment yield is principally due to the reinvestment of maturing short-term treasury securities into higher yielding securities. Partly mitigating the increase in yield was additional premium amortization associated with an increase in mortgage-backed securities cash flows of approximately 25%.

The total linked quarter cost of funds remained flat at 0.78%, as non-interest bearing deposits grew approximately $100 million on average. As of period-end June 30, these accounts equal approximately 31% of Valley’s entire deposit base. In late July, a $75 million long-term borrowing with a cost of 5% matured and was replaced with alternative short-term funds.

The bank’s loan-to-deposit ratio equates to approximately 100%, a level at which we are very comfortable operating. Contributing to the increase loan-to-deposit ratio is the decline in time deposits says the Bank look to other short-term funding alternatives as opposed to certificates of deposit which are rate and term sensitive.

Non-interest income increased approximately $3 million from the first quarter as both current originated and previously held for sale residential mortgage loans sold in the secondary market equal to $128 million, an increase of approximately $75 million from the prior quarter. Origination volume remains vibrant and we anticipate continued strong residential mortgage gain on sale revenue for the remainder of the year should the mortgage interest rates remain at only at their current levels. Additionally including second quarter non-interest income was a $709,000 gain on the sale of assets, primarily emanating from the sale of two former branch locations closed in conjunction with Valley’s branch efficiency program.

Non-interest expense of the second quarter was $119.8 million, a slight increase from the prior quarter. Significant linked quarter increases in professional and legal fees of $1.6 million coupled with other expenses sparked the increase. The sequential quarter incremental periodic expense increases overshadow of the noteworthy reductions in salary and employee benefit expense. Many of the periodic expenses incurred during the quarter, reflected times, infrequent items, and we do not anticipate incurring similar levels of expense in future periods.

As I previously stated, Valley originated approximately $1.2 billion of loans during the quarter. Nearly $650 million were commercial real estate loans, coursing a linked quarter period-end increase in CRE outstandings of $433 million. A portion of the growth reflected purchased participations in which Valley underwrites each loan individually, applying Valley credit standards including minimum cap rates on appraised valuations.

Valley’s motivation to augment organic originations with participation is largely due to the enhanced ability to manage portfolio duration. In addition, participating and acquiring loans through bank partners as opposed to purchasing 100% directly through the brokerage community mitigates the potential negative implications of adverse selection for certain loans.

Valley’s growth in CRE is a function of the Bank’s macro credit underwriting and concentration risk, risk management processes. Valley has a diverse commercial real estate portfolio comprised of multiple property types such as retail, multi-family, industrial office and others. Each segment has unique underwriting criteria specific to the inherent risks. The bank spends tremendous resources monitoring and stressing – stress testing each portfolio. In part, as a result of this diligence, coupled with the Bank’s low historical loss rates and borrower equity requirements, we anticipate continued CRE growth within our balance sheet.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Collyn Gilbert. Please go ahead.

Collyn Gilbert

Thanks. Good morning, gentlemen.

Alan Eskow

Good morning, Collyn.

Gerald Lipkin

Good morning, Collyn.

Collyn Gilbert

Maybe if we could just start, I just want to try to kind of pick a part that how you guys are thinking about loan growth, obviously a lot of moving parts here, origination volumes are very robust, paydowns are big. Can you just comment – maybe give an outlook instead, do you see sort of an inflection coming at all on the rate of paydowns? And just sort of tying together how you see loan growth shaking out on an organic basis? And then what your appetite is for future purchases?

Gerald Lipkin

Well, I think – Collyn, it’s Gerry. I think a lot of the paydowns come from refinancing. People are taking advantage of the low interest rates. So as long as the interest rates remain low you’re going to see a higher volume of refinancing.

That being said, the economy itself is only growing roughly at 2% rate. So, new origination outside of refinancing is going to be tempered to some degree buyback. How long it stays at these levels, I think you’re going to be more dependent upon the Federal Reserve and actions they may take. People are selling properties also today because of the strong pricing and you’re seeing a lot of that taking place.

We are very conservative were though when it comes to commercial real estate financing, all types of financing, and one of the things we do do is we stress test to our own levels of cap rates irrespective of the cap rate that the appraiser uses. I think that’s one of the things that put us in good stead with our portfolio in the past and will in the future.

Collyn Gilbert

Okay. And your appetite for purchases; is it opportunistic? Is it that you’re managing the balance sheet recognizing how many kind of the acceleration of paydowns and you want to hold it to a certain level, which is why you’re kind of doing these purchases? And I know you’ve explained in the past, you can think about it too as an offset to security issue?

Gerald Lipkin

It’s just a combination. It’s really a combination of those things. At times we want to balance, the residential mortgage portfolio tends to be heavily when they refinance in the 30-year bucket. We don’t want to hold 30-year paper which will extend far beyond what has been in the past, when people are refinancing in the low-3%s – mid-3%s for a 30-year mortgage. On the other hand, the participations we buy into are generally a much shorter duration and they have a remaining life usually in at three-year to seven-year range, so that we’re actually in a much better position from a duration standpoint. And again, as Alan correctly pointed out, we underwrite every single loan to Valley’s, say, credit standards. We don’t buy everything that’s presented to us by a long shot.

Collyn Gilbert

Okay, okay. So does all this tied together to suggest that you’ll maintain kind of this mid single-digit loan growth rate you think in the next foreseeable future?

Gerald Lipkin

Yes.

Alan Eskow

Yes, I would say so, Collyn. That’s what you should expect.

Collyn Gilbert

Okay, okay. And then just shifting to the indirect auto, you talked about some of the changes you’re making there. How are you guys measuring the profitability of that business and maybe where does it stand today and where do you want to get it to? And just kind of I guess it sounds like now you do want to grow it.

Gerald Lipkin

Yes.

Collyn Gilbert

I think maybe there really – wondered maybe after the first quarter, if you could shut that down a bit. So maybe just talk a little bit more about sort of the financial drivers behind that business.

Gerald Lipkin

Sure. The one thing to keep in mind is the CFPB has their disparate impact measures that they use. I attended a meeting about a year ago, in which Director Cordray spoke. He did not direct his comments at Valley but he did speak about indirect auto lending and how the CFPB is concerned about disparate impact. And he gave some, say, what he called as safe harbors, areas that he felt were appropriate for a bank, because it’s very difficult to measure disparate impact when you’re buying paper from a dealer and there’s no indication as to whether it’s a male, female or what the ethnic background of the borrower is.

But he did give some safe harbors and we went through those. We adopted his recommendation as to a safe harbor. It did have an immediate impact negative on our volume. Although it is up to some degree coined back, we put in some enhancements to the dealers so they can better understand what they are going to be earning on the loan. As a result, it is come back to some degree.

We’ve also entered into some other arrangements to build auto volume in the future. We have an auto lease finance program that we’ve gotten into which is very attractive. We have a strong guarantor, who is behind the residual. So that was an inducement for us to get into the program. Not only that, they also guarantee the performance of the loans. So the volume of automobile paper should build back up again to a level that meets our expectations.

Collyn Gilbert

Okay. And then if you just in general terms like if this – if the indirect auto business, obviously it’s a – it’s been kind of you guys have been doing this for a long time. If that at a peak, it was generating a certain – I don’t know, do you measure it on ROE basis. I’m just trying to get a sense of – would versus where it is today and where you want to take it?

Alan Eskow

Yes, Collyn. Obviously, that is down today. It’s not what it was at one point of time, we do measure it all in. But that’s being said, it’s still – at this point an another line of business that gives us an outlet in the lending arena rather than just doing for example, so much of CRE. We like the cash flows and we’re hopeful that over time it will be able to come up with some efficiencies to increase the returns on that portfolio.

Collyn Gilbert

Okay, okay. That’s helpful. And then just on – yes, yes.

Gerald Lipkin

Collyn, just one another point to that, there is – there are corollary benefits that we get out of the automobile financing such as automobile deal or floor planning, which we have about a $100 million of lines available in that area, which has been – we’ve been in that business since the 1950s with a very, very strong track record. It also brings in an opportunity to do some dealership financing as far as their building are concerned. So there are some corollary benefits to the automobile business that don’t always show up when you simply look at the car volume.

Collyn Gilbert

Okay, okay, that’s helpful. And then just finally on expenses, I know, Alan, you indicated a couple of items there that were likely to be non-recurring. But, taking it again all into totality, give us a sense of where kind of that ongoing expense level should be on a run rate basis as we look out over the next few quarters.

Alan Eskow

Yes, it would be lower than where it is. I think Collyn we were pretty comfortable with the number we gave everybody at the early part of the year. I think we gave an overall rate of about $455 million annually. Unfortunately there are quarters in which that number can go up or down depending on events taking place which we had some of those during this particular quarter, but we are continuing as Gerry pointed out, to work hard, to bring down those expenses. So we expect to get close to a 60% efficiency ratio by the end of the year.

And just as an example though, we talk about infrequent items, I’ll just – I’ll give you a small taste of the fact that we had a loan that was a FDIC loan that paid off three years ago. We ended up having to take a hit this quarter for something that we thought it was long gone and it caused us a fair amount of money this quarter that we don’t expect to happen again. It was very unusual item, but unfortunately it happened and we had a requital loss. So things liked that occur. It drives our numbers up and down a little bit from quarter-to-quarter. But that’s unfortunately – that’s the way things go from quarterly.

Collyn Gilbert

Okay. Okay, I will hop out for now. Thank you.

Alan Eskow

Thanks.

Gerald Lipkin

Thank you.

Operator

We have question from Frank Schiraldi. Please go ahead.

Frank Schiraldi

Good morning.

Alan Eskow

Good morning, Frank.

Frank Schiraldi

Just couple of questions. First on the margin, just thinking about the NIM here, seems like there was a – maybe a few basis points of interest income – recovery interest income in higher swap fees as well. But if you kind of – if you exclude that seems like we may get into a pretty good number, normalized NIM. Is that reasonable? And then is it just sort of reasonable to assume that you have couple of basis points of core compression in that more normalized NIM going forward? Is that a good place to…

Alan Eskow

Yes, I would tend to agree with that. And I think you have to assume this is going to be at this level that quarterly margin compression just as a basis of rates we’re lending at. I mean there’s just not much you can do to offset that.

Frank Schiraldi

Right. But then the higher-priced borrowings at this point have largely matured or been prepaid, right? I mean, is there a lot more left?

Alan Eskow

Well we had that $75 million that went away this month just a couple of days ago, so that obviously is a help. We still have more out there that matures in 2018. We have some going out at 2020 – what is it, 2011 and 2022. So we still have some high cost borrowing out there. We constantly look at it, look for alternatives. And when and if it makes sense, we’ll maybe do something about that.

Frank Schiraldi

Okay. And then just one other question on M&A. You guys have talked about Florida as being attractive for potentially additional M&A. Florida has obviously also been a geography that historically has a tendency to get a bit frothy at points in the cycle. So just wondering if as you sit and look at the geography today if there’s certain areas either geography or product down in Florida now that you wouldn’t want to increase your exposure to and therefore might limit further M&A down there.

Rudy Schupp

Frank, it’s Rudy Schupp. I think that our – within our footprint in strategy, we are not discouraged about any of the markets. Having said that, we have our target institutions that we stay close to and we are asked to participate in most processes if someone engages in a process. But I wouldn’t say that there’s a market that’s discouraged.

Frank Schiraldi

All right, I appreciate it. Thank you.

Operator

And we have a question from Matthew Breese. Please go ahead.

Matthew Breese

Good morning everybody.

Alan Eskow

Good morning, Matt.

Gerald Lipkin

Good morning, Matt.

Matthew Breese

Alan, just thinking about your $455 million expense, the core expense number, is that for the year 2016, or is that the run rate, the annualized run rate you hope to get to by the end of this year?

Gerald Lipkin

Yes, it’s an annualized run rate.

Matthew Breese

Okay.

Alan Eskow

I was hoping you weren’t going to say it was a quarterly number. I got a little nerve there Frank – Matt.

Matthew Breese

Okay. So that’s the quarterly annualized run rate you hope to get to by the fourth quarter?

Alan Eskow

Not quarterly.

Matthew Breese

Got it. Right. Okay. And then thinking about the margin and the compression, you were talking about, is there going to be a little bit more of a pickup from the borrowings you’re pricing or do you think we will see overall compression from this quarter’s level?

Alan Eskow

Well, the borrowing that just matured is going to help us beginning next, I mean it only matured at end of this month, so we will get two months of benefit out of that $75 million which matured at 5%. So we’re going to pick up something there, but that being said, we still expect to see some core margin compression every single quarter until something changes.

Matthew Breese

Right. I’m just trying to compare the core margin compression versus prior guidance of getting to 318 to 325 for –

Alan Eskow

I think we revised that a little bit at the end of last quarter and said we didn’t really expect that. And I think we said we were much more at the lower end. And that being said, that would have been 318, so this quarter came in at 314. It’s better than where we were last quarter by 6 basis points, but you are still going to have the core compression. Also, if you remember, we reported in the first quarter the PCI, we had an adjustment on some PCI loans, which impacted our interest income on PCI loans going forward. So that impacted the original number we gave you of 318 to 325, so 318 to 325 is not a number that I think you are going to see.

Matthew Breese

Okay. Okay, and then just hopping to taxi medallion portfolio. It looked like there was some deterioration this quarter. Were the ones that deteriorated, were those New York City medallions or medallions in some other area?

Alan Eskow

No, our New York City medallion portfolio which comprises the vast bulk of our taxi medallion loans, are all performing at this point.

Matthew Breese

Okay. Are you looking to exit that business at all, or are you going to maintain –??

Alan Eskow

I don’t know. It all depends upon what the city of New York does as far as Uber is concerned.

Matthew Breese

Okay. I will leave it at that. Thank you very much.

Gerald Lipkin

Okay.

Operator

We have question from Mr. Steven Alexopoulos. Please go ahead.

Steven Alexopoulos

Hi, good morning everybody.

Gerald Lipkin

Good morning, Steve.

Alan Eskow

Good morning.

Steven Alexopoulos

So one of the hot topics this quarter has clearly been CRE concentration given some of the commentary out of BankUnited. Can you guys talk – are you seeing any increased scrutiny yourself on your concentration of commercial real estate loans? I know you are over 300% or is it just business as usual?

Gerald Lipkin

We have always scrutinized our commercial real estate portfolio on our own. Over the past several years we have artificially imposed cap rates that were somewhat higher than the appraisers were sending in valuations at. But we felt that making loans using crazy cap rates would only get banks in trouble just like making subprime residential mortgages did.

So for some time now we have been setting our own floor coming up with appraisals that give us a level of comfort. As long as we get products that meets our criteria, we’re happy to forward and we haven’t had any pressure regarding our levels of commercial real estate as long as they fall into those categories that we’ve been following. If you start to do apartment houses using a 2.5% or 3% cap rate you’re going to have problems. If you are doing them at 5.5% cap rates, chances are you won’t have problems, particularly if you maintain your loan to value using those cap rates.

Steven Alexopoulos

That’s helpful. I appreciate that commentary. With the loan participations, are you guys able to build a relationship with the borrower, or does that just stay with the originating bank?

Gerald Lipkin

It stays pretty much with the originating bank.

Steven Alexopoulos

Okay. That’s what I figured. And then just shifting to Florida for a second, some of the Florida banks also seem to be getting a little bit more cautious on credit, just where we are in the cycle. Do you guys still generally like what you are seeing there in terms of the term structures, everything, or are you seeing any need to maybe tighten a bit?

Rudy Schupp

It’s Rudy Schupp. I was having a dialogue with our Chief Credit Officer just yesterday about it and other colleagues. And there is – it’s interesting because I think it’s getting a little tougher on the lending front largely because we are we think common sense lenders and conservative lenders and we’re finding profiles of clients that are looking for non-recourse structures, and our judgment don’t deserve non-recourse structures.

From a pricing perspective I think that we have best-of-breed pricing and we use it appropriately to the risk involved. I think from an advance rate perspective, if we’re dealing with real estate purpose lending, we tend to be conservative. There are lenders without a doubt that have much higher, very aggressive advance rate structure. And then from a cash flow underwriting perspective, I think we’re common sense and conservative, and yes, we’re finding more lenders that will accept skinnier debt service coverage ratios and so on. So it is that part of the cycle it seems where banks are – I won’t desperate for lending, but aggressive about lending and are relaxing standards below that which we will accept. And so we pick our spots and our transactions. I think we are all in it together from a lender perspective, a credit perspective, our risk management team in general. And so I think sticking to our guns means that we will sustain ourselves through any next downturn. But Florida is becoming frothier from a structuring and pricing perspective.

Steven Alexopoulos

That’s really helpful, Rudy. Maybe just if I could squeeze one more in. I know you guys own many of your branches. When you look at where the branches are being carried, are you able to close and exit them without taking a writedown?

Alan Eskow

Yes. For the most part, I would say the answer is yes. I mean we’ve just sold, for example, as I pointed out, a couple of branches this past quarter that we had on our books and we had a gain on those. I know there’s – as we move into the next quarter, I think there was another one that got sold that also was going to have a gain. So for the most part, I would say that’s correct. There’s always going to be a potential anomaly where that won’t really be the case, but we also have an awful lot of leased branches as well and so we are trying to exit those that we’ve closed down. A lot of those are trying to make deals with the landlord and figuring out a way to pay them something up front so we get out of the lease if it extends longer than we’d like.

Steven Alexopoulos

Thanks for the color, everyone. Appreciate it.

Alan Eskow

Okay.

Operator

[Operator Instructions] At this time, there are no further questions in queue.

Marc Piro

Thank you for joining us on our second quarter conference call. Enjoy the rest of your summer.

Operator

Ladies and gentlemen, this conference will be available for replay after 1:00 PM Eastern time today through midnight Eastern time on August 27. You may access AT&T Executive Replay system at any time by dialing 1 (800) 475-6701 and entering the access code 396066. International participants dial (320) 365-3844. Those numbers once again are 1 (800) 475-6701 and (320) 365-3844, access code 396066. That does conclude your conference for today. Thank you for your participation and for using AT&T teleconference services. You may now disconnect.

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