Valley National Bancorp
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Ladies and gentlemen thank you for standing by. And welcome to the Valley National Bank Second Quarter Earnings Call. At this time all participants are in a listen-only mode, later there will be an opportunity for questions. (Operator Instructions) As a remainder this conference is being recorded. I would now like to turn the conference over to your host Ms. Dianne Grenz. Please go ahead.

[Dianne Grenz:]

Thank you. Good morning. Welcome to Valley’s second quarter 2013 earnings conference call. If you have not read the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules for the first quarter from our website at valleynationalbank.com. Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings including those found on Form 10-K, 8-K and 10-Q for complete discussion of forward-looking statements. And now, I’d like to turn the call over to Valley’s Chairman, President and CEO, Gerald Lipkin.

[Gerald Lipkin:]

Thank you, Dianne. Good morning and welcome to our second quarter earnings conference call. We are pleased with the second quarter results as the earnings total past due loans, non-accrual loans, non-performing assets and credit side assets of the bank all show signs of improvement. Furthermore, we anticipate continued core net interest income expansion as we move into the second half of 2013. Although the economy and regulatory environment remain challenging, we are beginning to witness the opportunity that provide for growth in both the balance sheet and net income. Loan prepayments continue to slow and Valley’s portfolio of non-covered loans expanded on a linked-quarter basis for the first time in a year, as we’ve also experienced broad-based growth in both Valley’s commercial and consumer lending portfolios. For the quarter, we originated over $970 million of loans which represented one of the best quarters of originations in the bank’s history. Originations in the consumer lending portfolio were largely driven by activity in Valley’s residential mortgage department, although consumer lending largely in direct auto activity was also brisk with new originations increasing 10% above the first quarter. During the second quarter, we closed over $480 million of residential mortgage loans approximately 81% of which we either sold or targeted for sale. The recent increase in market interest rates have negatively impacted application volume. However, we have also enhanced the bank’s future profitability by beginning to retain a larger amount of originations in the portfolio, now that we are closing loans at interest rates where they are holding in portfolio. In response to the increase in market rates, we have modified our marketing strategies to highlight Valley’s $1899 fixed cost purchase program, which similar to Valley’s $499 refinance program covers the course of title insurance and all bank fees. We anticipate significant traction in this product, as the application volume begins to shift from refinance activity to that of a purchase market. Additionally, effective July 1st, we introduced a new low fixed cost product for two to four family homes located in New Jersey, New York and Eastern Pennsylvania. We believe this market offers a real opportunity as we have historically focused primarily on traditional single family home financing. Even during the refinance move Valley’s origination volume of loans paled in comparison to the major players in this field. With the aforementioned product expansion, we believe even capturing a small percentage of this marketplace could produce significant results. Consequently, while the increase in market rates is expected to negatively impact residential mortgage refinancing and result in a decrease in gain on sale of revenue for the remainder of the year. The overall impact maybe offset by the new products just mentioned. Furthermore, as a positive, the increase in rates as improved the pricing profile on many commercial products. During the last year, as market interest rates covered at historic lows and thanks competed on price to obtain business. We remain cautious about expanding loan growth merely to increase the size of the balance sheet. At Valley generating positive returns priced appropriately for both the inherent credit at interest rate risk as always been our focus, putting on large volumes of long-term low interest rate loans or investments ultimately place undue pressure on bank capital and future earnings. However, the increase in market rates is now shifted the pressure, and for many commercial credits the market dynamics have improved as to where the risk reward relationship is more rationale. During the second quarter, we originated over $315 million of commercial credits an increase of approximately 4% from the first quarter. Also our new loan pipeline is the strongest we have seen in many years. As such, we expect new commercial lending origination volume in the third quarter to exceed the second quarter results. Hence as a result of this activity we are guardedly optimistic that we will see an increase in our net interest margin in the third quarter. Additionally, as customary and expected as Valley we have not denigrated or relax credit standards in an effort to expand volume. Quite simply from our perspective, pricing within the marketplace is returning to levels both equitable for the borrower and the bank. With regard to the marketplace, we are still witnessing extreme competition for quality credits, although pricing has increased other loan terms opt to remain overly accommodative and from Valley’s perspective to create undue risk. The relaxing of personal guarantees coupled with expanding the acceptable loan to value and duration thresholds are more common trends we have absorbed. We continue to remain diligent in our underwriting and resist moderating our criteria simply to grow the bank. As we look to profitability, profitably grow - as we look to profitably grow the balance sheet, we remain focused in our pursuit to reduce operating expenses throughout the organization. As a result of the decline in mortgage banking activity, we expect a commensurate percentage reduction in operating expenses. We have already reduced staffing in the residential mortgage department by 20%, and we’ll continue to do so if market conditions warrant such action. In addition, we have undertaken other steps to reduce operating expenses. For example in just the last year alone we have announced or closed six branch locations that were either underperforming or there were opportunities to consolidate services with another nearby location. However, we adamantly believe that the value of deposits will increase as interest rates rise and we must be conscious of closing locations, which may prove to be more valuable and a higher interest rate environment. To remain prepared for the lightly shift in the benefits of a broad-based branch network, well simultaneously furthering our efforts to reduce expenses; we have pursued alternative strategies rather than simply closing branches. We have combined the branch manager position at nearly 70 of our locations, to put this in perspective the cost saves attributable to just this one action are roughly equivalent to closing another 10% to 15% locations. When contemplated in conjunction with the aforementioned actual branch closings in just the last year, we have reduced the closes of our branch network by approximately 10%, while only having to close less than 3% of our locations. As I stated earlier, we firmly believe that as interest rates rise, the importance of deposits and the associated value of our branch in generating those deposits will be enhanced. It would be shortsighted to naively close a long-term valuable asset due to current short-term economic conditions. At Valley, we remain vigilant in continuously optimizing the cost structure and reducing expenses where we’re approximate. In just the last year staffing levels at the bank have been reduced by over 2% and we anticipate continued contraction as we automate more processes. Reduce the size of our branch locations and enhance the utilization of technology. Our efforts to optimize staffing levels is a major accomplishment considering the implementation of additional regulatory requirements throughout the bank as mandated by Dodd-Frank the CFPB and our primary regulators. To further reduce labor expense of the bank during the quarter Valley Board of Directors approved the freezing of our defined benefit employee pension plan, the executive benefit equalization plan and the Board of Directors pension plan. Well a painful step to take a defined benefit plan has become a very expensive benefit due to the costly and often unpredictable nature of this expense. Shortly, Alan will discuss the impact of this action that what the impact of this action will have on future period expenses in more detail. We have been and remained proactive in reducing operating expenses both were appropriate and inline with the long-term interest of the bank. In summary, we are guardedly optimistic about enhanced income opportunities in the coming quarters. The slow down in loan prepayments coupled with the increase in market interest rates is encouraging and should have a positive impact on Valley’s net interest margin and income. Alan Eskow will now provide some more insight into the financial results.

[Alan Eskow:]

Thank you, Gerry. The tax equivalent net interest margin declined slightly from 3.18% in the first quarter to 3.15% in the second quarter. The linked quarter 3 basis point decline albeit negative is a significant improvement from the prior quarter linked period declined in the margin of 23 basis points. Net interest income for the quarter was a $109.9 million relatively in line with the results reported in the first quarter. Earning asset yields contracted 6 basis points on a sequential quarter basis to 4.34% as the 6 basis point increase in loan yield was more than mitigated by a contraction in investment yields coupled with the continued increase in average excess liquidity for the quarter. The decline in investment yield is largely attributable to new investment purchases during the quarter of approximately $385 million with a weighted average yield of 2.22%. Many of the new purchases were mortgage-backed securities with higher coupons and to a lesser degree corporate securities with short to intermediate stated final maturities. During the quarter Valley recognized nearly $8 million of premium amortization expense related to investment securities which negatively impacted our investment yield and net interest income. We have historically purchased securities with higher coupons and larger premiums. As of June 30th the unamortized premiums on mortgage-backed securities was approximately $64 million of which we are scheduled to amortize approximately $32 million over the next 12 months based on prepayments fees recognized in the second quarter. If market rates remain at or close to the increase current levels we anticipate a decline in future amortization which would positively impact a portfolio’s yield and net interest income. The increase in loan yields of 6 basis points is largely the result of additional accretion on purchase credit impaired loans. We anticipate additional accretion in future periods from the purchase credit impaired portfolios as the credit performance of each pool has improved resulting an increase expected cash flows and a net reclassification from non-accretable to accretable yield. Although interest rates have recently increased absolute yields are still had historically low levels and the competition for a high quality credits remains intense throughout the market place. As a result of these conditions credit spreads remain thin resulting an yields on new loans originated to the below the current loan portfolio yield. During the quarter, the weighted average yields on new loans originated and held in portfolio was less than 3.5%. We anticipate the new volume yield to improve as margin rates increase. However we do not expect the increase yields on new originations to have a positive impact on the overall loan portfolio yield until market rates increase the level significantly above current rates. As market interest rates improved we anticipate shifting a portion of Valley’s residential mortgage volume from a strategy of originate and sell to that have been originate in whole model. The increased loans held in portfolio will likely reduce Valley’s excess liquidity position and as a result positively impact both the net interest margin and net interest income. With the expected decline in liquidity due to the fore mentioned change in residential mortgage strategy coupled with the new loan volume Gerry referenced in his comments. We expect an increase in aggregate earning asset yields for the remainder of 2013 assuming market interest rates remain at or above current levels. Valley second quarter total cost of funds was 1.18% a decrease of 3 basis points from the prior quarter. The cost of deposits declined 3 basis points to 0.43% as on average the composition of non-interest bearing deposits the total deposits increased approximately 1% and the average composition of time deposits to total deposits declined by slightly less than 1%. The decline in funding cost is expected to continue as loan terms certificate of deposits repriced at current market rate and Valley continues emphasizing the importance of non-interest bearing deposits throughout the bank’s branch network. As a percent of total deposits, non-interest bearing demand deposit accounts represent approximately 32% of the entire deposit base. When combined with Valley’s long-term borrowing portfolio approximately $6.5 billion or 45% of Valley’s entire funding base is largely immune to increase interest rates. We expect continued improvement in the cost of funds although on an isolated basis the market compression on asset yields due to new volume rates largely mitigates the entire benefit that being said we anticipate other factors to positively impact earning asset yields and the margin in future quarters. The additional interest accretion recognized on purchase credit impaired loans in the second quarter of approximately $2 million is expected to double in future quarter assuming forecasted cash flows remain inline with expectations. Additionally if current interest rate levels remain static due to a likely contraction in market prepayment fees we anticipate a decrease in premium amortization in the investment portfolio. Finally we expect to reduce a portion of the excess liquidity through loan growth when combined we are optimistic these variable will expand both net interest income and net interest margin. The lower provision for losses on non-covered loans and unfunded letters of credit when compared to net charge-offs is the result of a lit née factors. The overall credit quality the institution improved from the prior quarter as total accruing pass-through loans declined shortly from the prior quarter. In addition both criticized assets and non-performing assets also declined from the prior linked quarter. As discussed in both our prior earnings calls and reflected in our regulatory filings the actual net charge-off amount recorded in each period may not be represented of the actual provision due to the methodology used to determine the quarterly reserve. Non-interest income for the quarter was $32.9 million an increase of $1.6 million from the first quarter. $14.4 million of the income was attributable to mortgage banking activity as the bank originated and sold approximately $475 million or residential loans during the quarter. Due to the increase in market rates origination volume in the third quarter is expected to decline significantly from the second quarter. Additionally as market yields on this product have increased Valley has begun to shift strategy from that have been originate and sell approach to an originate in whole model. As a result of these events we anticipate a reduction in gain on sale activity in the third quarter. A portion of the decline in non-interest income will be mitigated by increased interest income attributable to expanded portfolio volume. However we do not expect the increase in interest income to fully offset the contraction in gain on sale income. Loan volume is dependent on both purchase activity and the absolute level of market interest rates. Non-interest expense for the quarter was $95.3 million nearly identical for the amount reported in the first quarter. However, the second quarter results included a few infrequent items which we do not anticipate recurring in the third quarter. Second quarter FDIC insurance expense of $5.6 million included approximately $1.6 million of adjustments to our assessment imposed by the FDIC. Based on our current profile, we expect to incur future quarterly assessments of approximately $4 million. Additionally with the expected decline in mortgage banking activity, we have begun to actively address staffing levels and other direct expenses throughout the department. It is likely non-interest expense attributable to mortgage banking will decline by approximately $1.5 million to $2.0 million in the third quarter, in part as a result of these actions. Further in June, the Board of Directors approved they freeze of all benefits related to the company’s defined employee and director retirement plans effective December 31, 2013. As a result of this action, we anticipate recording approximately $2.1 million less in non-interest expense over the next six months. Additionally retirement related benefit expenses in 2014 will be considerably less as the increase in expense attributable to expanded employer matching 401(k) contributions will be a fraction of the previously recorded annual pension expense recognized by Valley. As a result of these proactive strategies to reduce non-interest expense, we anticipate third and fourth quarter recurring non-interest expense to be about $92 million a quarter. Our effective tax rate declined during the quarter as a result of management actions to effectively use corporate structures to our benefit as briefly discussed in our press release. Additionally, our use of tax credits also reduces our effective rate. These credits generally require an investment by the bank that is amortized over the life of the credit. The amortization expense approximated to - approximated $2.6 million during the quarter and was reflected in other expenses. Although these expenses negatively impact our efficiency ratio on an overall net basis, the tax credits have a positive impact on net income, currently we anticipate using more tax credits in the future, so long as they remain available and accretive to net income. We continue to actively manage the bank’s capital position, remaining cognizant of growth opportunities in the marketplace and new regulatory capital guidelines. Improving the capital efficiency of the organization where by balancing both risk-weighted assets and regulatory capital in the framework of product pricing and rationalizing the return on net income on an important focus at the bank. During the second quarter, we announced the redemption of $15 million in the principal face amount of trust preferred securities expected to be completed tomorrow. As a result of the new Basel III capital rules trust preferred securities for Valley will be faced out from counting towards Tier 1 equity effective January 1, 2015. Our Board has authorized the management to retire the remainder of our trust preferred securities in a timely manner to confirm to the new Basel III guidelines and to adjust our composition of regulatory capital to both reflect the new guidance as well - as well as reduce our cost of capital. Valley currently remain, maintains strong capital ratios as evidenced by a Tier 1 common regulatory capital ratio of 9.37%. Presently this ratio exceeds the fully faced in minimum Basel III Tier 1 common capital ratio including the full capital conservation buffer by 237 basis points or over $270 million of common equity. This concludes my prepared remarks and we will now open the conference call to questions.

[Operator:]

(Operator Instructions) And your first question comes from the line of Ken Zerbe of Morgan Stanley. Please go ahead.

[Ken Zerbe:]

Hey thanks. First question I had just on the FDIC, the higher accretion in the non net interest income, want to make sure that, because obviously you’re talking very positively about this does add to NII, but just want to make sure that we’re thinking about this right that this has a, I’m going to say 80% offset in fees such that you’re fees actually go down by 80% of the increase in NII. So it is right to think that, the net impact of the higher, the better accretion is largely offset to your lower fees?

[Alan Eskow:]

Not to lower fees it’s an income offset.

[Ken Zerbe:]

Well that’s, yes I mean lower accretion from the FDIC and little fixed asset?

[Alan Eskow:]

It’s a non-interest income offset.

[Ken Zerbe:]

Got, okay, but that is the right way of thinking about that the vast majority really doesn’t hedge.

[Alan Eskow:]

Yes, right that’s correct.

[Ken Zerbe:]

Okay, okay I understood. Thanks. And then I guess, can you be little more specific in terms of - you’re talking about the pricing improving, I think we’ve gone mixed messages I guess from, why that the different banks this quarter where exactly are you seeing the better pricing, which products how maybe how much of improvement you are seeing versus where we were say a couple of months ago.

[Gerald Lipkin:]

This is Gerry Lipkin. I think we are seeing it in our commercial real estate, I think the spike up in interest rates the 100 - approximately 100 basis point increase has been reflected in underlying co-op loans, we’re seeing higher pricing in those loans, we’re seeing higher pricing in some of our garden apartment type multi-family loans. I think that’s, its starting to settle in of course the board was starting to see higher pricing in the residential mortgage area for sure. We were down pricing a 30-year fixed somewhere around 3.5% and right now that number is about 4.25% to 4.5% so that’s a significant change. We don’t want to keep loans on our books at 3.5% or 3.25%, if you’re putting them on the books 3.25% you’re certainly not going to help your net interest margin. If you’re putting them on your books at 4.25%, 4.5% you are helping your net interest margin that’s one of the reasons why we wouldn’t hold that one level, we would hold that at a different level.

[Alan Eskow:]

Hey Ken just going back to your other question for a minute, not all of our PCI loans are covered by the FDIC, a lot of those are loans that we acquired from state for example and another outward purchase. And so therefore if there is an adjustment and accretion adjustment it’s not necessary that doesn’t necessarily get offset all, by non-interest income. So that’s a gain, to the net - to the bottom-line pre-tax.

[Ken Zerbe:]

Got it, great. Okay thank you very much.

[Operator:]

Okay, thank you. And the next question is from the line of Steven Alexopoulos of JPMorgan. Please go ahead.

[Steven Alexopoulos:]

Hey good morning guys.

[Gerald Lipkin:]

Hey good morning.

[Alan Eskow:]

Good morning.

[Steven Alexopoulos:]

I want to start with the new originating hold model for the resi mortgage, are you going to essentially hold all of your production?

[Gerald Lipkin:]

We never hold all of our production. We will be holding a much larger percentage that we did in the past.

[Alan Eskow:]

You know we always look at it in terms of our needs, in terms of asset liability management, we look at credit quality and so there are always going to be loans that are going to be originated that are going to be available to be sold it just maybe a lot lesser number than we’ve done in the last couple of quarters.

[Steven Alexopoulos:]

30-year fixed rate mortgage that will start adding to portfolio as well?

[Alan Eskow:]

We hope so and could be, yeah. We’ve always looked at our entire composition of the balance sheet, you can’t take out one category and look at that, this is an entire asset liability strategy if you will, and it changes with the interest rate levels and, what kinds of products we can do.

[Gerald Lipkin:]

The long-term historically we found that the duration on a 30-year fixed and the duration on a 15-year fixed were very close. But when the interest rates on a 30-year fixed cut down below 3.5% in some cases, some banks were offering in below 3% that loans duration certainly is going to go out a lot longer than the historic 7, 8 years that we see on a fixed rate mortgage. That’s one reason we did not want to hold those in portfolio. But as rates gravitating north of 4.25%, 4.5% maybe close to that, if they keep moving in this direction they could hit 5%, if that be the case, the duration will go back more closely aligning itself to our historic numbers that’s the reason we’ve made the change.

[Steven Alexopoulos:]

So given this new model maybe Alan do you have an estimate of where like sell revenue could go to I mean because that get cut in half what do you think about third quarter?

[Alan Eskow:]

Sure. Could easily be that.

[Steven Alexopoulos:]

Okay. And then on the margin guidance which I think I get it but I’m looking at the loan portfolio yields I guess around $4.5 this quarter you are adding you said 43.5. Are you added a $3.5 in 2Q securities yield $2.6 I think you said you are adding $2.2. How are you thinking about reinvestment rates? Does this all basically just cash going from securities book into longer term mortgages that’s going to drive higher NIM and NII or are you assuming reinvestment rates actually improve above?

[Alan Eskow:]

A lot of this is going to be going into commercial loans as well and the duration on those is a lot different.

[Steven Alexopoulos:]

But you are assuming that core earning asset yields continue to decline it’s just a mix shift phenomenon essentially? Right.

[Alan Eskow:]

You know Steve I think the way you really have to look at this is a number of factors one is we had this accretion. So we theoretically if you look at it been penalized to some extent and you can only recognize it over a longer period of time as the credit quality in the pools do better. So that’s part of what we are seeing here, the second thing is we’ll be seeing as Gerry indicated larger revenue coming out of things like commercial real estate that we are putting on at higher levels. We are also going to be using we are sitting with the still a fair amount of liquidity 25 basis points. If I go from 25 to 4 or 4.5 or whatever that number is it automatically increases my net interest income line.

[Steven Alexopoulos:]

Okay. Maybe just one final one.

[Gerald Lipkin:]

And also Alan pointed out the amortization of the premiums we pay on higher coupon investments as rates move up that amortization slows down the yield on that portfolio goes up.

[Alan Eskow:]

You know one of the things we’ve already seen and of course we are not through the month yet but we started to see a decline of prepayments running around 20%. Now that holds you can do the calculation yourself as the work we are having.

[Steven Alexopoulos:]

Okay. That’s helpful maybe just one final one. Alan the $92 million run rate you spoke off on expenses I guess the way to think about that is some of these pension benefits kick in at 2014 that will step down further.

[Alan Eskow:]

Right.

[Steven Alexopoulos:]

Could you give us a sense of where that could step down to?

[Alan Eskow:]

I’d rather not tell you that number at this point I mean it could be let’s say it could be in the $5 million to $8 million number.

[Steven Alexopoulos:]

For the full year benefit?

[Alan Eskow:]

Yes.

[Gerald Lipkin:]

Yes.

[Steven Alexopoulos:]

Yep. Okay. Thanks guys.

[Operator:]

Thank you. Next question from the line of Nancy Bush of NAB Research. Please go ahead.

[Nancy Bush:]

Good morning guys. How are you?

[Alan Eskow:]

Good morning.

[Gerald Lipkin:]

Fine. Thanks.

[Nancy Bush:]

Gerry I guess this is the most optimistic I have heard you be and I guess a long time and can you just tell me if there is any particular catalyst here I mean in listening you today it’s sounds like some switch has been flipped somewhere and I’m trying to figure out where because it hasn’t quite made it out here at the (indiscernible) County yet.

[Gerald Lipkin:]

Well I have seen and we’ve all seen interest rates you just how you watch the 10-year U.S Treasury as an indication of all interest rates. The 10-year is gone up 100 plus basis points from its low level 45 days ago. We’ve seen as a result of that though a general rise in interest rates. We are seeing a slow down in our prepayments both in the investment portfolio and mortgage-backed securities and in our own residential mortgage portfolio which means that some of the higher yielding loans that we are prepaying are suddenly slowing down that prepayment. We are putting on new credits at a little bit higher rate. We’ve had some of our commercial borrowers who sat on the side lines because they had another year or two years before their prepayment and penalty expired alone sitting there waiting to refinance some of their projects not necessarily loans with us is back which is the good news come to the table and say well maybe we’ll pay that prepayment penalty because we want to lock into the lower interest rate that we can get now even though it’s not as low as what we could have gotten a month ago. So we are starting to see some activity that we hadn’t seen in a while which makes us that much more guardedly optimistic.

[Nancy Bush:]

But it’s not I mean this is a function of what’s going on in rates.

[Gerald Lipkin:]

Right.

[Nancy Bush:]

Are you seeing sort of a corresponding better feeling about what’s going on in the economy.

[Gerald Lipkin:]

No, no.

[Nancy Bush:]

Okay. The second.

[Gerald Lipkin:]

But it’s still being us because they are helping us to absorb the large unused liquidity position that we have been sitting on for the past 18 months.

[Nancy Bush:]

Fine.

[Gerald Lipkin:]

If we are taking this 25 basis points in loans that are sitting at the Federal Reserve the money the funds and we are putting out in four in a quarter 4.5% credits it’s going to have a marked impact on our net interest margin.

[Nancy Bush:]

Alright. My other question would be I think there was an article on the times couple of weeks ago about the foreclosure down finally beginning to break in New Jersey. Are you saying that?

[Gerald Lipkin:]

Yeah a little bit we are starting to see some progress in getting through the foreclosure process. We have a relatively small number of loans in foreclosure at the present time and we really throughout this entire cycle it’s really been in a less than 80 the number of loans in foreclosure in our banks against a residential mortgage portfolio of roughly 20,000 loans.

[Nancy Bush:]

Right.

[Gerald Lipkin:]

So it really well it may started delinquencies look higher than they normally would be. It’s still a relatively low number.

[Nancy Bush:]

Right. Okay. Thank you.

[Operator:]

Thank you. Next question from the line of Collyn Gilbert of KBW. Please go ahead.

[Collyn Gilbert:]

Great thanks. Good morning guys.

[Gerald Lipkin:]

Good morning Collyn.

[Alan Eskow:]

Good morning.

[Collyn Gilbert:]

So Gerry maybe I wanted to follow up a little bit on Nancy’s question on sort of a change here in your appetite I guess for loan growth and pricing and how it feel through. I guess I’m trying to reconcile well yes rates have moved here in the short-term but there is still much lower levels than they would have been you know a year ago two years ago when you still were sort of resisting growth. So is it and with the outlook on the economy necessarily better I guess I’m trying to understand what you are seeing today when you were that it wasn’t the returns weren’t sufficient enough say two years ago to sort of put these assets on?

[Gerald Lipkin:]

I don’t believe that rates are going to go up and I could be wrong but I don’t personally believe rates are going to go up materially from the levels that they reached at this point but there are a lot better than the rates where the levels that they were sitting at six months ago or nine months ago. If I we were going to hold for example residential mortgages that three in a quarter percent right that certainly wouldn’t be helping our net interest margin. But if I’m going to hold residential mortgages at four in a quarter 4.5% that does help our net interest margin. So that part of what’s way is it as I said prepayments are slowing down so that helps us we don’t have to put as many loans on to have the portfolio grow today as we would have a year ago when we were experiencing very, very heavy prepayment. So some of the higher yielding loans is speaking with us a little longer. It will make me feel a lot better.

[Collyn Gilbert:]

Okay. So, what would your outlook be do you think for loan growth I mean you know CRE you are feeling confident about it that it wasn’t 2% you think the momentum carried from therein.

[Gerald Lipkin:]

Yeah.

[Collyn Gilbert:]

The appetite for resi mortgage what is it there because at the end of the day whether your portfolio that are sell it the volumes are dropping. So how are you sort of thinking about that?

[Gerald Lipkin:]

When you hold it as oppose to when you sell it you get an immediate gains. When you hold it you get the gain but it takes a longer period of time. So by holding the loans we are not going to see the bottom line and the bank jump in 30 days. But it will gradually continue to grow and that increase income over a period of a couple of years brings back what we would have made in the short run.

[Collyn Gilbert:]

Okay. So do you think you’ll you can migrate up to 3%, 5% loan growth I mean I was trying to.

[Gerald Lipkin:]

Oh, yeah. Okay.

[Collyn Gilbert:]

I mean in totality the whole the total portfolio you think could grow 3% to 5%?

[Gerald Lipkin:]

Yes.

[Collyn Gilbert:]

Okay. And then just a question kind of on your asset sensitivity, how are you looking at that now maybe what percent I know you’ve talked in the past that the floors that you have in your loans could minimize that. It maybe what percent of your loans currently set the floors and then how does the asset sensitivity picture change with putting on some of these longer duration assets with the resi mortgages?

[Gerald Lipkin:]

Well we are not really putting on a lot more in then way of longer duration remember a lot of the loans that are not prepay and help us with our loan growth if I’m having 2% of the - if I’m having 5% of the portfolio pay itself off in a quarter or six months and all of a sudden that drops to 2% or 1% that that helps our loan growth. I don’t have to plan that many more loans. A lot of the loans we put on simply were to keep ourselves even with the portfolio.

[Collyn Gilbert:]

Is that what you have been saying about 5% payoffs a quarter?

[Alan Eskow:]

In resi, well I don’t have. We’ll figure it out. We’ll figure that out.

[Collyn Gilbert:]

Okay.

[Alan Eskow:]

I don’t think its 5%.

[Collyn Gilbert:]

You can - you can hop back on.

[Alan Eskow:]

We’ll get back.

[Collyn Gilbert:]

Okay, okay.

[Alan Eskow:]

We’ll get back.

[Collyn Gilbert:]

So but just so then back to just to the asset sensitivity, how are you guys thinking about that?

[Alan Eskow:]

Well you know what Collyn what and I think I mentioned it before. You got to look a little bit on the funding side of the balance sheet and what could happen with that or can happen within it at the moment I think as we indicated, we’ve a substantial amount of funding that’s very, very stable in terms of interest rate so even with the rise. And also 45% of it is probably not very much locked. In addition, we’re always looking at derivatives and using some derivatives to protect ourselves in the case of a rising rate environment. We all know, we’ve a lot of borrowings and we’re watching out for that as they get closer and closer to being restructure and redone that restructure but paying down and redoing them and we look at derivatives so that we can, we can protect ourselves.

[Collyn Gilbert:]

Okay. And just one final question sorry (indiscernible) much time but Alan just your point on the accretion so it was $2 million this quarter can double next quarter.

[Alan Eskow:]

Yes.

[Collyn Gilbert:]

So, we shouldn’t be thinking about that $4 million only on that $142 of covered loans that $4 million you are earning is on…

[Alan Eskow:]

That was my point it can’t be $4 million. It’s the balance.

[Collyn Gilbert:]

Okay. What’s the balance of your acquired so in totality how should we be thinking about the portfolio that was generating up?

[Alan Eskow:]

We had about $800 million of loans other than the FDIC loans so.

[Collyn Gilbert:]

Okay. So, that $4 million is FDIC and that $800 million?

[Alan Eskow:]

The $2 million that we had now were really the FDIC loans.

[Collyn Gilbert:]

Okay.

[Alan Eskow:]

The balance $2 million we’re talking about really come from the other PCI loans, which has no FDIC coverage. So, there is no offset to that.

[Collyn Gilbert:]

Got it. Okay. All right thanks guys.

[Operator:]

Thank you. Next question is from the line of Matt Schultheis of Boenning & Scattergood. Please go ahead.

[Matt Schultheis:]

Good morning gentlemen.

[Gerald Lipkin:]

Good morning, Matt.

[Matt Schultheis:]

Actually all of my questions have been answered. Thank you.

[Gerald Lipkin:]

Good.

[Operator:]

Okay. Thank you. (Operator Instructions) You have a question from the line of Craig Siegenthaler of Credit Suisse. Please go ahead.

[Nick Karzon:]

Good morning. This is actually Nick Karzon standing in for Craig today.

[Gerald Lipkin:]

And good morning, Nick.

[Nick Karzon:]

And I guess, just first on the tax rate with the updated and the restructuring I just wonder if you give us the dollar amount of fixed tax credits and tax credits related to tax exempt investments? And then kind of what the statutory rate is that we should be thinking about?

[Alan Eskow:]

I think what I mentioned before is there is about $2.6million of expenses that are related to those credits. So, beyond that I’m not going to break it down any further. I mean, obviously it helps. There is a positive benefit to that to our tax rate. I mean, the obvious federal tax rate is 35% and the state tax rate runs on a statutory basis around 9%. So, it’s bringing it down from that rate down to what we just showed you.

[Nick Karzon:]

Okay, thanks. And then the second on the service charges on deposit accounts, you have seen that declined year-over-year for the last two quarters and I was wondering if that’s due to changes in customer activity or behavior or if there has been a change in your fees or product lineup?

[Alan Eskow:]

I think if anything its customer behavior.

[Nick Karzon:]

Thanks for taking my questions this morning.

[Alan Eskow:]

Sure.

[Operator:]

Okay. Thank you. And there are no further questions in queue.

[Dianne Grenz:]

Okay. Thanks everyone for joining us on our second quarter conference call and have a good day.

[Operator:]

Okay, thank you. And ladies and gentlemen, this conference will be made available for replay after 1 o’clock PM today, through August 1st at Midnight. You may access AT&T Executive Replay System at any time by dialing 1-800-475-6701 entering the access code 296332. International participants dial 320-365-3844 again that access code is 296332. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.