Valley National Bancorp
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Valley National Bancorp Third Quarter Earnings 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] And as a reminder this call is being recorded. I would now like to turn the conference over to Dianne Grenz.

[Dianne Grenz:]

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

[Gerald H. Lipkin:]

Thank you, Dianne. Good morning and welcome to our third quarter earnings conference call. We are pleased with the third quarter results as the core earnings, non-accrual loans, non-performing assets and criticized assets of the Valley all show signs of improvement. Unfortunately, we did recognize a large charge-off totaling $8.9 million relating to a bankruptcy of a long-time commercial borrower. Exclusive of this loss, aggregate net charge-offs for the entire bank would have been less than $300,000 for the quarter. While we are optimistic regarding future recoveries from this borrower, the amounts and timing are very uncertain due to the bankruptcy filing. Although, we are disappointing with this one incident during the quarter, we are encouraged by a litany of positive activities and events throughout the bank. During the quarter, we originated nearly $1.1 billion of new loans. For the first nine months of 2013, we have originated approximately $3.4 billion in total loans compared to approximately $3.7 billion all of last year. Origination volumes during the quarter was skewed towards commercial as residential activity declined significantly from the prior quarter. During the quarter, we closed $295 million of residential mortgage loans compared to $573 million in the prior quarter. The decline was largely attributable to the 73 basis point increase in the average 10-year treasury rates between the second and third quarters. Application volumes similar to the actual closings weakened between the linked quarters dropping to $254 million in the third quarter from $669 million in the second quarter. The decline in application activity was prevalent in Valley’s New Jersey and New York marketplaces, although slightly heavier in New Jersey. Based on month-to-date application and projected closing levels, we anticipate a continued lower volume in applications and loan closings during the fourth quarter. During the third quarter as a result of the after-mentioned decline in mortgage activity, coupled with Valley’s decision to portfolio by larger percentage of originations, gain on sale of loan income declined $11.7 million from the second quarter and reflects current market conditions as the increase in purchase activity is negligible compared to the decline in refinance activity. For sometime now, Valley has emphasized residential mortgage activity as a means to mitigate the potential negative lending implications associated with the absolute low level of market interest rates, coupled with rises in credit spreads. Prudent asset liability management practices, during this time period, constructed Valley’s ability to originate and hold loans at levels that would expand the size of the balance sheet. As a result, during this period, we witnessed a build-up in liquidity and further pressure on Valley’s net interest margin and net income. However, as market dynamics have begun to shift and the pricing profile on certain commercial credits improves to levels that are both equitable for the bank and the borrower, Valley’s desire to leverage the balance sheet is enhanced. During the quarter, we originated nearly $700 million of new commercial credits. As a result in the aggregate together with C&I and CRE portfolios grew over $380 million in net loans after payoffs for the quarter. However many of these new originations closed in the latter half of the quarter and average commercial lending balances only increased a $188 million from the second quarter. The full benefit of the loan growth should be reflected in the fourth quarter. It should be noted that none of this commercial growth resulted from purchasing securitized loan participations as commonly utilized by other institutions as a mean to demonstrate loan growth. Many of the originations in the commercial real-estate portfolio were 10 year adjustable rate loans with interest rate resets occurring after 36 and 72 months. The initial interest rate on these new loans are at levels above Valley’s net interest margin and the adjustable nature of each limits Valley’s interest rate exposure and sensitivity in rising interest rate environments. Significant prepayment penalties were built into these loans, which should be sufficient to prevent prepayment even if interest rates remain low following the interest rate reset periods. The pipeline within the commercial real-estate portfolio remains strong and we anticipate continued growth within the portfolio during the fourth quarter. Although not as sizable as commercial real estate originations, C&I activity was brisk for the quarter as Valley originated over a $160 million of new loans. However, the portfolio only expanded approximately $8.9 million from the prior quarter as pay-offs within Valley’s purchased credit-impaired loan pools and legacy loans remain substantial. Market conditions within the commercial space in general appear to let improve. However, we are by no means entering a period of economic boom. Nevertheless both micro and macro conditions appear to be gradually strengthening. For many of our borrowers, cash flows are expanding, vacancy rates are declining and new business ventures are being explored. We are guardedly optimistic that these indicators will continue. However, there remain a multitude of economic hurdles still prevalent in the marketplace. Loan pricing although improving remains challenging. Quite simply from our perspective, there is an excessive amount of money chasing a limited supply of borrowers. Although Valley is competitive on pricing, we remain unwilling to expand volume by relaxing terms and conditions. We continue to remain diligent in our underwriting and resist moderating our criteria simply to grow the Bank. That being said and as I stated earlier, the commercial lending pipeline remains strong and we anticipate continued growth in the fourth quarter. As announced in this morning’s press release, earlier this month, Valley sold impaired trust preferred investment securities issued by one deferring bank holding company for a net gain of $10.7 million. This gain will be recognized in the fourth quarter. These securities sold reflect Valley’s entire interest in this deferring institutions trust preferred securities as of September 30, 2013. Based on Valley’s reported non-performing assets as of September 30th, the sale of these securities would have reduced the aggregate non-performing asset figure by approximately 25%. In addition to the forthcoming gain in the fourth quarter, the transaction is of significant importance to Valley. The sizeable decrease in the level of non-performing assets will allow us to once again earn interest on the $52.5 million to help reduce Valley’s future FDIC insurance assessments and prove its capital position under Basel III and most importantly remove one of the largest single credit exposures within the Bank. The reduction in non-performing assets attributable to this transaction is not the only positive event from a credit perspective to have occurred. In spite of the large charge-off associated with the one commercial borrower mentioned earlier, credit in the aggregate improved from the prior quarter. Although total accruing cash to loans increased slightly from the prior quarter, $19.5 million of commercial real estate loans past due in the 60 to 89 day bucket are performing, well collateralized and demonstrate adequate ample cash flow. These loans are only categorized as past due because of some delays in the renewal process. Exclusive of this relationship, total accruing past due loans would have declined by over 30% or $14 million from the second quarter. Total non-performing assets declined from the second quarter by $4.2 million due in part to OREO sales. The margin for OREO assets continues to improve, while at the same time our residential mortgage non-accrual loans are beginning to complete New Jersey’s three-year foreclosure backlog. Based on the judicial process, we anticipate another 18 months until we are able to fully reduce the residential mortgage non-accrual loan balance to levels reflective of Valley’s current credit condition. In summary, we are guardedly optimistic about the continued income opportunities in the coming quarters. The decline in mortgage banking although significantly will ultimately be replaced from the revenue perspective to loan growth. Credit quality is improving and we continue to focus on improving operating efficiencies throughout the Bank. Alan Eskow will now provide some more insight into the financial results.

[Alan D. Eskow:]

Thank you, Jerry. The tax equivalent net interest margin improved from 3.15% in the second quarter to 3.20% in the third quarter. This marks the first linked quarter improvement in the margin in over two years. Net interest income during the same period increased approximately $1.8 million to $111.7 million. The expansion of the margin in net interest income is largely attributable to strong loan growth coupled with a decline in premium amortization on our taxable investment securities portfolio and a decline in interest expense on time deposits. Earning asset yields increased 5 basis points from the second quarter to 4.39%. In part as loan growth enables the Bank to deploy excess liquidity, which had been earning 25 basis points into higher yielding loans. Although total loans grew over $500 million for the quarter, average loans expanded only $223 million as many of the new originations closed in the later half of the quarter. The increase in the interest income on new loan originations was partly mitigated by a continued contraction in Valley’s purchase credit impaired portfolios. The decline in these asset portfolios negatively impacts both the margin and income, as the loans maturing or paying off are at levels far greater than the rates are in that new originations. In the aggregate, Valley originated over $1 billion of new loans during the quarter in which the average yield was a little north of 3.5%. While the yield is accretive to net interest income, it is less than the collective yield on total loans. On so such time, when market level interest rates begin to rise, we anticipate continued pressure on the average loan rate. The expansion of earning asset yields for the quarter was attributable to a reduction in premium amortization within the securities portfolio. The increase in interest rates and decline in residential mortgage refinancing activity has led to a significant decline in pay down activity within Valley’s mortgage backed securities portfolio. During the third quarter of 2013, cash flows were approximately 23% less than the second quarter. Based on preliminary cash flow forecast, we anticipate a similar reduction between the third and fourth quarters. As of September 30th, the unamortized premiums on mortgaged backed securities was approximately $60 million of which we are scheduled to amortize approximately $18 million over the next 12 months based on projected fourth quarter prepayment speeds. In addition to the aforementioned another variable impacting the net interest margin in the fourth quarter will be the positive cash flow received from the sale of the impaired trust preferred securities that Gerry previously mentioned. With the liquidation, we will receive over $50 million of cash, which can be redeployed into earning assets. As a result of the impairment, Valley had been accruing no interest on the principal. Valley’s third quarter total cost of funds of 1.18% was equal to cost of funds reported in the second quarter although the cost of deposits declined from 0.43% to 0.41%. The decline in linked-quarter cost of deposits is largely attributable to a slight shift in the composition of funds as time deposits declined $144 million from the prior quarter with the resulting interest expense declined by $515,000 and now comprised only 20% of Valley’s total deposit base. During the quarter, Valley redeemed approximately $15 million of junior subordinated debentures. We announced the redemption of the remaining outstanding notes equal to approximately $131 million tomorrow, October 25. The rate under debentures is equal to 7.75% of which the interest expense is reflecting on Valley’s income statement in interest expense on long-term debt. The decline in interest expense associated with the aforementioned redemption will be quietly mitigated by the cost of the 10-year fixed rate subordinated debt that Valley issued on September 27. That note rate on net debt is 5.125%. Affected with the settlement of this newly issued subordinated debt, Valley entered into a derivative transaction where Valley receives a fixed rate of 5.125% and pays a flowing rate of one month LIBOR plus 238 basis points. As a result of the combined transactions, the effective current cost of Valley’s newly issued subordinated debt is approximately 2.56%, which compares favorably to the 7.75% rate on the junior subordinated debentures, which are being redeemed. In addition, during the quarter, Valley purchased an interest rate cap with a notional amount of $125 million and an effective date and maturity date equals to the aforementioned subordinated notes. Based on the aforementioned, we anticipated savings of approximately $6.4 million annually. The fourth quarter will have a benefit of approximately 2 months of savings or about $1 million. Non-interest income for the quarter was $22.4 million, a decline of $10.5 million from the second quarter. The decline was principally the result of the decline in mortgage banking activity during the quarter. In the second quarter, we recognized mortgage banking income of $14.4 million, which declined to $2.8 million in the third quarter. The decline is attributable to both a reduction in loan closings as well as Valley’s decision to shift strategy from that of originating itself to that of originating the whole model. Valley’s decision to retain yourself future production is depending on a multitude of factors emphasizing credit exposure, portfolio concentration and interest rate risk. If market rates continue to decline, we may elect to sell a greater portion of our origination volume in the fourth quarter. Non-interest expense for the quarter was $94.5 million, a decline of approximately $1 million from the prior quarter. The linked quarter decline is largely attributable to a contraction in FDIC insurance assessments and advertising expense. However, mitigating the decline in these items was an increase from the prior quarter of $2.6 million in mark-to-market gains and losses related to mortgage banking derivatives. The valuation in size of mortgage banking derivatives at each period end is mostly subject to Valley’s activity in the secondary market coupled with the movement of market interest rates during the quarter. In addition, during the quarter Valley’s closed three underperforming branch locations, while we anticipate reducing further non-interest expense. As a result of this action, we did incur approximately $500,000 of expenses associated with these closures. For a presentation purposes, the expense is recognized on our income statement in loss on sale of assets. We anticipate further streamlining of our branch network either through consolidation of personnel, redesigning subsequent reduction in the branch footprint or direct office closures. We regularly analyze branch performance including loan activity generated from each location. We have established internal return thresholds and we’ll act accordingly if these bogies are not met. As part of our branch delivery philosophy, we focused on incorporating technology driven delivery channels as a supplement not a replacement to our branch network. During the last couple of years, we have spent over $6 million incorporating new technology throughout the branch footprint. Our effective tax rate declined during the quarter as a result of management actions to expand the use of tax credit in addition to the settlement of an income tax examination. The tax credit utilized, generally require an investment by the bank that is amortized over the life of the credit. The amortization expense approximated $2 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 focusing on both risk weighted assets and the cost of regulatory capital. As discussed earlier, Valley announced the redemption of substantially all of our trust preferred securities portfolio with the exception of those acquired through prior acquisitions. As a result of the new Basel III capital rules for Valley these instruments will be phased-out from counting towards Tier 1 equity, commencing January 1st, 2015. As a replacement, Valley issued a 125 million of subordinated notes, which count as Tier 2 equity, the same qualifying equity level as the trust preferred securities after the phase-out period. As a result of the full redemption on October 25th of the trust preferred securities, we anticipate a decrease in Valley’s Tier 1 equity ratio. The redemption occurred at September 30th, our Tier 1 ratio would have declined from 10.64% to 9.55%. Valley’s capital ratios will remain strong even after the redemption as evidenced by a Tier 1 common cap regulatory capital ratio of 9.17%. Presently, this ratio exceeds the fully phased-in minimum Basel III Tier 1 common capital ratio, including the full capital conservation buffer by 217 basis points or by over $250 million of common equity. To put this figure in context, Valley has only recognized approximately $170 million in net charge-offs on non-covered loans since the inception of the great recession in 2008. The current amount of excess capital above and beyond the aggregate level of net charge-offs is 147%. This concludes my prepared remarks and we will now open the conference call for questions.

[Operator:]

(Operator Instructions) And we will begin with the line of Steven Alexopoulos with JPMorgan. Please go ahead.

[Steven A. Alexopoulos:]

Hey good morning everyone.

[Gerald H. Lipkin:]

Morning, Steve.

[Alan D. Eskow:]

Morning, Steve.

[Steven A. Alexopoulos:]

A few questions on the commercial real estate, with balance is being pretty flat over the past few quarters, can you give a bit more color on what’s behind the jump driving more volumes? We’re seeing this from other newer players as well.

[Gerald H. Lipkin:]

Well, one thing the increase in interest rates, a slight increase but an increase makes them more attractive to us, so we would become more aggressive in going after them. I think a lot of our borrowers and then I’m sure that of other banks as well, who have been sitting on the sidelines fear that rates at least during the exit of the last quarter feared that rates were going to rise. So they wanted to jump on the bandwagon and refinance their projects before that rate rise fully set in. So I think that that attributes for most of the activity increasing.

[Steven A. Alexopoulos:]

So Gerry what does that imply for future growth here that rates have backed down a bit?

[Gerald H. Lipkin:]

I don’t know. We have been telling people, I don’t know how long those stay low where our pipeline is still pretty strong in that area of – Bob Meyer would heads up that area.

[Alan D. Eskow:]

C&I pipeline is well over a couple hundred million right now of improved and accepted loans and the C&I pipeline is in excess of &100 million in improved and accepted, they were now closed but we anticipate the bulk of them as well.

[Gerald H. Lipkin:]

And that’s only in the first two weeks or the three weeks of the quarter.

[Steven A. Alexopoulos:]

All right. And Gerry when you said that commercial real estate loan yields were above the NIM, are you seeing it a loan yield is above the NIM or is that the new NIM on those loans is above the current portfolio NIM?

[Gerald H. Lipkin:]

See I said the interest rate that we’re getting on those loans is above our net interest margin. It does I didn’t say that the net interest margin on those loans are higher.

[Steven A. Alexopoulos:]

Got you. And what was prepayment penalty income in the quarter?

[Alan D. Eskow:]

Wasn’t that significant.

[Gerald H. Lipkin:]

Very insignificant.

[Steven A. Alexopoulos:]

Insignificant, okay.

[Gerald H. Lipkin:]

Yeah.

[Steven A. Alexopoulos:]

And Gerry just a final one related to capital. Historically, you paid out I guess around half of earnings with the dividend, earnings now are running about half they were pre-crisis, what’s your hesitancy here to reset the dividend to a level that at least gives you more capital flexibility.

[Gerald H. Lipkin:]

The dividend as I said at every call, first of all, our historic is more than half. Our historic has been closer to 60% to 65%, number one. Number two, our board looks at that every quarter sets as what our current estimated earnings are going to be for the remainder of the year, where that is going to place our dividend in relation to our earnings for the year, where else we could deploy the capital if we didn’t put it into – if we didn’t pay it out to the shareholders and then they make their decision every quarter as to whether or not they should keep the dividend the same increase it or decrease it. All those factors will be looked at by the board I’m sure in November when they renew the dividend.

[Steven A. Alexopoulos:]

Okay, fair enough. Thanks for all the color.

[Gerald H. Lipkin:]

Okay.

[Operator:]

The line of Ken Zerbe with Morgan Stanley. Please go ahead.

[Ken Zerbe:]

Great, thanks. I think I have more of a conceptual question. When I look at the trajectory of earnings, obviously you’re still under sort of mid-90s on expenses, fees have certainly come down. When you plan ahead right because you don’t have the mortgage banking income to rely on anymore, it seems that you’re still facing certain material headwind in terms of how do you grow earnings. And I heard the comments about closing branches but when you think ahead over the next year or two years, where does the material earnings growth come from if there is any. I mean, can you be more aggressive on cutting expenses. You’re now from 94% to 93% but like from 94% to 84%. Is there some number like that or other revenue streams that we can start looking towards?

[Gerald H. Lipkin:]

Well there are a couple of things. For one thing loan growth is the best source of revenue for the Bank and we have added some lenders to our staff. We are aggressively going out, looking for credit that meets our criteria. It makes a little bit more difficult for us because we do believe we keep a criteria that’s somewhat more stringent than a lot of the competition. And I think when you look at our historical loan losses and that’s reflected in that. There’re a lots of things that we try to do. We’re always looking for new areas to expand the Bank. We look to increase our footprint. We’re looking for new products. We have some new loan products that we’ve introduced in the last year that is starting to take hold and I think will help to generate future earnings for the Bank. We intend to be somewhat opportunistic. I think we were opportunistic when it came to the mortgage banking activities and while that market existed we think we did quite well. I’m still somewhat perplexed as to why it was almost like a light switch going off and in the refinance activity when rates moved up a 100 basis points, it just shut the market down. Even though, historically, the 30-year and the 15-year are at very, very low levels, I think it may reflect and I know interest rates have dropped a little bit although we haven’t really seen much of a reversal. But with the recent small drop in interest rates, that may come back a little bit, comes back a little bit, couple back with the other loan growth we have seen, I think our revenues will show a good future.

[Ken Zerbe:]

Understood, okay, because I guess, I was just getting out of, if you posted the $0.14 and I understand there was some positives and negatives in the number, but it seems that you’re looking for ways to improve earnings, but borrowing, finding something material or getting a material increase in mortgage banking, the $0.14 is probably not that bad of a run rate going forward at least in the near-term. Rhetorical question. All right, I’m now done. Thank you very much.

[Gerald H. Lipkin:]

Thank you. We don’t give guidance, so, but I think we gave you lots of indications in Alan’s report and in my report on some of the good things that we expect to happen in the fourth quarter.

[Ken Zerbe:]

I’m done till you did and I appreciate it. Thank you.

[Operator:]

We will go to line of Dan Werner with Morningstar. Please go ahead.

[Dan Werner:]

Hi, good morning.

[Gerald H. Lipkin:]

Good morning, Dan.

[Dan Werner:]

Going forward, are you looking for the loan loss provision to approach closer to the net charge-off levels going forward here, given with the allowances and as well as to kind of account for the loan growth that you’re talking about?

[Gerald H. Lipkin:]

Dan, I think we’ve said it pretty much in the last couple of quarters in a row, we have a methodology, not best based on charge-offs, it’s based on the overall portfolio. I think as Jerry mentioned, criticized went down, classified went down, non-performings overall went down, the impaired loan requirement went down, all of those things went down based on what we’re seeing in our portfolio. So we are not gearing it towards anything other than what the methodology really shows us.

[Dan Werner:]

Okay. And then, second question, is there going to be any significant staffing changes with regards to the mortgage business that would be impactful to expenses?

[Gerald H. Lipkin:]

We have already cut the staff in the mortgage area by about a third, if it continues to not show growth, there will be further reductions in that department in accordance with what the levels of production are.

[Dan Werner:]

Okay. And then in terms of the mortgage production, is it primarily 3.1, 5.1 that you’re adding on right now and not much in the way of fixed-rate?

[Alan D. Eskow:]

We are doing both fixed-rate and adjust of all.

[Gerald H. Lipkin:]

Yes.

[Alan D. Eskow:]

But again, I think as I indicated we are still seeing some low 15-year fixed-rate loans coming on that we’re going to look at very closely in terms of whether or not we are going to add into our portfolio, we want to sell them.

[Dan Werner:]

Okay.

[Alan D. Eskow:]

Yes, it’s really, I personally don’t like to see us build a portfolio of long-term very low interest rate loans.

[Dan Werner:]

Okay. All right thank you. Operator Next we will go to line of Nancy Bush with NAB Research. Please go ahead.

[Nancy Bush:]

Good morning guys, how are you?

[Alan D. Eskow:]

Good morning, Nancy.

[Gerald H. Lipkin:]

Good morning, Nancy.

[Nancy Bush:]

Couple of questions, Gerry does the implementation of the qualified mortgage will make any difference in your outlook for the business or the kinds of mortgage is you are going to be doing, is it consequential I guess is my question?

[Gerald H. Lipkin:]

I don’t think it’s going to be consequential at Valley because our underwriting criteria closely resembled – historically closely resembled that in qualified mortgage. We never did subprime mortgage lending, because that wouldn’t have fallen within that overview, did they make it difficult in a handful of loans that we went about in the past, some interest only in certain circumstances, but for the most part the bulk of our loans well into the 90 percentile, which should make no difference.

[Nancy Bush:]

Okay. And secondly I noted your comment when you said about your mortgage apps declining and you said the decline was slightly heavier in New Jersey than in New York. Could you just kind of speak to the whole sort of economic situation in our state and are you seeing any lift or?

[Gerald H. Lipkin:]

Well, let me start out by saying we did very little activity in New York State up until about two years ago. When we acquired State Bank, we became a lot more aggressive in New York. So that market I think is more a low hanging fruit than there is in New Jersey, so the decline while it is there isn’t as great as it is in New Jersey. New Jersey is suffering in many areas. It is not seeing the growth. We just at our Board meeting this week, we had a presentation on the economic conditions that are prevalent both nationwide and in our region and then a breakdown in our region and it showed the statistics that were presented to us indicated that the growth in New York City, Long Island was stronger than that in New Jersey. So we do monitor those statistics and we try to focus our attention if loan growth, if the economy is growing stronger in Long Island, the benefit of are having a franchise that that extends itself both over New Jersey and New York, we’ll focus more into that New York area.

[Nancy Bush:]

Well I mean our tax situation still has not improved that much and we’re still losing business that’s a problem.

[Alan D. Eskow:]

Gerry gets the folks [indiscernible] to recognize that is an impediment to grow.

[Nancy Bush:]

Okay, all right, thank you.

[Gerald H. Lipkin:]

Thank you, Nancy. Any others?

[Operator:]

Craig, Your line is open.

[Nicholas Karzon:]

Good morning this is Nick Karzon for Craig Siegenthaler this morning.

[Gerald H. Lipkin:]

Good Morning.

[Nicholas Karzon:]

I guess first just with the upcoming stress test, can you talk about what preparations if any you’ve made for that or how that’s changed your outlook looking forward?

[Gerald H. Lipkin:]

We have a fairly large in-house group that’s working on this stress testing before it’s an out side people in terms of consulting a little bit with us. And we’re working very hard on meeting the requirements, so that we’ll be ready for the filings as is required by the law. So it’s taking a lot of time and effort of a lot of different people and we are mainly doing it on the inside although we are using outside people to assist us in the preparation or to validate what we’re doing.

[Nicholas Karzon:]

Thanks, and I guess as a follow-up, you mentioned earlier this year that you’d expected to see increased M&A activity. I’m just wondering to what extent that that has occurred or that outlook has changed at all?

[Gerald H. Lipkin:]

I think my outlook on that is unchanged. I think that it is going to tick up. You hear more people talking about it today than we did a year ago. We continue to hear a lot of chatter about it. This M&A activity doesn’t happen overnight. It usually takes months or years before somebody either decides that they want to sell starts to find out who they would like to join up with when someone wants to buy, you’ve got to convince the other party that they would make a good combination. So it’s a time lengthy proposition, I do think you are going to see an increase in that activity though.

[Nicholas Karzon:]

Yeah, thanks for taking my questions this morning.

[Gerald H. Lipkin:]

All right.

[Operator:]

Next we’ll go to the line of Collyn Gilbert with KBW. Please go ahead.

[Collyn B. Gilbert:]

Thanks. Good morning, guys.

[Gerald H. Lipkin:]

Good morning, Collyn.

[Collyn B. Gilbert:]

So Gerry, I don’t want it to sound like a dumb question, although it might be, a simple question. I guess, I’m just trying to understand how the loan growth, just in practical terms kind of going from an institution where the lending operation was fairly dormant which by design, we understood certainly and clearly where you stood on it all. And then to ramp up the way you did in a one quarter’s time, I mean, how does that just work, I guess just logistically. And again, recognizing that you are not the time to think has all these teams of lenders that have come on to really choose that engine. So I’m just trying to understand conceptually sort of how that works?

[Gerald H. Lipkin:]

We have added a couple of new lenders, which have in this situation, but for the most part, it’s a lot of our existing customers as I said earlier that pretty much sat on the sidelines came to the conclusions that interest rates had bottomed out or we’re close to bottoming out, and they felt this was the time they could lock in some longer-term money at lower rates. We did hard on adjustable basis for the most part, so that it was good for them and it’s good for us and we saw a lot of activity. We actually started seeing that activity; loan activity takes a lot longer between the borrower approaching the bank and are closing the loans than what might be. Meaning all of the regulatory requirements and underwriting requirements, it usually takes many weeks if not a couple of months for our loan to close. So some of this activity actually started at the latter part of the second quarter, we started seeing, I think I gave some indication in the end of the second quarter that we were starting to see a lot of activity building up, that activity did build up. As I pointed out in my comments, if you look at the average loans that went on the book, that we had on the books and where we are at the end of the quarter, a lot of the loans didn’t close until the latter part of the third quarter and some of the pipeline that we are sitting with today, will be closing into the fourth quarter. They may have actually started though some time early in the third quarter.

[Collyn B. Gilbert:]

Okay.

[Gerald H. Lipkin:]

It seems like a light switch, this just suddenly happens once in a year, but yes…

[Collyn B. Gilbert:]

So – but it seems like again, just kind of following your commentary in the second quarter. So it seems like the move on your borrower base, maybe was more rate driven than economic driven because I thought you said in the second quarter that your borrowers are still not feeling good about the economy, which is why the C&I was is – you are less optimistic about the C&I loan growth.

[Gerald H. Lipkin:]

That is correct.

[Collyn B. Gilbert:]

Could we – I mean, as we think about I guess, I mean you’re not asking for specific guidance, but as we think about kind of that growth trajectory from here. So there is certain dynamics that are going on in the third and fourth quarter that could pull some of that demand forward. I mean, are you – or do you think given your sort of appetite for growth at this point and the dynamic in the market that we’ll see double-digit loan growth in 2014 from you guys?

[Gerald H. Lipkin:]

2014? Actually that question is, in another month or two; I’ll have a better feel for it.

[Collyn B. Gilbert:]

Will you…

[Gerald H. Lipkin:]

I mean, I – listen, I believe what I like to see double-digit loan growth. I would like to see double-digit loan growth. I mean that will be – will we see it? I don’t know.

[Collyn B. Gilbert:]

Okay, and then just the next question on the loan yield, these would be average yield on that billion of originations was about just a little bit higher than 350. And I guess just thinking about the split of that is, if you are putting on revenue mortgages, if it’s the fixed rate 30 products. And I know Alan you said, you are doing some arms and stuff, but I guess what I’m saying, is that implies a pretty low CRE yield?

[Alan D. Eskow:]

Well, as I pointed out, they’re adjustable. Most of the – over a large portion of that, we put on at one rate that is 36 months re-adjust to a predetermined higher rates and in 72 months from now would adjust to a predetermined higher rate yet.

[Collyn B. Gilbert:]

Okay, okay.

[Alan D. Eskow:]

So we are not locking ourselves in as we would already to a fixed rate, low rate and these are ultimately only 10-year loans. They are not 30-year; they are not even 15-year loans. So I think from a structure standpoint, their excellence of the bank and the way we’ve got it structured I think the client is pretty happy with it.

[Collyn B. Gilbert:]

Okay.

[Gerald H. Lipkin:]

The other thing Collyn is that – that’s the average of all loans in the bank. So for example, we do put on a fairly large volume of order loans. Order loans are historically and certainly today at a much lower rate than where our commercial real estate loans are et cetera. And of course they are at such a low rate, they tend to bring the overall average down. So wasn’t that, it was CRE loans that were that low, it was the average of all of those and these days order rates are in the tools [ph].

[Collyn B. Gilbert:]

Okay, all right, well that leads to my last final question and then I’ll hop out. I guess again kind of big picture, just thinking about the balance sheet and if we see and I guess where I’m going with this is kind the trajectory on the NIM because if we see this, the asset yield likely migrate into the 4% range maybe even lower given the dynamics of the loan yield that we may see here in the next year or two. And the difference that you all have relative to maybe some of the peers that are getting more aggressive on loan growth, as you still there sort of settled by that the high cost borrowings. So if we’ve got a 4% loan yield and then the funding cost that can’t move much below. I would guess that 150 and I’m – then that’s a 250 NIM. I mean am I crazy to think that there is a lot – still a lot more downward pressure to go on this NIM.

[Gerald H. Lipkin:]

We’ve got to keep one thing in mind Collyn, like you just said, you said over the next couple of years, but over the next couple of years, those borrowings are going to start to go away by themselves.

[Collyn B. Gilbert:]

Well, but just wondered – right I’m talking the dynamics you are seeing now in 2018 when those borrowings go away…

[Gerald H. Lipkin:]

Well, we’ll start before that.

[Collyn B. Gilbert:]

Or 2016, so in the next three years?

[Gerald H. Lipkin:]

Well we are up the 2014 already. Listen well it is what it is, by putting more emphasis on some of the higher yielding products that are out there that’s fine. The certain things still that we don’t do and that I don’t want to do, and I won’t – when we don’t try to do the purchasing of securitized the loan participations, lots of companies get involved with and they can show huge loan growth and in sometimes at a higher yield from a credit quality standpoints, I know how I feel on it, I know I’ve had conversations for deals and see about things like that. And I think they feel like I do. I don’t know how you do but…

[Collyn B. Gilbert:]

Okay, I said that was my last question. One more quick question, the securities, how much do you think you can take securities down to sort of fund the loan growth. Basically went up, how much longer can you see this benefit of this mix shift going on?

[Gerald H. Lipkin:]

I think the cash flow is showing somewhere between $25 million and $35 million a month. So whenever that comes down, if we don’t see a region to put it into securities roof on loan growth.

[Collyn B. Gilbert:]

Okay.

[Gerald H. Lipkin:]

We just got $52 million.

[Collyn B. Gilbert:]

Okay, all right thanks guys.

[Gerald H. Lipkin:]

Okay, all right.

[Operator:]

Next we’ll go to the line of Matthew Kelley with Sterne Agee. Please go ahead.

[Matthew Kelley:]

Yeah hi, just a follow-up on one of Collyn’s question there. During the three to six year fixed-rate period on these kind of resetting commercial real estate loans, what are the coupons during that fixed-rate period? So if I could have three years fixed and seven years arm, what am I paying in that first three years?

[Gerald H. Lipkin:]

All over the place.

[Matthew Kelley:]

What would…

[Gerald H. Lipkin:]

There is a variance of perhaps as much as 40 basis points, 50 basis points between loans.

[Matthew Kelley:]

Okay. Well let me ask you this of the $380 million of commercial real estate originations during the quarter, how much was multi family, net growth I should say.

[Alan D. Eskow:]

A fair amount…

[Gerald H. Lipkin:]

Fair amount of multifamily, not necessarily what you might be thinking of a lot of them were New Jersey, garden apartments, some of them were co-op type loans, they were not necessarily New York City apartment loans, so if that’s what your thinking off. Underlying mortgage is on co-ops...

[Alan D. Eskow:]

Yeah, underlying…

[Gerald H. Lipkin:]

All right.

[Operator:]

(Operator Instructions) We have a question from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Hello, can you hear me?

[Gerald H. Lipkin:]

Yes.

[Alan D. Eskow:]

Yes.

[Unidentified Analyst:]

Good. Jerry, I mean when asked before about the dividend, you said the board reviews its decision every quarter. I mean you are the Chairman and you are in a public forum and I think you should tell your investors how you feel about it. I mean you guys came through the financial crisis so much better than peers and your stock performed so much better from peers, but has underperformed somewhat dramatically here and a lot of it frankly is because you’re chewing up all your capital with the dividend and you’d would probably get some multiple expansion if you would led your capital base grow. And so I think your board is a little bit of sleep and perhaps has been a sleep and maybe it’s time to start thinking about that.

[Gerald H. Lipkin:]

That issue has been discussed at the board. How I feel as one member of the board will be inappropriate even though you said this is a public forum for me to comment on my feelings, it’s up to the board to decide that what they’re doing on the dividend. I hear what you’re saying and I understand and I think the board hears what you’re saying; we’ll discuss this at the meeting.

[Unidentified Analyst:]

I mean look, look if you were to do $0.10 a quarter, your dividend yield would still be among the highest of 90% of all peer companies, that’s still pretty respectable and let’s your capital base grow, I mean it’s time to do something.

[Gerald H. Lipkin:]

I hear what you’re saying.

[Unidentified Analyst:]

Thank you.

[Operator:]

And there are no further questions at this time.

[Dianne Grenz:]

Okay. Thank you for joining us for our third quarter conference call and have a great day.