Gerald LipkinThank you, Diane. Good Morning and welcome to our second quarter earnings conference call. The banking industry continues to be besieged with a litany of external variables, ranging from additional regulatory expenses to the Federal Reserve’s direct intervention on market interest rates. Community Banks have historically been a catalyst to economic growth within the neighborhoods they operate. Banks and the communities they serve have a mutual interest in the prosperity of each other. In today’s difficult economic environment, the health and profitability of our industry will be closely tied to improving employment and economic conditions. New and additional regulatory guidance surrounding the increased amount and form of capital held at every financial institution stands as an impediment to that expansion. To further this disconnect, the new draft capital requirements, issued by the joint regulatory agencies, are inconsistent with the treatment of capital as outlined in the Collins amendment as they further limit the eligible forms of capital for many banks. On the other hand, the proposed regulatory adjustments to the measurement of risk weighted assets, for certain loan categories is an improvement, as we have always believed every borrower needs skin in the game. Specifically, the proposed Basel III guidance provides an advantage to those institutions, like Valley, which have emphasized larger borrower equity in their underwriting standards. Based on a recent third party review of Valley’s first lien conforming residential mortgage portfolio, the adjusted mark to market loan to value ratio was approximately 48%. As a result, under the proposed guidance, we anticipate a significant reduction in the calculation of risk weighted assets for that portfolio. Therefore, based upon our initial review of the proposed Basel Three capital requirements, we believe we currently meet the enhanced 2019 well capitalized definition for all regulatory capital ratios, as defined under the new proposal. As the market level of interest rates remains constrained due to a multitude of factors, Valley’s emphasis on non-interest income revenue generating sources will continue to receive much greater focus.
The strength in Valley’s residential mortgage banking division has consistently generated positive returns for the organization and we anticipate continued benefits. During the second quarter, Valley closed nearly $0.5 billion of new residential mortgage loans. For the year, total closed residential loans exceeded $1.0 billion and we are on pace to surpass all of 2011’s actual volume by the end of this month.We anticipate significant increases in mortgage banking revenue for the remainder of 2012, as we intend to sell a larger percentage of originations into the secondary market. For the first six months of 2012, Valley earned approximately $6.3 million in gains on sale of loans into the secondary market. We expect to recognize a significantly greater amount in the third quarter than we generated in the entire first six month period. In spite of our recent success in expanding our mortgage activity we still hold only a tiny market share in New Jersey, New York City, Long Island and eastern Pennsylvania. Presently, approximately 73% of Valley’s residential mortgage refinance applications are coming from non-valley customers. This not only presents a cross sell opportunity, but provides management with an indication as to the potential products acceptance when we began to expand the geography in which we market these loans. We emphasized the fact that we have no plans to lower our strict underwriting guidelines in this endeavor. As we like to say, we plan to fish in a bigger pond, not deeper in our existing pond. For over 15 years, Valley has actively sold loans to both Fannie Mae and Freddie Mac. We have the infrastructure and experience presently in place to conduct this enhanced mortgage banking effort. Historically, Valley has witnessed minimal repurchase requests from the agency which is a testament to the strict underwriting and processes employed in this area.
At Valley, we have always retained the servicing rights to the loans we originate. Interestingly, the performance of the loans we sell closely mirror the performance of the loans we retain in portfolio. Furthermore, we believe that these servicing rights will become a more valuable source of fee income in the future, as the propensity to sell or refinance properties currently being refinanced are at today’s extremely low interest rates, and will likely be low in the future as market interest rates are likely to increase.Read the rest of this transcript for free on seekingalpha.com