Earnings Call Transcript - VLY Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Valley National Bancorp Second Quarter Earnings Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator Instructions: I’d now like to hand the conference over to your host today, Mr. Travis Lan, Head of Investor Relations.

Travis Lan, Head of Investor Relations

Good morning. And welcome to Valley’s second quarter 2020 earnings conference call. Presenting on behalf of Valley today are President and CEO, Ira Robbins; Chief Financial Officer, Mike Hagedorn; and Chief Banking Officer, Tom Iadanza. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today’s earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide two of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp, the banking industry and the impact of the COVID-19 pandemic. Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements. With that, I will turn the call over to Ira Robbins.

Ira Robbins, President and CEO

Thank you, Travis, and welcome to all the participants on the call. This morning, I will provide some perspective on Valley’s strong year-to-date performance in the context of a challenging operating environment. Mike will offer additional details on the financial results before opening the call to your questions. On our earnings call in April, we outlined organizational efforts to support our employees, clients, and communities amidst the COVID-19 pandemic. While I will not reiterate each of those efforts this morning, I will provide an update on a few key highlights that speak to Valley’s culture, performance and value proposition. Valley originated over $2.2 billion of loans under the Paycheck Protection Program. Approximately 85% of these loans were for balances below $250,000, and our median originated loan size was just $43,000. While these numbers reflect the macro overview of the program, they only broadly speak to the external community impact. More specifically, we estimate that loans facilitated by Valley employees helped preserve over 170,000 jobs within our marketplace. Equally important, nearly 30% of our PPP loans were provided to minority-owned businesses, non-profits, or women-owned small businesses. With a purposeful direction, our PPP response was differentiated by our high-touch service, which leveraged an internally developed digital process made possible by the efforts and commitment of our employees. As we begin to transition to loan forgiveness, more hard work is ahead of us. We remain committed to helping our clients understand the changing regulations around the program and to easing the forgiveness process for these small businesses. We believe Valley will continue to distinguish ourselves from our peers through this process by providing a unique customer experience led by people and supported by best-in-class technology. To date, Valley has granted over 10,000 loan deferrals, totaling approximately $4.6 billion. We have closely monitored the actions of our borrowers that have reached the end of their first deferral period: approximately 5,000 loans totaling $1.9 billion have completed their initial deferral period and have returned to regularly scheduled payments. Meanwhile, only 10% of commercial deferrals scheduled to return to repayment requested an additional deferral. While New York and New Jersey were hit hard very early in the stage of the pandemic, the COVID case trends in these markets have improved significantly. These markets continue to progress toward a more complete reopening earlier than many other markets in the country. Meanwhile, Florida now faces a deteriorating health crisis similar to that experienced by New York and New Jersey earlier in the year. After working hard to reopen our branches, we have returned our Florida locations back to appointment-only status. We will continue to take the necessary steps to protect our employees and all of our clients in Florida. While we cannot control the environment around us, Valley continues to succeed by focusing on items that we can more actively manage. In the second quarter of 2020, we reported net income of $96 million and earnings per share of $0.23. These results include over $2 million of pretax expenses associated with the COVID-19 pandemic. On an adjusted basis, pre-tax provision revenue increased 12% from the first quarter, benefiting from aggressive funding cost reductions that began late in the first quarter. We remain keenly focused on generating positive operating leverage and optimizing performance. On a year-over-year basis, we achieved approximately 30% growth in adjusted revenue against just a 12% increase in adjusted expenses. Our adjusted efficiency ratio was 46.8% in the quarter. While we expect revenue pressure to build across the industry, we believe that additional expense levers exist at Valley to help us mitigate these challenges. The quarter’s strong bottom-line results include a $41 million loan loss provision, which was more than 20% higher than the first quarter’s provision. While our underlying credit trends remain stable, the economic outlook related to COVID-19 is absolutely uncertain. We continue to appropriately build our loan loss allowance to reflect this uncertainty. 2020 has presented challenges that no one could have predicted at the beginning of the year. Despite this, we are extremely proud of all of our accomplishments and performance year-to-date. Funding cost reductions and expense management have accelerated our pre-provision profitability gains and enabled us to absorb higher loan loss provisions required under CECL. We will continue to conservatively navigate these challenging times and we will position ourselves for success as the environment normalizes. Now, I’d like to turn the call over to Mike Hagedorn for some of the quarter’s additional financial highlights.

Mike Hagedorn, Chief Financial Officer

Thank you, Ira. Turning to slide five, highlighting our quarterly net interest income and margin trends, Valley’s reported net interest margin was 3% versus 3.07% in the first quarter of 2020. Our decision to hold the higher cash balance in the quarter impacted our margin by approximately 8 basis points. Exclusive of this, our net interest margin would have increased for the third consecutive quarter reflecting the positive impact of our aggressive funding cost reductions. On a sequential basis, our cost of interest-bearing liabilities improved by 54 basis points to 0.96%, and our interest expense declined by approximately 33%. We had previously identified the meaningful and unique funding cost reduction opportunity available to us. We were able to capitalize on this opportunity which enabled us to absorb asset yield pressures and drive strong net interest income growth from the prior quarter. While a significant amount of our re-pricing opportunity has been captured already, slide six identifies the amount of retail CDs expected to mature in the next 12 months at rates well above current offering rates. Specifically, over the next three quarters, we have roughly $4 billion of retail CDs maturing at costs around or above 1.4%. Slide seven illustrates the significant reduction in deposit costs achieved over the last few months. On a quarterly basis, our interest-bearing deposit costs declined 57 basis points to 0.83%. Our all-in cost of funds improved to 0.73% from 1.2% in the first quarter due to deposit cost reductions and significant non-interest bearing growth. While CD costs declined 53 basis points sequentially, there may be room to further reduce those costs. As illustrated on slide six in the third quarter, we have $1.9 billion of retail CDs maturing at a cost of 1.38%. From a balance perspective, total deposits increased $2.4 billion or approximately 8% sequentially. Excluding roughly $1.6 billion of PPP-related deposits at the end of June, sequential deposit growth was 2.5%. Importantly, non-interest bearing deposits increased 29% in the quarter or approximately 6% exclusive of PPP deposits. We continue to experience customer rotation out of CDs into more flexible and lower cost transaction accounts. With branches partially unavailable, customers have continued to migrate towards our online and mobile banking channels. The count of new online banking users in the second quarter more than doubled from the first quarter. In the first quarter we outlined a variety of steps that we undertook to bolster our liquidity position. At June 30th, our cash and equivalents totaled $1.9 billion, up from $1 billion at March 31st. We continue to believe that holding excess liquidity is prudent given the uncertain environment that we currently face. From an average balance perspective, we held roughly $1 billion of excess liquidity during the quarter. We estimate this excess liquidity dragged on our net interest margin by approximately 8 basis points. Slide eight details our loan portfolio and the asset yield pressure that we have been experiencing along with other banks in the industry. During the quarter, loan yields declined 42 basis points. We attributed approximately 7 basis points of decline to PPP loans and the normalization of PCD accretion income from an elevated level in the first quarter. Total loans of $32.3 billion include roughly $2.2 billion of outstanding PPP loans at the end of the quarter. Excluding these PPP balances, total loans declined approximately 4% on an annualized basis as economic activity has weighed on loan demand in our markets. On a year-to-date basis, we have seen solid activity in our commercial real estate segments while non-mortgage consumer balances continue to decline; commercial line utilization returned to a more normal 44%, following a modest uptick to 46% at the end of the first quarter. While traditional lending activity in our footprint has slowed, we were very active in the SBA Paycheck Protection Program as outlined on slide nine. As of mid-July, we had originated approximately 12,800 PPP loans with an aggregate balance of $2.3 billion; approximately 85% of the PPP loans that we originated were for amounts less than $250,000. While regulations governing this program have been in flux, we continue to believe that approximately 75% of the loans that we have originated will be forgiven and off our balance sheet by the end of the year. In total, we expect to receive more than $60 million of loan origination fees associated with our PPP activity. Slide 10 updates our exposure to industries which we believe have primary or secondary pandemic exposure. Approximately $2 billion or 7% of our non-PPP loans are in industries that have primary exposure to the pandemic. These industries include non-essential doctor and surgery centers, the hospital and food service industries and retail companies. We also have identified our exposure to industries such as manufacturing and education, which may be less impacted by the virus. In total we have closely monitored the performance of these lending segments and have been pleased with our borrowers’ resiliency, while approved referrals in these categories totaled approximately $780 million. You can see that current active deferrals were only $356 million. This is the result of borrowers in these industries coming up from deferral and returning to current or paying status. Moving on to slide 12, our non-interest income increased 8% from the linked quarter driven primarily by strength in loan sale gains and stable swap revenue. Adjusted fee income ticked up to 13.7% of total revenue from 13.5% in the prior quarter. Despite strong fee income growth, fees as a percentage of revenue remain below our target, primarily as a result of continued strong net interest income growth. We remain focused on growing diverse revenue streams over time and enhancing customer adoption of the various financial products that we offer. Swap fees were nearly $15 million during the quarter as we originated back-to-back swaps on approximately $390 million of notional loans. While traditional lending activity slowed in the quarter, our borrowers continued to demand the interest rate protection provided by our swap offerings. Our net residential mortgage gain on sale income increased approximately 80% sequentially. The increase included $3 million for the change in fair value of loans held for sale and further reflected both higher loan sale volumes and gain on sale margin expansion. Residential loans sold totaled $240 million for the period, up from $200 million in the linked quarter, while the gain on sale margin increased 80 basis points to 3.26%. Slide 13 provides an overview of our quarterly operating expenses and the continued improvement in our efficiency ratio. Our expenses on both a reported and adjusted basis increased modestly from the prior quarter. Adjusted expenses exclusive of de minimis merger charges and $3 million of tax credit amortization totaled $153 million. This was up $2 million or approximately 1.5% from the prior quarter. Adjusted expenses include approximately $2.2 million of costs associated with COVID-19 and roughly $1.8 million of periodic technology costs related to our ongoing core system upgrade. Our adjusted efficiency ratio continued to improve coming in at 46.8% in the quarter versus 49.3% for the March period. As Ira mentioned, on a year-over-year basis, we have generated 31% revenue growth with only a 12% increase in adjusted operating expenses. We remain focused on expense management and are looking to identify potential opportunities to reduce expenses where possible. For example, it is possible that changing employee work patterns and customer behaviors may lead to further cost reduction opportunities. Turning to slide 14 on asset quality, our allowance for credit losses increased $26 million to 0.99% of loans from 0.96% in the first quarter. The allowance represents 1.06% of non-PPP loans—roughly two times higher than our reserve level at the end of 2019. The quarter’s reserve build reflects a $41 million provision and nearly $15 million of net charge-offs. Net charge-offs increased $10 million from the prior quarter. This increase is largely attributable to an $8 million Florida-based restaurant loan that came to Valley in the prior acquisition. This borrower faced significant challenges prior to the COVID-19 outbreak and became further stressed during the pandemic. While we have increased our focus on the restaurant exposure within our portfolio we do not view this loan as indicative of an outsized stress in our restaurant portfolio or in our Florida loan book. Taxi medallion loan charge-offs also increased to $3.3 million in the quarter reflective of another downward revaluation of medallions. The taxi loan portfolio stands at $107 million and carries a 58% specific reserve. The reserve build in excess of net charge-offs reflects updated economic forecasts within our CECL model. Our CECL model remains conservatively weighted towards Moody’s adverse and prolonged recession scenarios as a result of the uncertain economic outlook. Our model reflects some amount of GDP recovery in the third quarter of 2020, followed by GDP declines in the beginning of 2021 with the slow recovery throughout that year. We also expect unemployment to climb above 11% in early 2021 and remain in double digits for the foreseeable future. Future provisioning activity will be largely dependent on the degree that economic outcomes track our expectations. Non-accrual loans increased $5 million or 2%, reflecting modest increases in the CRE and residential real estate portfolios. As a percentage of total loans, non-accruals declined to 0.65% from 0.68% in the first quarter. In addition, we saw a significant improvement in our accruing past due loans, which normalized to 0.29% from 0.52% of total loans in the prior quarter. You can see the growth in our tangible book value and capital ratios on slide 15. Tangible book value has increased 8% in the last 12 months. Our tangible common equity ratio declined to 6.98% from 7.31% at March 31st. The $2.2 billion of PPP loans and our excess liquidity position reduced our tangible common equity to total asset ratio by approximately 70 basis points in the quarter. We continue to feel good about our capital levels and believe that the sequential growth in our risk-based capital ratios illustrate our improving ability to increase our capital levels on an organic basis. With that, I will turn the call back over to Ira for some closing commentary.

Ira Robbins, President and CEO

Thanks, Mike. The headline risk of COVID-19 has somewhat overshadowed Valley’s extremely strong year-to-date performance. We have produced significant positive operating leverage, which has led to a meaningful improvement in our pre-provision profitability. Over the last few years Valley has become a more dynamic and nimble institution, and we remain well-positioned to serve the diverse financial needs of our clients. I am extremely proud of the immense effort put in by our team and I know that this hard work will continue to pay off for our company and our shareholders. With that, I’d now like to turn the call back over to the operator to begin Q&A. Thank you.

Operator, Operator

Operator Instructions: Our first question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi, Analyst (Piper Sandler)

Good morning.

Ira Robbins, President and CEO

Good morning, Frank.

Frank Schiraldi, Analyst (Piper Sandler)

I wanted to ask on deferrals. Looking at the presentation, it really does seem pretty remarkable looking at some of the highly sensitive areas like hotels, and how much those deferral rates have come down. I guess part of those were already base, but I just wanted to ask about Florida. I heard anecdotally that hotel occupancy rates down in Florida were quite high in the early stages of the pandemic, and I am assuming it changed — so I was just wondering your thoughts about what you have seen so far in terms of deferral requests down there and how you anticipate that might trend?

Tom Iadanza, Chief Banking Officer

Sure. Frank, it’s Tom Iadanza. I will try my best to piece together the question; you are breaking up a little bit. As slide four pointed out, we had total deferrals at a high point of $4.6 billion; $3.9 billion of that was commercial related and $3.5 billion of that $3.9 billion is secured by real estate. There was no significant concentration by region. Every region was distributed roughly a third to Florida or Alabama, two-thirds to New York and New Jersey, which is our distribution of our total loan portfolio. On the Florida side, it does have a predominant level of leisure and hotel hospitality portfolio, but I will tell you of that portfolio, we have $193 million of deferred loans; $138 million met that first 90-day expiration period, and of that amount, $133 million went back to full pay. That’s our hotel experience, and our total hotel book is $488 million. So 96% of that hotel deferral went back to full pay after 90 days. We’re encouraged by the trends and I’ll give you a little bit more highlight because the experience is broad based. We are seeing that within New York, New Jersey, Florida and Alabama. If you look at that retail book we have, which is another high-profile, high-risk component, we had 90% of that retail go back to full pay: $359 million met that 90-day period, and $323 million went back to full pay. So there was a 90% experience — again, no different in Florida than New York and Alabama.

Frank Schiraldi, Analyst (Piper Sandler)

So even now with Florida having a tougher time, are you not seeing any change?

Tom Iadanza, Chief Banking Officer

No. No. Keep in mind, all of it is secured. We predominantly flagged based on hotels; we have personal guarantees. These are people who we have done business with for a long time who have weathered cycles in the past. We conservatively underwrite. The average loan-to-value on that portfolio was 56% at origination, and the debt service coverage was 1.7 times pre-pandemic. So we believe there was a bit of a cushion in there before we even have to rely on the guarantees, but the guarantors are stepping up and they are relatively liquid people for the most part.

Ira Robbins, President and CEO

Frank, this is Ira. I think on an anecdotal basis, getting to the point of your comment, in our conversations with many of our borrowers in the Florida footprint, some of the headlines are really disconnected with what they are seeing from an experience perspective; occupancy rates really haven’t changed that much.

Frank Schiraldi, Analyst (Piper Sandler)

Okay. And then just the NIM — if I set aside liquidity, with the CDs coming up for repricing, are you guys confident in core NIM expansion and NII expansion from here into 3Q?

Mike Hagedorn, Chief Financial Officer

Yeah. Frank, this is Mike. Well, I wouldn’t say core NIM expansion necessarily, I would say NIM protection. As the slide shows, that opportunity to reprice a lot of our funding sources gives us the ability to offset the reductions that we are going to see on the earning asset side. And don’t forget that part of that liquidity I referenced in my prepared remarks is a result of us essentially not buying any new fixed income securities for our investment portfolio, and think of that as basically insurance, because I think the cash flows we would buy today are pretty much the same cash flows we would buy in the not-too-distant future. We are going to try to stay liquid in the hopes that maybe this COVID situation gets better, and we will see some slightly upward movement in interest rates.

Operator, Operator

Our next question comes from Steven Alexopoulos with JPMorgan. Your line is now open.

Alex Lau, Analyst (JPMorgan, on behalf of Steven Alexopoulos)

Hi. Good morning. This is Alex Lau on for Steve.

Ira Robbins, President and CEO

Hi, Alex.

Alex Lau, Analyst (JPMorgan, on behalf of Steven Alexopoulos)

I just had a question on fee income — it’s down a bit from your waived fees for the quarter. Can you just talk about what you are doing on that front and what do you expect for the rest of the year? Thanks.

Ira Robbins, President and CEO

I think right off the bat, consistent with many other banks in the country, we elected to waive fees for many of our customers that were impacted by COVID-19. That said, it is a small component of the entire non-interest income base, and we have gone back to adjusting our fee schedule accordingly.

Operator, Operator

Our next question comes from Collyn Gilbert with KBW. Your line is now open.

Collyn Gilbert, Analyst (KBW)

Thanks. Good morning, everyone.

Ira Robbins, President and CEO

Good morning.

Mike Hagedorn, Chief Financial Officer

Good morning.

Collyn Gilbert, Analyst (KBW)

Mike, maybe if we could just start on the NIM, just to follow up on your comment about liquidity and how you are positioning yourself on the deposit side. So just to understand, the intention is to maintain that liquidity? I am just trying to reconcile because I presume a lot of that came from the PPP deposits — how are you thinking of the ultimate outflow on that, so could you walk through some of the moving parts on how you are seeing the liquidity movement?

Mike Hagedorn, Chief Financial Officer

So, on the first part of your question, as you might have noticed from prior comments we made in the first quarter, we have released some of that liquidity already, roughly around $500 million so far. So the goal isn’t to hold onto that kind of liquidity indefinitely and I think you will see us selectively use that where we think it makes sense. I can’t promise you that we are going to do that in the third quarter necessarily — we may. But no, we are not going to hold onto those higher levels longer term. When this thing started, liquidity was obviously the biggest risk. I think now the liquidity risk relative to the industry has abated quite a bit. On the PPP side, we had originally forecast that we would start to see some of that in the third quarter at least in a meaningful way. Now I think that’s going to be pushed off to maybe fourth quarter to first quarter of next year. And keep in mind, those yields, based upon the size of them because the fee income is different and the income accretes through, are roughly around 3.26% for us. So it’s a little bit lower in the portfolio, but it’s getting pretty close to where new loan volume is coming on as well.

Collyn Gilbert, Analyst (KBW)

Okay.

Tom Iadanza, Chief Banking Officer

And Collyn, it’s Tom. I just want to add that 21% of our PPP loans were to customers previously not with Valley. We generated approximately $150 million in deposits that were non-PPP loan-related deposits with that group and with an opportunity to solicit for even more. We have an active program going after that based upon what we now have as new prospects to generate even more business deposits from it.

Operator, Operator

Our next question comes from Steven Duong with RBC Capital Markets. Your line is now open.

Steven Duong, Analyst (RBC Capital Markets)

Hi. Good morning, guys.

Ira Robbins, President and CEO

Good morning.

Steven Duong, Analyst (RBC Capital Markets)

Just a question on your reserves: the 99 basis points now is almost double your fourth quarter level. With CECL that basically implies that you are looking at about 45 basis points of credit loss through the cycle and the assumption is based on a double-digit unemployment rate through 2021, is that right?

Tom Iadanza, Chief Banking Officer

So I won’t specifically address the 45 basis points, but I am going to point you back to the fact that the model is incredibly sensitive to the economic forecast. The most impactful factors are GDP and unemployment. I will tell you the percentages that we use so you can get a better feel as to where that comes out on a weighted average basis. For the second quarter, we used Moody’s June estimates and we used 50% for their S3 scenario, 20% for S4, and 30% for baseline. To give you an idea of the dispersion, baseline had GDP for third quarter coming in at 17.2% and S4 has it at 1.7%, so on a weighted average basis it’s 9.2% positive. When you look at the forward next seven quarters, it goes negative in the fourth quarter and negative in the first quarter of 2021. As I said in my prepared remarks, the unemployment rate is above 11% in early 2021 whereas in prior estimates that was more around 9% when you look forward. So it’s gotten worse on the unemployment side and it’s gotten less optimistic on the GDP side.

Steven Duong, Analyst (RBC Capital Markets)

Got it. And how would your reserve level compare to where you guys were in the financial crisis?

Ira Robbins, President and CEO

This is Ira. I think it really has to be considered together with where our capital position is. When we went into the last financial crisis we started with the tangible common ratio around 5.75%. Today, on an adjusted basis if you account for liquidity as well as PPP loans, we are close to 7.70%. So we are about 200 basis points more in capital today than we were when we went into the initial financial crisis. On the coverage ratio and overall loan portfolio, we think we are in a solid position as well. On an area basis we have a lot more reserves and stronger capital than we did last time.

Operator, Operator

Our next question comes from Matthew Breese with Stephens. Your line is now open.

Matthew Breese, Analyst (Stephens)

Good morning.

Ira Robbins, President and CEO

Good morning.

Matthew Breese, Analyst (Stephens)

Regarding the provision, how much of the $41 million was qualitatively driven, and how does that compare to last quarter? With more stability in the Moody’s forecast, should we view the majority of the reserve build in the rearview mirror at this point and that future provisioning should start to just reflect growth in charge-offs?

Ira Robbins, President and CEO

So the qualitative part was not a large portion of the $41 million. As it relates to your second question, you might see less reliance on the baseline scenario. As you can see, even in our weightings we only used 30% for the baseline this time, because generally people believe this might last a little bit longer. If you get that economic impact into your model you might weight more heavily toward adverse scenarios. So that would be a bigger driver of future reserve build than just small changes to the Moody’s estimates.

Matthew Breese, Analyst (Stephens)

Understood. And then on the expense front you pointed to $2.2 million of COVID expenses this quarter, $2.1 million last quarter, a lot of that is in regards to readiness. Should we start to see these figures start to wind down and therefore expenses flatten out or come down? You also mentioned potential room for expense savings—could you talk about areas where you see that possible and to what extent?

Tom Iadanza, Chief Banking Officer

On the $2.2 million, roughly $750,000 of that is related to enhanced cleaning procedures and that will be directly correlated to outbreaks in hotspots within our footprint, so over time you would hope that would come down. There are some marketing-related costs specifically tied to our recovery CD that we launched and Phase 2 of that program. Inside that number we also included expenses related to reopening: things like decals on the floor, signage, plexiglass, sneeze guards in certain locations — all of that is in that number as well and that should, over time, reduce itself.

Ira Robbins, President and CEO

Matt, we still believe there is significant opportunity to reexamine our business model and improve operating efficiency further. As we continue to enhance the technology platform there will be operational savings as we move across facets of the organization. If you recall about two years ago we presented what branch transformation looked like at Valley; up until this point we probably exceeded some of the metrics and numbers we provided. We think it’s prudent to reassess the entire platform regarding real estate expenses and look for more opportunities, not just from a branch perspective but from a corporate perspective as well. In addition there’s probably more to do from the Oritani acquisition integration.

Operator, Operator

We have a follow-up question from the line of Collyn Gilbert with KBW. Your line is now open.

Collyn Gilbert, Analyst (KBW)

Thanks, guys. Sorry, I wasn’t finished. Just on the NIM: you indicated there may be room on the retail deposit side to lower again. It seems like there’s more than maybe room. What would keep you from being more aggressive in dropping some of those retail CD costs?

Mike Hagedorn, Chief Financial Officer

I said there may be some room; that’s probably just me hedging. There is absolutely room, and slide six shows that opportunity. The rates you see in the third quarter, for example, include amounts that we know at today’s rates we could replace at lower costs. So absolutely we will continue to see reductions. The issue around stating a specific number is that with the CD book it depends on what maturity we want to pursue. We have been quietly building a nice ladder and extending out some of our longer-term deposits.

Collyn Gilbert, Analyst (KBW)

Okay. That’s helpful. And then some clarity on fee movements: first, your outlook on mortgage banking and where you see that trending in the back half of the year — was there a lot of pull-through in the second quarter, or do you expect activity to remain elevated as we move into the back half?

Tom Iadanza, Chief Banking Officer

When you look at our second quarter, 66% of our business was conforming for sale mortgage and 34% was portfolio. The refinance market is active and strong in this interest rate environment. We are pulling through on a similar basis so far in the third quarter and our pipeline remains somewhat elevated compared to the first quarter, similar to where it was in the second quarter.

Operator, Operator

We have a follow-up question from the line of Matthew Breese with Stephens. Your line is now open.

Matthew Breese, Analyst (Stephens)

Just one more on deferrals: you said there was a 90% cure on the commercial loans that came up. What was that on the consumer side and is there any reason to believe that blended cure rate is not something we should apply to the remaining $2.7 billion of deferrals?

Tom Iadanza, Chief Banking Officer

I don’t want to over-generalize. We had $525 million in residential mortgage deferrals; approximately $300 million of that came due — 60% requested a second deferral and 40% went on to full pay. On the auto piece, which is the bulk of our consumer balance, we had $116 million in total; $80 million came up and $72 million went back to full pay, so that was 90%. I think those percentages are in line with what we would have expected to see in those two categories.

Ira Robbins, President and CEO

Matt, I just think this speaks to the volume and to who Valley is and how we underwrite — the real differentiation of our borrowers versus many of our peers.

Matthew Breese, Analyst (Stephens)

Understood. Thank you very much. I appreciate the follow-up.

Ira Robbins, President and CEO

Thank you.

Operator, Operator

And that concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Robbins for closing remarks.

Ira Robbins, President and CEO

Thank you so much for joining us today. You can tell by the tone in our comments where we are really excited about the quarter’s performance, not just from an earnings perspective, but from a credit quality perspective as well, and we look forward to talking to you next quarter. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.