Valley National Bancorp (VLY) 2016 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Valley National Bancorp fourth-quarter 2016 earnings release.

(Operator Instructions)

As a reminder today's conference is being recorded. I would now like to turn the conference over to Mr. Marc Piro, Senior Vice President of Public Relations. Please go ahead.

Good morning and welcome to Valley's fourth-quarter 2016 earnings conference call. If you have not read the fourth-quarter 2016 earnings release that we issued earlier this morning, you may access it from our website at valleynationalbank.com. Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings, including those found on forms 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements. Now I would like to turn it caught call over to Valley's Chairman and CEO Gerald Lipkin.

Thank you, Marc. Good morning welcome to our fourth-quarter earnings release. I'm pleased to begin by discussing the executive reorganization announced by Valley earlier this month. With the promotions of Ira Robbins, to President of Valley National Bank and Rudy Schupp to President of Valley National Bancorp and Chief Banking Officer of Valley National Bank we have addressed Valley's long-term succession plans in a prudent and meaningful manner. Each of us, working closely together, will provide unique strengths and experiences. Which we strongly believe will positively impact the operations and performance of Valley as we collectively develop strategic oversight and direction.

Rudy will be responsible for Valley's lending businesses across all geographies. He will spearhead the change in philosophy in residential mortgage banking from a traditional refinance-driven originator to one focusing on the purchase, mortgage, and home equity markets. In addition, Rudy will be responsible for setting strategic direction and oversight for Valley's expanding wealth management businesses. Of course, Rudy will continue to give oversight to our Florida markets, as well as focusing on growing the New York and New Jersey segments of our franchise. Ira will be responsible for Valley's Consumer Bank, giving attention to our retail deposit customer base and the multitude of delivery channels through which our customers interact with the Bank. Ira will continue to oversee our human resources and treasury functions, as well as concentrating on improving Valley's operating efficiency and technology across all platforms.

Although the new responsibilities for Ira and Rudy reflect our expanding organizational hierarchy, we intend to mutually establish strategic direction and collectively collaborate on significant issues across all reporting lines. Personally, I am extremely pleased with the above changes. And am convinced that this will be significant in the importance for the long-term growth of Valley. The Board and I believe that the communities and customers to whom we provide banking services, the 3,000-plus employees, and the numerous shareholders who have trusted us with their financial assets will be well served by these changes. Although I have no near-term plans to retire, the Board and I recognize the importance of orderly succession. I firmly believe that with both Ira and Rudy along with the rest of our Management Team, the Bank is well-positioned for the future.

I would also like to take this opportunity to thank Peter Crocitto, the Bank's Chief Operating Officer for his 40 years of dedicated service to the Bank and to our customer base. He will be retiring at the end of February. Peter has made significant contributions to the Bank. Without his poise, intellect, and leadership prowess the Bank would have never blossomed into the nearly $23 billion Company we are today with meaningful operations in three states. Simply stated, thank you Peter.

In recent months we have noted improving consumer sentiment and generally economic conditions in each of our primary markets. This positive trend should be favorable for Valley, as the interest rate environment continues to normalize. And the forecasted growth in GDP should have a positive impact on loan growth. As we enter the first quarter, we are excited about our growth opportunities. We finished 2016, as you will hear in more detail from my associates, with a very solid loan growth. Historically, the first quarter has presented a challenging operating environment for Valley.

In the past, our automobile, residential mortgage, and traditional C&I portfolios were often negatively impacted by the weather in the Northeast. Florida provides counter cyclical balance to Valley's Northeast footprint as loan volume typically expands in Florida during the winter months. With the additional growth emanating from Valley's Florida footprint, the previous negative seasonal impact on Valley's aggregate loan portfolio should be somewhat mitigated.

As to our operating results reported today, we are very pleased with the strong performance of our Company during the fourth quarter of the year. Management continues to direct its attention on improving operating performance of the Bank. For the quarter, return on average assets was 0.88% versus 0.78% for the sequential quarter and 0.76% for the entire year.

Furthermore, Valley's annualized return on average tangible shareholders equity was 12.76% for the fourth quarter, and 11.07% for the entire year. This compares to 11.29% in the third quarter of 2016, and 7.66% for all of 2015. Our improved annual performance was a function of our strong top-line growth in net interest income, coupled with a larger contribution from non-interest income. Non-interest income, as a percentage of total revenue amounted to 14.31% for 2016 compared to 13.22% one year ago.

We are very pleased to report that the expense reductions announced in October 2015 were fully recognized during 2016, and resulted in an annual cost save of approximately $20 million. Our efficiency ratio, excluding amortization of tax credits and loss on extinguishment of debt totaled $35.1 million. And $13.4 million was 61.2% for the full year of 2016 and 56.56% for the quarter. Both metrics reflect significant improvement versus 2015, when the ratio for the full year was 66.34% and over 70% just two years ago.

We would like to emphasize the fact that all of our financial improvements were accomplished while still maintaining our traditionally high credit quality. At year end, total nonperforming assets amounted to $49.4 million. Only 2% of capital and total internally classified assets were approximately 16% of capital. Just last month we announced project LIFT. Rudy and Ira will provide more color on this and other projects. Rudy?

Thank you Gerry. Thanks for your words and also for everybody participating in the call today. I would like to talk about our efficiency initiatives as well as our lending results.

First project LIFT. Our purpose at a global level is really to create sustainable incremental cost savings and revenue enhancements as a driver to future earnings. The process is interesting. We took 19 of our best and brightest and assigned them full time to the project. I'm smiling a little bit because the team, the group leaders that had to give up these folks had a pained look on their face, because they truly are some of our best and brightest. That's the way to get it done. All of our line-of-business leaders are fully entrenched in the project. In fact, we have key meetings today and tomorrow.

We are guided by EHS Partners, which is the firm that we selected because they specialize in this. They have dealt with major financial institutions in America with this work. The approach is different. It is the bottom- up approach not a top-down approach so it's one where we will discover these ideas together. Through catalyst team members and line-of-business owners together we'll identify, we'll value and then the line-of-business leaders will own and implement those ideas in the project timeframe.

Speaking of timeframe, there are really two phases for the project. The first has been kicked off; Monday the teams coalesced, it will run through May. That's the idea identification generation period, valuation period, approval-of-idea period. Then come June 1, on out, basically will be the implementation phase. The time when we begin to realize the fruits of the labor.

Clearly some of those projects will have very different timelines for us to realize the benefit from them. We recognize that, but we are ready to go again June 1 implementing. Given the bottom-up design of LIFT, I think it's important for all of you in the investment community to understand that; we will be able to talk about outcomes. But really not until midyear. Because again bottom up will have a discovery period. And we will give you very transparent results, as well timeframe for when we can realize the benefits of the program.

I can promise you the Company is [call ester] on this program of the energy in the room is very exciting. It's wonderful because it's not someone telling us what to do, its us discovering the opportunity ourselves. With that said, I would like to ask Ira if he has some comments on LIFT.

Thank you Rudy. I think as we look across project LIFT [with] Valley National Bank, we are really intending it to be more of an opportunity for us. An opportunity to improve operating efficiency, an opportunity to improve the performance of the organization. As really well as an opportunity to enhance the culture throughout all facets of Valley National Bank.

We intend to take the concepts learned through this project and have it impact the allocation of resources today, as well as tomorrow. We intend to have it affect how we look at human capital throughout the Bank today and into the future.

Basically how we look at spending the financial assets that we have as we move forward. We hope to take these lessons that we've learned from these 19 people that have been earmarked for the program, and evaluate all different delivery channels that we have throughout the organization. Specifically, our individual branch network. Determining the prospects for the future branch networks as well as assessing the customer relationships that we have and how they continue to evolve in the changing landscape.

I think we're all excited about project LIFT. We believe it is going to be a short-term catalyst to improving the operating performance of the organization. But it will be a long-term vehicle to really shape the new Valley.

Thanks Ira. I would like to talk about residential mortgage. Recently we announced the recruitment of a top mortgage executive to lead our residential mortgage business here at Valley. No pressure Kevin. His name is Kevin Chittenden. He comes to Valley with a truly rich and successful history. And is fundamentally important line of business for Valley.

What are our goals? At a global level we want to make Valley's mortgage business, A, highly scalable. Second, we want to reorganize our approach to home equity lending. We want to deliver the very finest customer experience including turnaround times and more. We want to build the best-of-breed business, particularly in the purchase mortgage business to complement our historically successful refinance business. Purchase in recent history, has been just 12% of our business so we have real opportunity there.

Given the rise to a meaningful increase in Valley's noninterest income that can be derived from this program, we get pretty excited. That would be expressed in terms of mortgage gain on sale. That too is another goal. To do this Kevin is focused on state-of-the-art mortgage systems along with Bob Bardusch who is our Head of all IT.

Processes in the mortgage area, recruiting key operations, and producing team members in our footprint which is three states and maybe more eventually. And collaborating with proven legacy team members like Elizabeth Delaney in secondary market and so on. We would expect these initiatives to have a positive impact ultimately on our noninterest income al-gain-on sale. And at the same time, truly they will increase our noninterest expenses as well through salaries and commissions. But we expect it to work will for us. Largely during the second half of 2017 is I think you'll see the fruits of Kevin's labor.

Having said this, while residential mortgage is what we say under construction, we still have to perform in the current period. So in this connection residential had a strong quarter in Q4. Kevin's Team close $371 million in new originations; that's compared to $258 million in the third quarter. Only $66 million in the same period one year ago.

New Jersey continues to generate the lion's share of that activity. Although it's important to note that Florida and New York are increasing, as approximately 25% of the application volume was generated outside of New Jersey compared to 18% in the prior quarter. With that said and the pressure I put on this man, I would like to introduce Kevin Chittenden to you. And just ask him to make a couple of global remarks.

Thanks Rudy, I appreciate it. I'm very thrilled to be part of the Valley National Bank family. And looking very much forward to running the residential mortgage business. I'm really also very excited to build a high-performance mortgage origination business throughout the Valley footprint. And looking to expand us into markets that will help generate more revenue for the organization in 2017.

Great. Thanks Kevin. A few more remarks now on commercial purpose lending. Having said that, I will focus a little bit on Q4. These results are function of strong leadership in three high-performance states: New York, New Jersey, Florida. Under the exceptional leadership [in our] view of Tom Iadanza.

I should mention that when we recently reorganized, Tom works now directly with me and we reorganized such that Tom, in addition to being our Chief Lending Officer, assumed responsibility for the line in Florida. Where there are two outstanding regional presidents that report him. Sandy Hostetter, a terrific training in this business. And she is responsible, for we call Central Florida. Let's say from Vero Beach on the East Coast all the way through the Tampa Bay region north to Jacksonville.

And Jeff Klink who would have responsibility and does have responsibility for South Florida. So below Central Florida, both coasts, down to Miami down to Naples. Tom works in turn with three other fabulous leaders. We've got Mark Saeger who is as the C&I Department Head in New York. Dorothy Kahlau is a C&I Department Head in New Jersey and Russ Murawski is the CRE Department Head.

In Q4 activity was brisk across all geographies. The teams originated $1 billion of new commercial purpose loans in the fourth quarter. That's an increase of 30%. 30% from the prior quarter. The CRE teams originated $650 million of fresh loans. Of which $150 million were purchased participations.

The teams' originated C&I loans of $455 million, compared to $390 million in the prior quarter. And in addition to the new loan volume, line usage, which we always care about was steady at 40.7% in the fourth quarter. Let me mention that Valley's New York geography experienced the most significant growth. Increasing line usage from 32.5% in the third quarter to 37.3% in the fourth quarter.

At 12/31 when we look back over the year, the total commercial loan book, including C&I and CRE, stood at $12.2 billion, an increase of over $500 million from just the prior quarter of 9/30/16. All this was accomplished in three fiercely competitive markets. The good news is that there is still generous opportunity for growth in all of Valley's footprint. With that said, let me introduce Tom Iadanza to you, who most of you know and ask him to make a few remarks.

Thank you, Rudy. As was discussed, we reported solid loan growth in all our markets. Really thanks to the Leadership Team that was mentioned by Rudy. In early 2016, we implemented a program to organically grow our commercial loans and deposits. This initiative began paying off in the latter part of the year as evidenced by our results. We achieved this growth in all our regions while maintaining our excellent credit quality criteria.

Over the past two years, we implemented a strategy to actively manage out our weaker customers from both a risk and return standpoint. This has allowed us to maintain our excellent loan portfolio quality while achieving growth in all our markets. We will continue with these strategies into 2017. Now Rudy, I will turn it back to you.

Okay thanks, Tom. Let me turn the program over to Ira Robbins our new President of Valley National Bank. Ira?

Similar to what Rudy mentioned with regards to what we've seen in our residential mortgage department we've been extremely active within our technology of Valley National Bank over the last year as well. In 2016 as Rudy referenced we hired Bob Bardusch. Bob comes to us with extremely exceptional technology base, tremendous business acumen and a strong focus on customer facing maximization. He brings to us the large bank experience and will help provide strategic direction on a multitude of fronts.

With Bob's direction, we are focusing on increasing capital expenditures in 2017, from approximately $14.7 million in 2016 up to about $18 million. Although that increase doesn't seem like a significant amount, it's a meaningful change in how we intend to allocate the money in 2017.

Historically, largely focus has been on strengthening the infrastructure within the organization. As the banking technology environment changes you'll see much more of $18 million directionally focused on the customer experience across all of our delivery channels at Valley National bank. We intend to be judicious in how we spend this money, with a keen focus on the bottom line. We intend to understand and maintain the results of Valley National Bank, and recognize that performance matters. And it's critical to the long-term success of the organization.

We intend to have more focus on data driven analytics across the Bank. And making sure that each of our business lines are proficient in how they go about their processes and earn their cost of capital. Specifically, as I mentioned earlier, as we look at the branch network, we embarked on a pretty significant focus at the end of 2015 on right-sizing our branches. We applied what would be considered a typical approach of looking at how we want to right-size our branches by assessing customer traffic, looking at the proximity of our branches to other Valley locations. While we intend to use these similar metrics as we move forward, we're going to apply much more data driven approach as well.

Incorporating actual opportunities within each individual market. And looking at changing customer behavior patterns, as well as looking at our new digital and robust delivery channels that we're offering within each of these markets. We understand that there's definitely more work to be done with our branches, as we continue to move forward.

We have begun to invest more heavily in digital channels. During the quarter fourth quarter, we introduce an online payment platform. And our total online banking customers increased over 130,000 as of December 31. The mobile app that we offer has been has soared in usage during the last 12 months as well. Increasing in over 30% from where we were just one year ago. We're operating in exciting times. The changing consumer landscapes and digital environments provide us with an infinite amount of possibilities in how we connect with our customers and shape their user experience of Valley. Now I would like to turn the call over to Alan to provide a little bit more detail on the financial results.

Thank you Ira. We reported strong EPS growth both on a link-quarter and annual basis as Valley generated $0.19 per diluted EPS for the quarter and $0.63 for the full year. Net income available to common shareholders for the year was $161 million. An increase of $62 million from the same period one year ago. Even adjusting for the $51 million pretax loss on extinguishment of debt realized in 2015, Valley generated a double-digit increase in earnings and EPS.

Strong loan growth, as has been discussed, across all categories as total loans increased 14.48% annualized for the quarter and 7.44% for the full year. In line with Valley's internal growth projections. Loan origination activity was robust. As the Bank generated over $1.5 billion of new loans in the quarter bringing the 12 month total to greater than $4.9 billion. A record for Valley. In part, as a result of the strong loan growth, Valley's net interest income increased $10 million from the prior quarter to $164 million.

The growth in net interest income was also a function of an expanded margin, increasing from 3.14% in the third quarter to 3.27% in the fourth quarter. Linked-quarter increases in swap-fee income of $3.4 million, loan prepayment fees of $1.6 million, and PCI accretion of $2.4 million, all positively impacted the current periods' results.

As we move into 2017 we anticipate the margin to contract as some of the previously mentioned items will normalized. That being said, both the improving interest rate environment, and continued loan growth should have positive future implications on net interest income.

On the funding side of the balance sheet, interest expense actually contracted on a link-quarter basis. Although average funds from deposits and borrowings increased over $550 million. Average non-interest bearings expanded approximately $100 million from the third quarter. Contributing to the nearly $760 million quarter growth in average total deposits. Valley's loan-to-deposit ratio as of December 31 improved slightly to 97.2%.

Noninterest income for the quarter increased approximately $8 million from the third quarter. As Valley completed the previously disclosed sale of $170 million of performing residential mortgages. Residential refinance new application volume has declined considerably into Q1 of 2017. However, as Rudy indicated, as we migrate Valley's origination platform to emphasize purchase mortgage production, we anticipate stronger mortgage banking gains on sale in the second half of 2017.

Noninterest expense for the quarter increased to $124.8 million from $113.2 million in the sequential quarter. Largest drivers of the $11.6 million link-quarter increase were, number one, expansion of amortization of tax credits of approximately $7 million. And an increase of $3.3 million in salary and benefits. Of which most was attributable to increases in incentive compensation accruals, of which we anticipate declining significantly in the first quarter of 2017.

Improving the operating efficiency is a principal driver of Valley of strategic initiatives. And we intend to preserve this focus in 2017. As Valley looks to maintain an operating efficiency ratio adjusted for the previously mentioned tax credit amortization below 60% and trending down. Credit quality has been very solid at Valley. And as we stated many times before, credit quality is one of the hallmarks of Valley. Number one, nonperforming assets declined by $1.6 million for the quarter. And almost $29 million year over the prior year. Early-stage delinquencies increased link quarter but mostly related to current matured loans not yet renewed and one payment received late. Otherwise, delinquencies remain under control.

Net charge-offs were only $110,000 for the quarter. And a total of $3.6 million for the entire year representing 0.02% of average loans. The allowance for loan losses, as a percent of nonaccrual loans increased to 305%. That completes my remarks and now we will open the call to questions.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Morning everybody. I would like to start on the LIFT program. I know we're very early in the process and you're just starting. But how should we be thinking of a range of pretax pre-provision benefit from this program? Is it more than the $19 million from the branch efficiency initiative?

I think it's a little premature Steven for us to provide a little bit guidance on that. I think as Rudy mentioned we're going to be very transparent about what the actual expectations are for us. I think as Alan mentioned, we have strategic focus on improving the operating efficiency of the organization. We would not have engaged a third-party if we didn't think there was significant opportunity here to reduce overall expenses, improve efficiency, and enhance revenue within the organization. At this juncture I'm not sure we want to give specific numbers. It is something that's vastly important to us.

How is the consultant compensated for this? Is it a portion of the benefits they derive?

Absolutely.

Okay. Thank you. Shifting to loan growth. You guys ended 2016 right in the middle of that 6% to 8% original range you guided to. Is this still a reasonable target for 2017?

We're not uncomfortable with that.

Okay. My final one. Thank you.

For Gerry, many banks have had quite a challenge closing M&A transactions with the timing of many of these getting extended. Does this environment lessen your appetite to pursue a deal?

No. We have as was reported today, we have a strong asset condition. So the regulators from that aspect I don't believe would have a problem with us. We have a robust AML BSA program. For which we don't have the criticisms that a lot of the banks that have had problems getting into mergers. We have been working diligently, ever since the First United acquisition on enhancing and expanding our CRA operations.

Right now we're pretty comfortable. We just met with a group from different community activist groups. And they were very pleased with what we were doing. If they are pleased, I would assume that the OCC would also be happy with the direction that the Bank is moving in.

And is Florida still the target market?

That is our primary target market.

Thanks for taking my questions.

Sure. Thank you.

Frank Schiraldi, Sandler O'Neill.

Good morning.

Good morning, Frank.

A couple questions. First, Alan, in the past I believe on last quarter's call you talked about a $455 million expense base run rate for the year. I think that might have been for 4Q annualized. But is that a reasonable place to be? As we head into 2017 X whatever the LIFT program may provide back half of the year?

I think and I did mention this previously Frank. We have targets to get to a lower cost and a better efficiency. Project LIFT is going to help us. But in the interim as you've heard, we have number of other projects going on here.

We have the residential mortgage department that's going to be hiring people and doing things there. We have technology expenses and things we will be doing there. I don't know that I want to give you an exact number at this point, I think it's difficult. I think as I did mention previously, this is a ongoing growing organization. And I think for us to try and pinpoint an exact number at this point doesn't really make a lot of sense.

Secondly, just wondered -- sorry if I missed this. But in terms of the growth in auto in the quarter, does that give you more confidence now in the business that's a viable business for Valley going forward?

I think we are encouraged by the growth we are encouraged by the improved coupon Tom, in that business. The team is very dedicated to it. I didn't mean to speak for Tom Iadanza. I guess I grabbed the mic first. Tom Iadanza's also been relentless about taking some cost out of the business and making it more efficient along with Bob's help in terms of technology. I would have to say we are more encouraged than we were last year about auto business. But it's always under the magnifying glass for us.

Thank you.

Matthew Breese, Piper Jaffray.

Good morning everybody. Just on the net interest margin. I know there are some factors this quarter that led to the sizable increase. But if I look back, from fourth quarter 2015 to first quarter 2016 there were some similar items going on there. And I wanted to know if, on your guidance, that there could be some near-term contraction is it to that extent?

I think the way you should look at where we're headed on the margins is a lot closer to where we were at the end of the third quarter. I think we reported 3.14% This quarter have some unusual items as we reported. Some of those items may have been unusually high, but they're not unusual. They are continuing and they are there all the time.

I can not tell you exactly how much swap fee income is going to be there every quarter. But we are engaged in doing swap transactions on loans. So we anticipate that will continue. The same thing with things like recovery income. Or prepayment fees. And PCI loan accretion. The PCI loans have not gone away. We will continue to have accretion. We did look at, and we re-forecasted our portfolio at the end of the quarter. And as a result of that we had a little higher amount during the fourth quarter than we likely would have had going forward.

Matt, if you're looking at last year we went down 22 basis points between the fourth quarter of 2015 and the first quarter of 2016. If that's your question whether we anticipate another 22 basis point contraction, I think would definitely be no.

It's in line with, it's around that. We are talking about a, in terms of basis points a double digit move down. For the first quarter.

If you look at the factors that are impacting the quarter as we move forward as Alan mentioned, the interest rate environment is more beneficial to us as we continue to look at where we are. We are getting higher yields on auto portfolio, which would have some of our overall benefit as well.

We were able to bring down the funding cost last quarter. The overall funding costs in the bank went from 76 down to 73 basis points. Those were all positives for us. And they were trends that weren't seen prior fourth quarter to first quarter. I would say we're not nearly as negative as we were last year. At this time, with regard to anticipating where the margin was going to lead to.

Understood. Going back to the expense front. I understand that the LIFT program is too early on to identify potential cost saves. But maybe can help us with what the right efficiency ratio, the overall Company is? Has identified as where you want to go? And is that a 2017 or 2018 event? Or longer term? Where do you want to bring that efficiency ratio to?

I think we like to strive to mid 50%s or lower if we can. Again, the amortization of tax credits, which is a large item, really has nothing to do with the operations of the Bank. And that is why we continually talk about it without that number in there. Because it really reflects the effective tax rate of the Company.

When you look at the efficiency ratio, in my opinion, you have to take that out. That being said, we also have some things that are a little bit out of our control. Let's take the FDIC insurance. There was an additional bump on the larger institutions above $10 billion. And so that cost us some extra money. Those are things really out of our control.

And as I mentioned earlier, I think the issue with other costs, we are trying to get those down. Project LIFT is going continue to help us do that. As Gerry mentioned we had a $20 million savings from last year. But as I've also told, this is a dynamic organization. And it's growing. We would like to be at that mid 50% range or lower if we can get it there. That's what our goal is.

Understood. Whatever the expense saves are from LIFT will those drop to the bottom line or what percentage of the cost saves do you expect to be reinvested?

I don't think we can, once again, answer that question at this point. I think it's too early.

It's difficult with our design model from the bottom up. I think you hit it right, asking about a target efficiency ratio. Because the companies that we admire from an efficiency perspective are in that zone of low 50%s to just shy of mid 50%s. That's what we're targeting. There are so many puts and takes this year because we are going to invest in the residential mortgage at the same time. We know it has again gain on sale as the plum, and yet it has increased noninterest expense associated with it.

We will invest in technology incrementally which we should. And the other I think, is LIFT because we are doing it bottom-up. Honestly, we think it's the right way to go. Because we think ownership of the ideas that come out of LIFT will be highest and best by virtue of doing a bottom-up approach. Rather than saying fine $20 million, $30 million, $40 million. Instead we're saying let's do a bottom-up and see what your discovery yields.

Not trying to dance around it truly. A lot of puts and takes. But we are committed to having efficiency ratio that I think is as Alan said, low 50%s would be the target mid 50%s maybe as a first step. And sustainable.

I think as you look at where we're moving to I think as we overlay some additional CapEx on the technology side as we bring on some additional people within the residential mortgage area. The focus still is on the bottom line in the organization. And that's a number one driver. So as we put those forward they're going to be level headed as to how we approach that. Back to your question with regard to LIFT.

Our incentive, is on a net basis. And the consultant's incentive is on a net basis as well. So it's not as if the consulting gets paid based on gross savings. If there's technology expense associated with the savings then that comes out of what the consultant gets as well. In our mind, it's all on a net basis after any kind of investment that's required. We think there's a significant opportunity for the organization.

Understood. And that mid 50% efficiency ratio is that it one-year, two-year, five your goal? Can give us an idea on timing of when you want to get there?

A lot sooner than five years. That's for sure. I think we need to look at that as in the next one to two years we need to be at that level.

Understood. Very helpful. Thank you guys.

Thank you.

(Operator Instructions)

We have a question Collyn Gilbert, KBW. Please go ahead.

Thanks. Good morning guys. As you think about the loan growth and the opportunities that you guys are seeing in both your legacy markets up here as well as Florida, how do you see that mix evolving throughout the year? And especially with what you're trying to do on the auto side? I know you hedged your comments in the press release that you could see balances decline there. But just where do you see the better opportunities for how that mix starts to change as the year goes on?

Collyn as I mentioned in my comments, Florida is countercyclical to our New York, New Jersey markets. And as Florida becomes a larger piece of the pie, so to speak, that offset becomes more and more important. We traditionally would drop-down particularly in the auto and residential markets in December, January, February up here. Because weather issues, you've got a snowstorm and people don't go out and buy cars. They don't go out and buy homes.

In Florida, that's their busiest season. That's when the population gets all of the snowbirds coming down and visitors going down there. I think in the long run, that's going to be a good counterbalance to what we do up here. We are quite excited. I think that will add significant amounts to our loan volumes. We are refocusing ourselves again, as was mentioned, on the automobile business.

Historically, we always did a quarter of our business, and I don't think it will get back to that quite soon, but we used to do a quarter of our business in automobiles. I would like to see a larger percentage of our business coming from that area again. While it does not have the highest yield on it, it has a very short duration so it always gave us great liquidity. There are other measures as to why we like to plant the money there. It gives us certainly a better yield they putting it in short-term treasuries. And historically the performance has been good.

We don't engage in sub prime auto lending. It's a high-end customer base with an appropriate yield for risk.

Aside from those two things how do you see the CRE the C&I, and components playing out?

Our CRE has remained very strong. Our delinquencies and our losses have remained very low. We do a very strenuous underwriting at Valley. We stress test every piece of property. We use what we call our artificial cap rates when we stress the property. So an appraiser may come in with a 3.5% or 4% cap rate that other banks would be accepting but we don't here. We don't we re-underwrite it, using a stress cap rate for example of 5.5% on a multi-family. By doing that, I think we fortify the portfolio from a quality standpoint and a performance standpoint. We've never had CRE problems at Valley. And we've gone through at least six or seven recessions during my tenure here. And we've always come out well. That's, I think, because of our underwriting standards.

Collyn, it's Rudy. As a bank, and lead by Tom Iadanza, we put a lot of emphasis on simulating C&I growth for exchange purposes and some improved coupons and shorter term loans that revolve and the like. Again the take away from this quarter is $455 million of C&I loans in relation to $615 million in CRE. Tom is really nailing the dismount on elevating C&I lending for us.

We think that's a sustainable emphasis throughout the Company, including Florida. Which is an important fraction, but a fraction the size of the New Jersey and New York teams, though growing. Florida has put a big emphasis on C&I lending, as well. And really put in strong results this year. So again, under Tom's leadership I think we are beginning to change the mix on the margin. It takes a while like an aircraft carrier to turn it, and we love CRE lending especially, because we are good at it. As evidenced by our small delinquencies statistics. I think that's a remarkable thing to take away from Q4.

Okay. That's helpful. On the deposit side and deposit pricing. The cost came down this quarter. How do you see that trending given need for deposit funding and competitive dynamics going on in the marketplace? Where do you guys see the deposit costs going as we look out for the year?

I think our market is probably going to be different than some other markets. There's a lot of banks are space that have loan to deposit ratios that are probably greater than other areas of the country. The margin, the cost to deposit of acquiring a new deposit is probably going to be little bit more expensive in our geography than some others. That being said, we have a very strong non-interest-bearing customer base. We have a lot of C&I business with mandated compensating requirements on the deposit side.

Those benefit us as we move forward. On the aggregate, I think acquiring that next marginal cost of deposit would be maybe more expensive than what we're seeing in other spaces. That being said I think the ability or the sensitivity of the data we have our folks right now probably are not as sensitive as some other organizations

Okay. That's helpful. Thanks guys.

Thanks Collyn.

Follow-up question from Frank Schiraldi.

Just one follow-up on the efficiency ratio discussion. I want to make sure have this right. Alan, when you were talking about efficiency ratio you said you really should take out the amortization from the tax credits.

So, I think there was a $7 million increase this quarter. I guess that's $13 million total about in the quarterly results. So best way to think about the mid-50%s or the efficiency ratio you want to get to maybe mid-50%s hopefully below that is to first exclude that expense.

Exactly right. Again because efficiency is supposed to measure the efficiency of what it costs you to produce revenue. It's a tax-related item. And it's only because of the way the accounting requires us to account for it that it's not included down below in the tax line. So it's included up above. That being said, it has an impact on the tax line; it has no impact on the rest of the operations.

Sure. I just want to make sure I'm thinking about what the reported efficiency could get to, because of you take out that $13 million in this quarter, I know there was some extraordinary items may be in the margin or some outsized items in the margin. But you are already out that if I exclude the $13 million. Already at that mid-50%s efficiency ratio.

But we're trying to be there on a (multiple speakers). I think if you look at our numbers for the full-year and you exclude it, I think we are right around 60% to 61% as compared to 56% for this quarter. That was a quarterly number.

I want to see that we get there on a consistent basis and then below that. I think Rudy pointed that out. We want to get not just to 55% but to lower number than that. But it needs to be more consistent I think

Got you. Thanks.

Thanks Frank.

At this time there are no further questions in queue.

Thank you for joining us on our fourth-quarter conference call. Have a good day.

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