Valley National Bancorp (VLY) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Second Quarter Earnings Release Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Marc Piro.

Please go ahead.

Good morning.

Welcome to Valley's Second Quarter 2017 Conference Call.

Today's call will include coverage of the investor presentation materials, which include highlights of the merger, second quarter 2017 earnings and the results of Project LIFT.

These investor decks are meant to accompany the presentation made by management during this call and can be found on our website at valleynationalbank.com.

If you have not read the second quarter 2017 earnings release or merger release or the associated Form 8-Ks that we issued earlier this morning, you may access it from our website at valleynationalbank.com or at the SEC website.

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-Q and 10-K, for a complete discussion of forward-looking statements.

Now, I would like to turn the call over to Valley's Chairman and CEO, Gerald Lipkin.

Thank you, and welcome, and thank you for attending our second quarter earnings call.

This has been a very exciting period for Valley.

The second quarter through today contain the completion or start of several important steps to enhance the Valley franchise and achieve or producing long-term superior returns for our shareholders.

During the quarter, our company produced favorable income and operating results, both in line with our internal projections and many analysts' earnings expectations.

At this time, I will touch upon some of the highlights of the quarter, and then Alan will go further into the details.

Net income increased to $50.1 million, up from $46.1 million in the first quarter of 2017 and $39 million in the second quarter of 2016.

This represents increases of 8.6% and 28.3%, respectively, over those periods.

Diluted earnings per share increased from $0.18 -- increased to $0.18 from $0.17 in the first quarter of 2017 and $0.15 in the second quarter of 2016.

Net interest margin increased to 3.20% from 3.14% in both first quarter 2017 and second quarter 2016.

Return on average assets increased to 0.86%, increasing from 0.80% in the first quarter of 2017 and 0.72% in the second quarter of 2016.

Return on average tangible equity increased to 11.88% for the second quarter and compared to 11.09% and 10.38% in the first quarter of 2017 and the second quarter of 2016.

The efficiency ratio, excluding tax credit investment amortization for all periods, was 57.6% compared to 61.6% in the first quarter of 2017 and 63.8% in the second quarter of 2016.

Our annualized growth was 6% for all loan portfolios during the quarter and that's after $122 million of residential mortgage loans were transferred to loans held-for-sale at June 30, 2017.

And credit quality remained well controlled for the quarter, as total accruing past due loans were only 0.23% of total loans at June 30, 2017.

Even more exciting, our solid earnings results for the second quarter of 2017 do not reflect our Project LIFT, which recently completed its discovery and approval phase and has just begun its implementation phase.

Shortly, you will hear much more about this program from Rudy Schupp and Ira Robbins.

And to make this morning's announcement complete, it is with the greatest pleasure we inform you of the signing of a definitive merger agreement with USAmeriBancorp.

This is a high-performing, $4.4 billion company with its headquarters in the rapidly growing Tampa Bay, Florida MSMA.

It operates 15 offices in the area and holds approximately $2.4 billion in deposits and $3.1 billion in loans in Florida.

Also, it generates approximately $1.1 billion in deposits and $520 million in small and modest-size business loans through 15 offices in the Birmingham, Tallapoosa, Montgomery, Alabama, marketplace.

It is anticipated that Jennifer Steans, Chairman of the company, will join Valley's board in connection with the merger.

Adding to our bench strength, Joe Chillura, CEO; and Al Rogers, Chief Lending Officer have each signed multiyear employment agreements with Valley.

Rudy Schupp and Ira Robbins will give more color on this acquisition in a few minutes.

Before I turn the microphone over to Alan to discuss the quarter's results in detail, I want to express my thanks and appreciation to Rudy, Ira and the entire Valley team for their untiring effort to bring these events to fruition.

Alan?

Thank you, Gerry.

Good morning.

I'd like to start by reiterating some of Gerry's comments.

We had a very successful quarter.

We were very pleased with the results that we had, and all of this, as Gerry also indicated, is before the acquisition and before the LIFT program, which Rudy and Ira will talk about a little later on.

So let me start by talking about net interest income and the margin, and we're on Page 5, actually, of the deck that we've sent out to you.

So as we said, the margin increased 6 basis points from 3.14% to 3.20%, and there's a number of things that, obviously, contributed to that during the quarter.

First of all, we had very solid increases in net interest income both quarter-over-quarter and year-over-year.

The average loans increased $389 million over the quarter, and we've seen on all new originations coming in the door that rates have increased across the board.

During the course of the quarter, as you all probably know, we saw a Fed rate hike on March 15 and then a second one that occurred on June 15.

So we have approximately $5 billion of loans that are impacted by the movement in that rate hike.

So that helped a lot in this quarter to see the increase, and obviously, the June increase will help us as we move into the next quarter.

We did report during the quarter, as we indicated, about $3.5 million of net swap fee income quarter-over-quarter, which helped to increase the margin.

We did slow some of our investment purchases down.

We're trying to make a little room for higher loan level growth and at higher rates.

You've also noticed that our deposit rates have begun to increase, although not as dramatically yet as we've hoped that, even with the Fed raising rates and other rates are moving up.

But in order to both retain deposits and to grow deposits, we have begun increasing those rates pretty much across the board.

And you can see in our time deposit category that we did have some nice growth in there, and we're trying to move those deposits to get them in line with the loan growth that we've seen so far this year.

One of the things that helped the quarter was there was a slowdown in the amortization of investments, and the amortization slowed to help us boost the yield a little bit on the investment portfolio.

As a result of some of our deposits being down, and some of that is due to some high deposits at the end of the year that actually we anticipated leaving us, we have used various alternative sources of funding, mainly the home loan bank and some repos.

And we have utilized them at rates we deem to be very respectable and that are helping our margin, as you can see, this quarter.

And as a result of both the cash flow, rate resets and new loan volume, we estimate that about 40% to 50% of our loans adjust annually.

So we do expect to continue to see as the market moves rates increase.

If you go -- if we continue on that page, on Page 5, we can talk a little bit about loan growth.

The chart shows that year-over-year we showed nice growth in CRE and Construction.

We did have some growth in C&I, and overall, the loans year-over-year increased by 7%.

So one of the things not shown in here, and Gerry mentioned it, is we did transfer out $122 million of residential loans at the end of the quarter.

So we're showing a decline in residential loans period-over-period.

However, we have been quite active under Kevin Chittenden's tutelage, and we have been seeing an increase in applications.

Loans closed represent more of purchases than refis, especially as that refi market begins to slow down.

And during the quarter, we actually saw 62% of the total closings were purchased activity or $30 million over the prior period.

New apps for the quarter were about $405 million, and this was an increase of about 91% over the first quarter.

So the activity has started to pick up.

We want to -- brought in a lot of new lenders, and there is a lot of activity going on, and we're looking forward to this growth in pipeline.

We're also seeing applications that are coming from the various states, and that's starting to shift a little bit.

New Jersey was at 61% during the quarter, New York at 28%, Pennsylvania 5% and Florida 6%.

So one of the things we're seeing is a little more exposure to other markets and not just the New Jersey market.

New York probably because we put on some teams there, and that started to help build the New York volume.

In addition to all of those things on the residential side, we're also seeing the average loan size increase, and that's going to be a benefit to us, and that's both on the purchase loans and on the refinances.

We are building teams, as I said, to help increase the flow of loans, as part of our vision is to increase the gain on sale and noninterest revenues.

Commercial line usage on the commercial side is up a small amount quarter-over-quarter.

The commercial loan pipeline continues to be strong going into the third quarter and is about 75%-or-so greater than where it was about a year ago.

And while C&I growth doesn't show all that much growth, a lot of those loans coming on C&I portfolio are owner-occupied loans, and they get classified as CRE loans.

So all our areas in the commercial side as well are very active, and volumes are increasing.

The consumer business also remains robust, and that's especially in this collateralized personable -- personal lines of credit.

So if we go over to the next page, which is Page 6, there is a discussion about operating efficiency in here.

And I know Gerry mentioned what that efficiency ratio is, and by the way, on Page 17, there is a chart in the back of the -- in the appendix, which shows the calculations of this and what we're showing.

But basically, what you're seeing in this chart is that our efficiency ratio back at the second quarter of '16 was 63.8%, [see] 57.6%.

And that's after removing the tax credits that Gerry mentioned, as those really have no benefit to the operations.

It only benefits the tax line.

So we do remove that.

And then, what you see in here is a reconciliation, which says that we're at minus 0.3% in terms of cost saves, meaning our costs went down period-over-period.

And then we also had an increase of revenues year-over-year of $17.9 million, which is highlighted on the right side here, which shows you a decline also of 5.9% to get you to that 57.6%.

So basically, what we're showing during the course of the quarter is we had very strong operating leverage, which really is helping the numbers.

And remember, keep in mind that none of this has anything to do with Project LIFT.

That'll all be discussed later, and that is yet to come as we move forward.

If we move on to Page 7. Page 7 discusses the credit quality.

Once again, we were very satisfied with the credit quality during the course of the quarter.

Our past dues and nonaccruals declined by 14 basis points to 0.47%, and a lot of that came from the fact that we do have the taxi cab medallions, which we have been discussing, about $140 million, of which 10 are in Chicago -- $10 million are in Chicago, and $130 million are in New York City.

A lot of those during the course of the first to the second quarter were in a past due category of 30 to 59 days, and they were matured loans that had not yet been redone.

So that occurred between the first and the second quarter.

And many of them, of course, did go into TDR.

And we only have 1 real relationship that's past due at this point.

Nonperforming assets remained steady at 0.23%.

The provision which is discussed in the press release was $3.6 million.

We did have net charge-offs of $2.7 million during the quarter.

And as we indicated as well in the release, there's about a $1.8 million relationship that caused the majority of that net charge-off.

You can see, by the way, some of the percentages on the right side and how we compare to our peers.

And I think you'll find that -- I don't know at this point that it's enlightening because we've been showing it for a long time, but our charge-offs are very, very low compared to our peer group.

And lastly, just the taxi medallion portfolio.

Again, we have talked about it.

We have picked up a fair amount of TDRs.

We have reduced the value of our taxi medallions.

Last quarter, we were up at about $550 million -- $550,000, excuse me, for a medallion, and we're down under $400,000 right now.

So we continue to monitor that very closely.

And we are comfortable that almost all of those loans are currently now performing.

And we do have reserves in the allowance to take care of it.

So we're comfortable with what our situation is at the moment.

So that really covers my portion of the earnings for this morning.

Obviously, we hope you will have read our release, which has a lot of other information in it.

So at this point, I'd like to turn it over to Rudy Schupp, who will discuss the LIFT initiative.

Okay.

Thanks, Alan.

So on Slide 9, we want to remind the audience, we've talked about this on the road quite a bit, that we have really 3 crisp, major strategic initiatives for Valley.

And they include enhancing our noninterest income, growing our customer base, simply grow -- good growth and improving our operating efficiency.

And so when we look at noninterest income, we have a series of engines that we've engaged to produce what we think of as sustainable income sources at the 15% to 20% level.

We're well on our way.

We're excited about it.

We're going to come back to that theme in a moment.

With respect to growth, we seek to be a growth bank.

We want you to think of us as a growth bank at the 8% to 10% loan growth level organically.

And we would punctuate that occasionally by -- perhaps by acquisition.

And when we think about efficiency, we've made great strides.

I think back to '14 and '15 and I look at us today, you saw the announcement Alan reviewed, we've made great, great strides, again.

All of our goals are about sustainable statistical conclusions to our goal.

If we toggle to Page 10.

First, let's review the noninterest income revenue goal.

Resi mortgages are our single largest engine for creating a sustainable gain-on-sale model.

It's in our DNA.

Valley has been in the residential mortgage business for many decades.

Our challenge here candidly was that we've been imbalanced historically with a refi program but not really on the purchase mortgage business and not with a purchase mortgage engine.

That's no longer.

If you see our mix change already, from 9% purchase to 62% purchase, again, under the tutelage -- I can't spell tutelage, but I know it's Kevin Chittenden's tutelage, and he is something else truly, and his team.

We are recruiting in all 3 states.

We're building a formidable operation.

You'll see this engine drive noninterest income for us.

But we're not just a one-trick pony with respect to noninterest income.

We're building these other businesses that we highlight at the bottom of Page 10: Valley Trust and a complete overhaul for the team that is aggressively building investment management clients; our Hallmark Capital Management group, which is a 4-star Morningstar-rated business; and our Commercial Purpose Premium Finance operation under the guidance of Tom Iadanza.

If we flip to Page 11, we'll talk for a moment about growth because today Valley is a growth organically and acquisitively.

We highlighted our major geographies here.

Under Tom Iadanza's direction, candidly, we're still very dedicated to the CRE business.

We are emphasizing C&I lending across all of our geographies.

We think that's going to be good for mix change like other metric.

At the same time, again, Kevin Chittenden is growing the resi mortgage business with a purchase team.

But again, in the end, with resi mortgage we just -- we want balance -- we want a balance between refi and purchase depending on what the economy naturally delivers to America and to our geographies.

Kevin is well under his way -- underway, if you will, with that transition.

On the Florida side, we're very excited about Florida.

I mean, it's growing from a GDP perspective at twice the rate of the rest of the country.

We just needed Florida -- the Florida franchise to be bigger.

So in a moment, we're going to celebrate together our proposed merger with USAmeriBank to do just that, that coupled with, candidly, our existing Valley Florida teams who have been growing at a double-digit rate.

So we're really quite excited about that.

So we'll come back to that theme.

As to our efficiency goal, I'm going to kick it over to Ira Robbins to talk with you about efficiency.

Thank you, Rudy.

So the third pillar of our initiatives really is to improve the operating efficiency of the organization.

This really was a multifaceted effort that we started in 2015 that have a sustainable manner that we're able to facilitate a change in culture that we have perpetual improvement throughout the organization.

In 2015, we announced a branch rationalization program that was about $18 million at that time and included the closure of about 30 branches, which was 30% of our overall footprint.

We executed on that transaction within -- I believe, within 12 months, and we did about $1.5 million greater than what we originally announced and a quarter ahead of our original schedule.

Before this branch rationalization program, we had an efficiency ratio that was close to 70%.

In the last 18 months, we brought that down 10% to right around 60% today.

And so talk about LIFT, the goal is to get that in the mid to low 50% range as we continue to move forward.

If we turn to Slide 14, we really want to talk a little bit about what Project LIFT was to us, the process we went through and then we get to the results of what we've done here.

I think, as we've mentioned over the last couple of quarters, we identified a bottoms-up approach in implementing Project LIFT, where we own the results, the business line leaders own the implementation of it and we engaged a third-party EHS to come in more as an advisory role to help us facilitate the process.

It was important to us not to have an adviser come in to own the process but an adviser to come in to help facilitate the process that we as an organization owned.

We staffed the group with 20 people internally here, high-trajectory people, and had them work for 6 months with every single employee throughout the organization.

That was the bottoms-up approach.

Now, we're at a point where we're able to deliver on what those ideas were, and that'll be top-down.

We had over 1,200 ideas that came about, 300 of which plus or minus is what we're going to execute on.

We have a dedicated implementation team to make sure that we execute upon the ideas that we're going to present to you.

Similar to what we did in our branch rationalization program, it's important to us to make sure we deliver what we're showing you as well as in an appropriate time manner.

Turn to next page, 15.

This is the result of what Project LIFT has come up with.

$22 million of recurring annual pretax sustainable benefit to Valley National Bank.

The $22 million is comprised of $19 million in expense reductions and $3 million of revenue enhancement.

The $19 million of expense reductions were based off of $480 million of consensus noninterest expense as we move forward.

But keep in mind, that $480 million includes many items that we believe to be noncontrollable, such as FDIC insurance of about $20 million, tax credit amortization of $25 million and other items that really are uncontrollable by Valley at this point in time.

So the $19 million of expense reductions are comprised largely in compensation area, with 70% of the $19 million, about $13 million, will be in that area, which reflects about 5% of the overall total compensation expense of Valley National Bank.

Now there's about 250 ideas that comprise that $19 million, which sounds like a lot.

But when you boil it down, there's only 20 ideas that equates about 65% of the total expenses, a much more manageable number when you look at the execution as to what we have to deliver here.

If we give it over to the execution, in the bottom of the page we talk about what the noninterest expense projections are going to look like.

We provided what 2017 is, 2018 and 2019 and what the capture rate of each of that is going to end up being on the expense side.

And I would like to highlight in 2018 our expectation is that $17 million of the $19 million, or 90% of the total expenses, will be captured, with the rest being captured in 2019.

And I highlight this because of the execution component associated with it.

In our mind, putting out expense reductions that really aren't going to be captured until 2019 creates a lot of exposure as to whether we're going to be able to actually recognize those.

But having a low number of ideas, combined with the implementation being in a short period, in our mind reduces a lot of the exposure when it comes to the capture risk associated with it.

And Rudy is going to mention real quick about what this looks like in totality for us.

Yes.

So if you look back at us in the last couple of years and we bulked together our $19.5 million that was largely branch rationalization with the $22 million, which is not really branch rationalization, that equates to cost saves that we've harvested or will harvest to, say, 10% of our operating cost in the aggregate for the company, which is incredibly powerful.

In fact, if we reduce our total operating, that which is controllable -- or as my friend says impressionable -- it's an even higher statistic.

So that's why we're so thrilled, and I think to punctuate the LIFT program, we've truly created now a culture of continuous quality improvement inside the company with a group of young, high-trajectory people who are going to help us year in, year out look at the company self-examination so we can be better stewards of our cost of doing business.

So we're thrilled about that.

We hope you are too.

So now we're going to transition to talk about the highlight of the day, which is the proposed acquisition of USAmeriBank.

This will be a major driver coupled with our organic work of the growth initiative, which is, again, the acquisition of USAmeriBank.

Joining us today, we have Joe Chillura here again, as our CE -- USAmeriBank CEO; Al Rogers, Chief Lender; Amanda Stevens, Chief Financial; and Greg Olivier, who is Chief Credit and Chief Risk Officer.

And I'll tell you, it's been an absolute pleasure to work with these 4 leaders.

They are really something else, and they're going to make a difference because this is a people business, front to back, and these are some kind of people.

We're excited for you to meet them.

Let's talk about the deal a bit.

If you look on Slide 4 in the acquisition deck, we just highlight the growth initiative because USAmeriBank announcement points to and feeds our customer base growth goal.

And it also shifts a large segment of our balance sheet to the very, very high growth Florida market for Valley.

I'm going to kick it to Ira, so he can talk about the components of USAmeriBank.

Thank you, Rudy.

As Gerry mentioned earlier, USAmeriBank is evenly split in its branch distribution network: 15 branches located in Florida, another 15 located in Alabama.

That being said, approximately 70 though -- 70% of the deposits are actually located in Florida compared to 86% of the loans that are located in Florida.

USAB was led by a strong management team consisting of Joe, Al, Amanda, Greg, [Vicky] and Tina who built a tremendous franchise.

And you can look at the financial highlights on the right-hand side and look at the ROA number that was generated just in second quarter of 1.19%.

The loan book is comprised largely of CRE, similar to what Valley is, about 54%.

When combined with Valley's 52% though, there really isn't much change, going to about 53% of the overall loan book on an aggregate basis.

They were a little slightly higher on the construction, 12%; with Valley's 5%, that really only increases the combined organization to 6%.

And the deposit franchise was a very strong franchise as well.

25% of the deposits are comprised of noninterest-bearing deposits, largely of a commercial nature and compensating balance requirement.

And overall, I think maybe a little bit different from Valley, they haven't really relied on the wholesale funds to the same degree that Valley has.

They -- about 90% of their total funding base comes from deposits, which is a pretty strong measure.

If we turn to the next slide, we can talk about the historical performance of USAB and what's really driven a lot of that ROA number.

If you look at the total asset growth of the organization, about a 15% CAGR over the last 4 years.

When you look at the loan growth, 17% in 2015, 15% in 2016 and 13% on the year-to-date annualized number.

When you couple that with the contraction in the efficiency ratio from 58% in 2014 down to 52.2%, where they are today, it's easy to understand why the net income has accelerated at 29%, and they're sitting with that 1.19% efficient -- return on asset number.

This mix was obviously very attractive to us.

Rudy will give a little bit overview as to the markets, and we'll get back into the transaction details.

Thanks, Ira.

On Page 7, if you look at that, clearly this acquisition substantially increases and expands Valley's Florida franchise.

If we look at the right, the biggest boost is in the Tampa Bay area.

This first cell, called Tampa, fuses Valley Florida's region -- Tampa region numbers, if you will, with those of USAmeriBank.

So you can see here, there'll be 18 offices, a powerful loan book of $3.1 billion, deposits $2.5 billion and our market share approximating 3.6%.

If we look at Southeast Florida and Orlando for Valley Florida, I do want you to understand that this does not include a very significant consumer loan book, mortgage, indirect auto and some of the purely commercial purpose loans, you see the statistics for those parts.

So you flip over to the bottom left, you see that for the state of Florida post-acquisition, we're looking at a 46 foot -- sorry, 46-office footprint, our distribution system and $4.8 billion in loans, $4.9 billion in deposits; plus, we would add Valley's consumer book also.

If you look at the map, I think you see here a distribution system in the high population areas, the high growth areas of the state of Florida.

So we are incredibly excited about this merger.

Our Chairman when he bought my old bank, 1st United Bank, in late 2014, had an aspirational goal that he expressed to you; and that was to see that the 3 states would be perhaps approximate 1/3, 1/3, 1/3 of our business.

With the combination with USAmeriBank plus organic growth, we will have achieved that goal.

So we're really very, very excited about it.

If we turn to Page 8, we see that USAmeriBank is a dominant bank in the greater Tampa Bay area.

Indeed, in deposit share terms, USAB is ranked 8th, with only Citi ranked higher, only Citi.

So they are a category killer from our perspective in the space that they occupy and do business.

Tampa Bay is the second-largest MSA in the state of Florida and the 18th largest in the United States by population, and it's very expressive.

It's quite the area.

I remember when Joe sent me an article about Tampapreneurs one day in the course of our dialogue, and it was impressive to read about the millennials that are finding Tampa to be the place to be; great encouragement for entrepreneurs and employment for millennials.

Indeed, if you look at the bottom of this page, you see that they're some impressive employers in the region, and you see it by sector as well.

So it's a rich market for business banking, a rich market for consumer banking business and a very attractive market for employment, all important for our customers.

USAmeriBank also entered the Alabama market by acquisition in 2011.

They operate in 4 Alabama markets, with $1.1 billion in deposits for a 15-office network and roughly $486 million in loan book.

If we look at this franchise, you see the 4 markets of, of course, the very powerful Birmingham, Montgomery, Alex City and Auburn.

And we won't take sides collegiately here in the room, so I'll be friends.

And we look at the highlights for Alabama.

I won't read them to you because you can do that, of course, yourself.

I would tell you though that USAB Alabama serves largely small business and consumer banking customers.

They do a darn good job of it.

We've had the privilege along with a number of our directors of visiting the team in Alabama, visiting each of the markets to get a measure of the team and a measure of the markets, and we truly were impressed with the team.

They're really quite something.

And the folks that are here in the room today built this, as they reshaped the bank after they bought it.

So we're very excited about supporting the Alabama team with our -- particularly our consumer products.

When we think about Kevin's power alley of residential mortgage lending, as we met with the Alabama team they were hungry for the resi mortgage products, the HELOC products, card, auto as well, which is under the direction of Tom Iadanza.

So we think it'll be a terrific for -- state for Valley.

So with that, I'll turn it back to Ira.

Thank you, Rudy.

So as we talked earlier about the 3 significant pillars for Valley to improve our overall performance, we mentioned earlier about what we're doing on the efficiency side.

Rudy gave a little bit of an overview on the noninterest income fees and to residential mortgage component.

And once again, just to highlight why is this a strategic fit for us.

We can place more of our assets in a larger growth -- in a higher-growth market is what's important for us to make sure we can deliver the growth that we think is necessary from a performance perspective.

What this transaction does is it puts, as Rudy said, about 30% of the franchise in the higher-growth Florida market.

The other piece why it was a strategic fit for us was the leadership team and the culture of the organization.

Far too often we're provided with maps from an investment banker that would show us we should be buying this bank, we should be buying that bank, irrespective of the culture of the employees and the customers that are associated with that.

Having sat down with the leadership team of the USAmeriBank, it became quite evident that the culture fits, the customer fits and we think that's something we can really lever to really grow the organization.

Financially compelling to us, the accretion to EPS, which we'll talk about in a little bit, is really attractive, and we think their dilution to tangible book of 4.7 years is very reasonable based on where the market is today.

We're very proactive, I think, in how we structured this specific merger, making sure that there was an appropriate credit mark and retention of key personnel throughout the transaction to make sure that there is a positive outcome.

As we turn to next page, 11, we'll walk through some of what the transaction highlights are.

Based on our stock close of yesterday of $12.40, the transaction value is about $816 million in 100% stock.

We've a fixed exchange ratio of 6.1, which equates to about 65.8 million shares that would be issued associated with the transaction.

Keep in mind the 65.8 million include about 3.5 million in options that are going to roll over to Valley.

So this would be the diluted share number that would be issued as a result of the transaction.

The pricing multiples, 238% on USAB's tangible book value, which is pretty consistent with where other high-performing Florida banks have traded at recently.

The real attraction to Valley was though on the next 2 multiples associated with price to the trailing 12-months earnings and, more importantly, price towards the 2018 earnings plus cost saves.

Valley currently trades at about 16x earnings.

And to be able to merge with a company that's trading at 16.4 on trailing 12 months and 11.4 as we move forward, obviously, only increases ours -- our overall performance.

When it comes to diligence, we spent 8 weeks at a minimum of comprehensive diligence here.

We looked at over 70% of the loans.

We engaged a team of 70 people at Valley, either the on-site or from back office perspective, inspected over 950 documents.

We looked at 84% of the construction portfolio and are comfortable with the mark we've put out there.

The closing we anticipate to happen in the first quarter of 2018, associated with normal regulatory approvals as well as the approvals from Valley's board as well as USAB's.

The assumptions that we put into the transaction, on Page 12, are pretty straightforward.

Expense savings were forecasted at $26 million, about 28% of the overall expenses at USAmeriBank, with 75% phased in, in 2018.

I'd like to remind you when we did our 1st United transaction, we announced 28% cost saves.

And when we announced CNL, we announced 41% cost save.

On both of those transactions, we exceeded what the announced cost save numbers were.

Most of the cost saves that we've identified, 60% are going to be in salary and benefits and 25% in the technology space.

Transaction expenses of $32 million equates to about 4% of the overall deal value, which is comparable to what we've seen in other transactions, and largely comprised of professional fees, contract termination agreements as well.

In addition, the pro forma numbers we're going to show you reflect the preferred equity raise of $75 million.

The details of that can be found in the offering document that was released earlier today.

The credit marks and other purchase accounting adjustments are highlighted on Page 12 as well.

We are forecasting a credit mark of $63 million, which is 1.75% of USAB's loans, which is about $22 million greater than what they have in their current reserve today.

CDI 1.15% at about $30 million and other purchase accounting adjustments that are consistent with what we've done in other transactions.

I'd like to add the pro formas that we put forth when we're looking at EPS numbers.

Obviously -- we, obviously, eliminate the impact of Durbin, as being our size we're not able to take the benefit.

So most importantly, moving to Page 13, go over highlights of the transaction.

So based on the assumptions that we just went over, we're forecasting 2018 EPS to be accretion by about 3%, in 2019 to be about 6%.

And why is this significant?

I think when you look at this accretion, combined with what we announced earlier with our LIFT transaction, it puts us real close to that target 1% ROA number that we've been forecasting, which is an important number.

I would like to highlight that the 3% and 6% accretion numbers do not include any revenue and synergies at all associated with this transaction, which is important when you think about what we've done in Florida since we announced the 1st United and CNL transition.

Over 12% of our residential closed loans in this quarter came from Florida.

Nearly 20% of our closed indirect auto came from Florida.

Keep in mind, when we forecast EPS accretion, we don't include any of these numbers.

Look at the initial tangible book dilution, 5.5%, with a payback of about 4.7 years.

The 4.7 years is important, as we discussed.

What really comprises of that overall 4.7-year number?

If you remember, we added about $22 million to the credit mark here.

Had we maintained their credit mark at $41 million as opposed to the $63 million, the payback year would be 4.0 years as opposed to the 4.7 years.

Further, had we not included the options that are going into the diluted number, the payback year would be about 3.5 years.

I think it's important for us to communicate to you transparently as well as a conservative number.

So the 4.7 number that we're reflecting here is definitely all-in and we think to be a very conservative number.

On a pro forma basis, the total assets would be about $29 billion and the loans and deposits of the organization about $22 billion each.

Once again, the capital ratios that we're reflecting here are inclusive of the $75 million preferred stock raise, and you can see Valley's numbers on a total risk base go from 12% to 12.2%.

And the increase in capital that we're looking here really is to support the overall growth of Valley on the organic basis as well as the growth profile of USAmeriBank.

It's not that we believe that we need more capital for any specific reason.

Loan concentrations, CRE, which has been, I guess [bantered about] throughout the industry, goes down from 433% to 417% for Valley and a number that we definitely feel very, very comfortable at.

In conclusion, I'd like to turn it over to Gerry to talk a little bit about the execution.

Thank you, Ira.

As I said earlier, all of us at Valley are very excited about this expansion of the southern portion of our franchise.

USAmeriBank will represent the 29th bank acquisition in Valley's history.

We are very confident based upon our past experience and the strong additions to our management team coming from USAmeriBank that the integration of this bank will be swift and successful.

When Valley acquired 1st United, we stated that we were very excited about entering the fast-growing Florida marketplace.

Again, at that time, we indicated it was our long-term goal to develop Valley's franchise into what I call the 3-legged stool, 1/3 of it in New Jersey, 1/3 in New York and 1/3 in Florida.

With this acquisition, we will have approximately, as it was stated before, 30% of our assets in Florida.

I thank you all for time -- for listening, and we'll now open up for questions.

(Operator Instructions) We do have a question from the line of Steven Alexopoulos from JPMorgan.

I just -- I want to start on the acquisition.

I had a question on the tangible book earnback calculation on the 4.7 years.

If I look at the tangible book dilution and the 6% accretion in 2019, I'm calculating 6.5-year earnback.

Could you walk through how you get to 4.7 years?

Probably based on what you're using for the out years and what the EPS is outside of the -- just the 2019 numbers.

Obviously, the growth that we have or that we're forecasting in USAB is around 13.5%, which is greater than where Valley is.

So EPS contribution that would come from USAB is greater than where Valley's numbers are, which gets us down to that 4.7 year number.

So Ira, you've been using more, say, than $0.05 for the earnings from the dilution.

We definitely think so.

Yes.

Okay.

Got you.

And then on LIFT...

Steven, just let me -- I -- and I think that was -- that's really part of the overall philosophy, right, is to generate more of our assets in that higher growth market.

And that's something that we strategically have been focusing on.

Right.

Right.

Okay.

And just follow-up actually on that.

Ira, what's the strategy to move towards the 8% to 10% long-term target for loan growth?

I think we're getting close to really being there as it is right now.

With the organic growth we had this quarter, when you back in the loans held for sale from the residential, we were sitting at 8%.

And there was -- I don't know if there were any loans...

Actually, over 8%.

It was 8.8% when you factor that back in.

So again, knowing that we're going to be involved in selling resi loans to some extent, you may be looking at it and saying, well, we didn't hit that number, but I think we are getting it.

Got you.

And then the $3 million revenue improvement associated with LIFT seems to me on the light side, given how senior management was so focused on this initiative.

Have you guys looked at ideas generated for improvement?

Were you surprised you didn't come up with more on the revenue front?

I think we tried to be conservative as to how we looked at everything, I think the time line associated with it, making sure everything is actually executable within the -- a 2-year time line and trying to accelerate as fast as possible.

And I think for us, what we did on the branch rationalization, hitting a higher number than what we produced and then making sure that it was delivered within an appropriate time line, is really important to us.

Yes, we're going -- Steve, we're going to chase those other ideas.

But we set a threshold both as to time and dollar, as Ira said.

And so if they didn't make that threshold, we didn't include it.

But we're very pleased.

We certainly exceeded what most expectation were.

That is in the aggregate.

And if I can squeeze one in for Alan.

The $3.5 million you called out on the derivative swap income, is that one-time?

Is why you're calling it out (inaudible)?

No, no, no.

Not at all.

No, we have been producing swap income for a couple of years now.

The issue is, is that it -- I'm not really pulling it out as I'm telling you it's not necessarily recurring every quarter at the same amount.

It's really dependent on interest rates and customers and their appetite for putting on for them fixed rate loans.

So to the extent rates stay low, they will continue to probably want to put on swaps.

We actually had for the quarter $4 million of swap income as compared to $600,000 in the prior quarter.

So my whole point was to really indicate that that's a little bit of a moving number.

It's not like any interest rate number that you know you're getting x% every single quarter.

And Steven, that number was about $2 million in the second quarter of 2016.

So a little bit of an uptick from where we were 1 year ago, but I think nothing that was that significant.

We do have a question from the line of Matthew Breese from Piper Jaffray.

Maybe just going to the outlook for loan growth and realizing that we're pretty close.

But in the 8% to 10% range, there is a bit of a pickup.

And I just wanted to pick your brain a little bit.

Given where we are in the economic cycle, what stage we're at, can you still be comfortable with accelerating loan growth given where we are?

Matt, it's a great question.

We're staying inside a policy and will not stretch outside of existing credit policy, assuming that even the soft items underwrite for us.

Having said that, we also have a very powerful mortgage bank that's being built that is less than a quarter of its ultimate size.

So it's a big driver.

And as mentioned, it skewed towards purchase and inside purchase that really skewed toward Freddie, Fannie qualifying loan.

So we feel comfortable at this stage with what we're booking.

But we're the first, we've been through multiple recession cycles as bankers.

And so when we feel the market is ripe, we immediately start to refrain.

So far, we've decided not to play in certain of our markets.

And we feel that's indicative of how we think both analytically and subjectively about where we want to grow loans.

So the acceleration is on the mortgage side?

Actually, this last quarter we had good growth in CRE and C&I.

We had a wonderful quarter for resi mortgage, and indirect auto contributed as well.

So we kind of like all the engines that we have participating in that application -- in that area.

Now resi mortgage had application volume year-to-date of $622 million.

If we look back for resi mortgage, we were pretty dead in recent period.

So the total fundings year-to-date were $345 million and, again, skewed toward purchase.

So yes, that's a heck of a contributor.

The pipe right now is almost $0.25 billion in resi at this stage.

So we're also excited about that.

And ARMs represent some 19% of pipeline.

So average size, I think Alan spoke to, and we're actually growing the business development team.

So the lines are crossing pretty well on that business.

But again, I think what we saw this quarter is what we want to see, which is each engine contributed to for the aggregate growth of the company.

Understood.

And then just sticking with the mortgage and your longer-term outlook looking to 15% to 20% noninterest income.

Should we expect more of what's going to happen next quarter?

Will we see a bulk sale of 30-year fixed rate mortgages?

Maybe a bit more sporadic, but on an annualized basis gets you into that range.

Is that the way -- a good way to think about it?

I think the sustainable way to think about it is that we're going to harvest, put into available for sale and sell recent production versus harvesting from the, if you will, from the preexisting portfolio.

I think Q4 is a quarter that we're thinking an awful lot about.

As we look at the development that Kevin's underway with for the mortgage, we see it becoming a big contributor in '18, candidly.

So it's hard to answer that question other than we expect to be production driven.

Okay.

And then thinking about the core margin outlook, Alan, excluding the swap income, could you just give me some idea of the trajectory from here if the yield curve maintains its current shape and the Fed does not lift for the remainder of the year?

We'll probably -- and first of all, I don't think you want to eliminate the swap income.

I mean, I think we've had it quarter after quarter after quarter.

It really becomes a matter of how much of that do we see.

There's going to be some continued pressure on the margin; there's no doubt about it.

Even though we've seen some rate increases on the loan side, we have to be able to continue to increase on the deposit side as well in order to maintain our deposit levels.

So I expect that you're not going to see any major -- any expansion, so to speak.

You'll probably see some decline going forward.

Okay.

And Matt, something else, just to say it.

I think our commercial purpose pipe is about $1.3 billion at the moment, and there is $570 million or so or [close].

Could be close.

Yes, approve pending closing.

So we're pretty excited about what the economy is serving up to us and what we're able to bring home.

Right.

Right.

Okay.

And then I understand with USAB the Tampa element to it.

What's interesting is the Alabama effort.

And that was something that I hadn't really considered.

Can you just talk to me about their exposure to Alabama, Birmingham and why that market is something that you want to be in?

And is that going to be a longer-term growth engine for Valley?

Maybe say something and then ask Joe if he might make some remarks, so you get it right from the source.

As we looked at Alabama, some of us had a basic level of fluency in the market but had not been bankers in the market.

So we did a lot of off-site kind of work.

You should know that in diligence of, our Chief Credit Officer and the team looked at 75% to 78% of the book of business at USAB, which would include the near $0.5 billion of loans derived from Alabama.

And we were comfortable that, that was inside of our credit policies, for example.

The underwriting (inaudible) to cover, and you can understand the loan scenario.

And so as we started looking at Alabama, you could take one view and say, well, it's a net deposit provider and in a world where [betas] may change and deposit acquisition may get tougher, if not more expensive, and we think, gosh, Alabama is attractive.

And then as we looked at the loan book, small business, pretty benign, consumer business, we thought, gosh, if we introduce our consumer products on top of what the team has built in Alabama, this could be a growth market for us.

We'll acknowledge that Alabama doesn't grow at the level that our other 3 markets do.

But that doesn't make it a market that we can in effect claim good growth.

So maybe, kick it to Joe just for a moment and may find out a few...

Okay.

This is Joe Chillura.

Alabama is -- really the base of the bank is a 100-year-old bank that was started by the Russell family.

And so they have a very stable deposit base, great branch network and some real distinct markets.

But we see the opportunity there to grow really in small business and SBA lending.

And SBA is a unique way to generate fee income, which is an initiative of Valley's as well.

We have a real strong management team there, with Caryn Hughes and Mark Spencer, both 30-year plus bankers, very intertwined in their communities.

And we feel like with the right support, the right consumer products that Valley has, we really can see some not only loan growth but also big deposit growth in the future.

Understood.

That's very helpful.

Just one last one.

Ira, you had mentioned all things included the deal and the LIFT initiative get you pretty close to that 1% ROA target.

Could you just give me an idea of timing on when you think we get close to that?

Or when do we achieve that?

A 2018 or 2019 event?

I think it's a really important metric for us, right?

So you look where we were about 2 to 2.5 years ago when we were in the mid-60s.

And for what we've accomplished even to get to the 86 basis point number in such a short time line is really the focus that we've all been internally working on here, I think, when you just look at the actual LIFT numbers outlined and $17 million of expense saves in 2018, $19 million in 2019, and just really focus on that 2018 number as well as the revenue enhancements that come from it.

And USAB was earning 1.19% on ROA.

So when you really just aggregate those together, you get really close to that 1% number without us really expanding on the mortgage fees that we're trying to do internally.

So this isn't a number that we think we should be waiting to 2020 to get to by any means.

It's something that's really important to us.

We have no further questions in the question queue.

Thank you for joining us on our second quarter conference call.

Have a good day.

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