Valley National Bancorp (VLY) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

We welcome you to the Valley National Bancorp's Fourth Quarter 2018 Earnings Call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Rick Kraemer, Investor Relations Officer.

Please go ahead, sir.

Thank you, George.

Good morning, and welcome to the Valley Fourth Quarter 2018 Earnings Conference Call.

Leading our call today will be Valley's President and CEO, Ira Robbins; and Chief Financial Officer, Alan Eskow.

Before we get started, I would like to make everyone aware that you can find our fourth quarter earnings release and supporting documents on our company website, valley.com.

Additionally, I would like to direct you to Slide #2 of our 4Q 18 earnings presentation with a reminder that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry.

Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q and 10-K, for a complete discussion of forward-looking statements.

And now it's my pleasure to turn the call over to Ira Robbins.

Thank you.

Good morning, and thank you for joining us today.

2018 was a remarkable year in the history of Valley.

Not only have we begun the physical transformation of our branches and brand, but we have dramatically improved upon the long-standing foundation that Valley was built upon.

I'm pleased with our progress to date, yet have eyes wide open that execution and delivery of the initiatives we have established in 2018 must be implemented to migrate Valley's financial performance towards the upper end of our peers.

Resource demands were extensive in 2018 as we closed our largest acquisition in our history and integrated with great success.

Most importantly, we retained the talented employees including key executives and customer-facing staff at USAB.

Loans within the new footprint grew nearly 20% while we simultaneously grew deposit household by over 5%, all of which occurred while undergoing a significant core platform system integration, commercial treasury solution migration, implementation of a brand-new residential mortgage platform and delivery of a multitude of new mobile delivery services such as biometric authorization and mobile wallet.

Our adjusted efficiency ratio improved 103 basis points on a full year-over-year basis, while we substantially reinvested into the bank during this time frame.

Our aggregate IT expense as a percent of total revenues was over 7.1% for the full year of 2018.

To put this into monetary context, this represents a direct increase of over $20 million in IT expense from 2017 that hit our P&L.

The mix of our tech expense has continued to shift towards growth and transformation, with approximately half of the incremental expense increase allocated towards improving future efficiencies and revenues.

To give an example, we spent about $1.5 million during 2018 on developing, establishing and introducing a data hub.

A significant amount of severance costs recognized in this quarter's period is attributable to new quantitative staffing models introduced within our branch network, a direct result of our data hub and shift towards analytics.

We anticipate salary expense will be positively impacted by over $3 million alone in 2019 as a result of this expense in 2018.

Further, positively impacting the future efficiency of Valley is the extensive efforts we've made in reshaping the workforce and ultimate productivity of our employees.

On a linked quarter basis, total headcount is down approximately 70 employees.

As a result, our assets per employee have increased 7% for the year, moving us much closer to peer levels.

However, a more telling change is that involuntary separations have increased by over 25% from 2017, as the bank's expectations have shifted towards growth and accountability.

A tangible result of the improvement and streamlining of our workforce is that our reported net income per employee was up over 20% from the prior year.

The culture change at Valley is real, and I can think of no better example than the profound lift and focus on sales and revenue growth.

Our loan growth over the course of 2018 was 13.4%, far outpacing the industry and our stated goals.

Approximately 65% of our total loan originations are repeat business with existing customers.

Additionally, the growth we realized in 2018 via USAB was a result of existing customer growth, even higher than the legacy 65% Valley rate.

In addition to the efforts on the asset side of the balance sheet, we continue to be very focused on new account growth and deepening core deposit relationships.

In 2018, we opened approximately 46,000 new core deposit accounts.

This is an increase of 23% from the prior year.

The average new core account balance opened in 2018 was approximately $55,000 versus $36,000 in 2017.

Additionally, we have steadily increased our share of wallet.

As an example, our residential mortgage business has opened over 1,000 new core deposit account customers with balances totaling in excess of $100 million just this year alone.

Execution and accountability are 2 driving things within the bank and it starts from the top.

In 2018, we effectively doubled the component of compensation tied to relative stock performance for every single executive.

We also tied greater levels of incentive to performance for all lending and deposit-gathering employees and continued to make stock a greater portion of the overall compensation, ultimately driving increased ownership across a greater base.

We are making all the necessary changes to drive a culture that puts the customer first and encourages performance and accountability throughout the entire organization.

Over the long term, we believe this is in the best interest of every Valley stakeholder.

With that, we'll move on to the earnings presentation to cover some additional highlights from the fourth quarter.

If we focus on Slide 3, for the fourth quarter of 2018, Valley posted reported diluted earnings per share of $0.22.

After adjusting for several entry [blinds] during the quarter, adjusted earnings per share was $0.21.

On an adjusted basis, our earnings -- quarterly earnings per share represent growth of approximately 31% over the same period just 1 year ago.

We continue to make strides in lowering our efficiency ratio.

In fact, included in the 56.7 adjusted efficiency ratio for this quarter are several items that we anticipate will not be as meaningful as we move into 2019.

Specifically, we incurred a little over $1 million in quarterly expense directly related to the company rebrand in the fourth quarter.

We expect a little bit of it will remain in the first quarter of 2019 and then come down thereafter.

Secondly, our residential mortgage commissions for the quarter, up $4.2 million, are meaningfully greater than our expectations for 2019 on an annual basis.

Based on more recent pipeline and changes in compensation structure, we expect this cost to drop significantly in the first quarter, while residential gain on sales revenue are likely to remain relatively static.

Lastly, as I previously mentioned, we continue to reinvest in our core business, having spent approximately $2.7 million during the quarter on future-facing technologies.

We expect a greater return on these investments in quarters and years to come.

With that, Alan Eskow will now cover a few slides regarding some additional financial trends for the quarter.

Thank you, Ira.

Please turn to Slide 4. We grew net interest income by 9.7% on an annualized linked-quarter basis.

Our net interest margin showed moderate compression of 2 basis points from the prior quarter ending at 3.10%, in line with our previous guidance.

For the full year, our net interest margin was flat compared to 2017 at 3.11%.

Our strong loan growth during the course of 2018, coupled with rising funding costs for Valley and the industry, have placed additional pressures on the NIM.

That said, we are constantly working to achieve a neutral balance sheet position and a defensive net interest margin.

Turning to noninterest income.

We saw a large increase on a quarterly basis.

That was driven primarily by a pretax gain of $6.5 million realized on the sale of our Visa Class B shares, partially offset by a loss of $1.5 million on the sale of private label mortgage-backed securities classified as available for sale.

We experienced stronger swap income generation versus the prior quarter, which was partially offset by our lower level of mortgage gain-on-sale income for the year.

During the quarter, we sold approximately $94 million of loans for a pretax gain of $2.4 million or a 2.5% margin, a modest pickup in spread from the previous quarter.

While the market still remains unpredictable for jumbo secondary sales, we are hopeful we will begin to realize greater sales revenue again over the course of 2019.

Slide 5 is next.

And if you move on to that and operating expense, you will notice that we have achieved over 83% of the annualized benefit related to our LIFT initiative.

We remain on pace to achieve the full annualized amount through the end of the second quarter of 2019.

Our reported operating expenses of $153.7 million included infrequent items of approximately $2.7 million of severance related to branch transformation and a credit of $600,000 due to merger-related items.

Our quarterly amortization of tax credit expense was $9 million.

Excluding all of these items, our adjusted operating expense level was down to $142.6 million for the fourth quarter versus $143.3 million in the previous quarter.

Importantly, there are several items that, while not considered infrequent in nature, inflated the current quarter expenses.

Mortgage commissions related to residential mortgage production were $4.2 million for the fourth quarter.

The originations in the fourth quarter remained high as a result of a large pipeline at September 30, driving the large commission expense.

Based on our current pipeline, we expect mortgage commissions to drop in the first quarter of 2019.

Also, we have previously cited our advertising costs associated with the company's rebrand were elevated by approximately $1 million in the fourth quarter.

We expect this number to be comparable in the first quarter and then abate.

One last highlight to mention is that our reported quarterly salary and benefit expense was essentially flat from the previous quarter, despite including the previously mentioned severance charge of $2.7 million.

This is further affirmation that many of the changes we have made recently are starting to take hold.

As you can see on Slide 6, we posted impressive loan growth of 15.3% annualized for the quarter.

The growth was diversified among all asset classes, but we are especially pleased by the increases in C&I, which is validating the initiatives we've implemented.

Also included in the fourth quarter was the purchase of $105 million in CRA-qualifying residential loans.

Additionally, we sold approximately $94 million of residential mortgages during the quarter.

Total gross originations for the quarter were approximately $1.5 billion, down slightly from the previous quarter.

Our new origination yields during the quarter were a weighted average of 4.95%, up significantly from the prior quarter.

In 2018, net residential loans grew approximately $700 million, while USAB added about $600 million in mostly commercial business lines.

Both of those business lines should be smaller contributors throughout 2019.

Resi should also be curtailed somewhat by our focus to drive the mix to more conforming loans, while the first year growth out of USAB was primarily driven by giving existing customers access to a larger balance sheet.

Additionally, as we continue to build out more niche programs with higher-yielding assets, we should continue to migrate the mix of loans away from lower-yielding fixed-rate commercial real estate.

Accordingly, we are anticipating overall net loan growth of 6% to 8% for the full year of 2019.

Turning to Slide 7, you'll notice our deposit balances experienced a linked quarter increase of approximately $1.9 billion.

The largest contributor of growth during the quarter was the increase in brokered deposits of approximately $1.4 billion, followed by retail CD growth of almost $250 million.

While these products do carry a higher level of cost versus some core deposits, they have enabled the bank to reduce the reliance on higher-cost and shorter-duration FHLB borrowings, which were $924 million lower than the previous quarter.

You will notice our total funding beta remains reasonably paired to our earning assets over the past 12 months.

We will continue to act opportunistically in an effort to improve our wholesale costs and durations.

However, we expect the growth of brokered CDs to diminish over the course of 2019.

Our loan-to-deposit ratio was 102.4%, down from the 107% in the previous quarter.

This level is back within our strategic operating range of 95% to 105%.

Competition for core deposits remains stiff, and our efforts to improve delivery channels and focus on core deposit generation are our first priority.

Over the course of 2018, we organically grew no- and low-cost core deposits of approximately 3.7%.

We recognize the need to improve this growth rate regardless of the rate and competitive environment that exists.

Turning to Slide 8. During the quarter, we recorded a loan loss provision of $7.9 million, up about $1.3 million linked quarter.

Negatively impacting the third quarter provision was the continued valuation decline of taxi medallion loans, which equaled about $2.5 million with 31% of the quarterly provision.

Following this quarter's provision, our level of related reserves as a percentage of exposure continues to build and now equates to 24.7% of the entire taxi medallion loan portfolio.

Our current model values the average New York City medallion on our books to a level of approximately $221,000.

We continue to monitor the positions closely to reflect any meaningful changes to the market and will adjust our evaluations accordingly.

Overall, our credit quality remains strong.

We did see a modest uptick in the 30 to 59 days past-due bucket, primarily due to one C&I loan and a higher seasonal uptick in residential loans.

This was offset in part by a decline in construction past dues that we highlighted during the last quarter's call.

The approximate $10 million quarterly increase of nonaccrual loans was driven mostly by the inclusion of additional taxi medallion loans.

With the exception of taxi medallion loans, we continue to experience very favorable credit trends.

Our legacy New Jersey and New York commercial portfolios are sitting at or near all-time lows in terms of nonaccrual loans and our acquired Florida markets are showing no signs of deterioration.

I would also like to highlight some details giving concerns in the investment community regarding the participation in shared national credit markets.

Similar to previous periods, our syndicated participation in this portfolio equates to approximately $317 million committed and $190 million outstanding, spread over approximately 19 different relationships, for an average $10 million outstanding per relationship and $16.6 million committed.

Currently, all of these loans are performing and the majority are secured by real estate and within footprint.

Further, our leveraged loan portfolio is minimal with less than $40 million outstanding and $50 million in commitments, all to well-known longtime customers of the bank.

On Slide 9, we have laid out some goals for 2019.

In terms of loan growth, we are expecting the full year to be in the range of 6% to 8% on a net basis.

We also expect our net interest income to be up approximately 5% to 7% from 2018.

We believe it's a reasonable expectation that loan growth will make up the majority of our earning asset growth throughout the year.

Finally, we anticipate achieving a full year adjusted efficiency ratio of 55% or better.

As a reminder, the adjusted efficiency ratio excludes amortization of tax credits and any other infrequent items.

And with that, I'd like to turn the call over to the operator for some question and answer.

(Operator Instructions) And our first question comes from the line of Ken Zerbe with Morgan Stanley.

I was hoping you could actually just address your net interest margin expectations a little more clearly.

And the reason I'm asking, because loan growth looks like it is -- your guidance is outpacing your NII growth.

And if Alan was right, the loan growth is -- the vast majority are earning assets, and it also implies that you're shifting into sort of higher-yielding assets, presumably, which kind of implies that the NIM itself would have to be down fairly noticeably to get the lower NII growth.

Just want to flesh that out.

Ken, what I'd like to say is, regarding the NII growth is we do expect that even in the environment we're in, relative to the Fed may be not increasing rates that much going forward, we obviously have a curve that's extremely tight and/or partially inverted at times.

So that being said, what we're seeing on the deposit and on the funding side are higher costs.

I mean, even just recently, I can tell you that we have seen the large banks come out with programs across the board that are raising rates that we did not see last year.

So where we thought we could reduce rates going into 2019, are now seeing pressure on that, which is causing us some concern.

So that being said, even though we are seeing higher originations and volume coming in -- not volume, I'm sorry, rate coming in, I think it is going to be pressure on the NIM on a go-forward basis.

So no doubt about it.

Ken, this is Rick.

Just to go back to your comment.

So I'm not so sure that that's what this guidance implies.

I mean, there is overlap between the net interest income range and the target loan range.

I think your estimate was around 9% net interest growth for the year, right?

So it was probably the high.

So this -- you personally may be down but I think this encompasses where the existing guidance was, or the existing consensus was.

So it does...

I was very optimistic for you guys.

Thank you.

It doesn't imply absolute decline in margin.

It does give -- it does leave some space for that, though, in case there is.

Got you.

Okay.

Well, I think Alan's answer was that there -- NIM compression does, it is reasonable to assume.

Yes, yes.

Okay, got you.

All right, and then just -- sorry, one follow-up question.

On the loan growth, obviously, this quarter was fantastic in terms of your ability to grow loans.

The guidance does imply a much more meaningful slowdown versus what we had this quarter annualized.

Sorry, if you don't mind, just kind of go over why the slowdown or what is driving the slowdown in '19 versus fourth quarter?

Ken, this is Tom Iadanza.

Yes, I think what you saw in '18 was the benefit of USAB coming onboard, having a higher hold level, being able to do more with your existing customer base that in the past they weren't.

We expect that to slow down.

USAB's 20% growth in 2018, we expect to be lower than that.

Also, we're just seeing a natural slowdown based on some of the economic conditions, political conditions out there.

People in our marketplace are still tentative on investing heavily into infrastructure.

So we're seeing it from up there, we're seeing certainly a slowdown in the housing and auto pieces of our business.

And as we report, our portfolio is a very granular portfolio.

Our average loan on the real estate side is still under $3 million.

Our average loan on the C&I side is still under $1 million.

And we're building that way and some of the -- what we're really noticing in the market is heavy competition.

We're not going to compete at some of the cap levels that are happening in certain segments of our real estate market, and we're not going to compete on terms that would compromise our traditional credit standards in the C&I market.

And, Ken, this is Ira.

I think in addition to that, we saw about $700 million of growth in the residential portfolio during the course of the year.

And our expectations are for that to come way down as well.

So I think when you combine what Tom referenced with regard to the USAB portfolio, combined with the contraction we're expecting in annual growth in resi, we go down to numbers that are much more palatable for the capital we have.

And our next question comes from the line of Frank Schiraldi with Sandler O'Neill.

I'm wondering if you guys could talk about the efficiency target for the fourth quarter or your expectations for the fourth quarter.

I think you came in a little bit above there on an adjusted basis.

And then sort of the primary reason for that, and then you gave guidance for under 55% in 2019.

Given some of the elevated cost you talked about and given some of the branch closures early in '19, are you thinking that can get -- is it reasonable to think that gets to 55% or below in 1Q, and then maybe trails down from there?

I think at the beginning of the year, if you go back 1 year ago, the guidance we gave for efficiency was at 56%.

So we definitely came in a little bit higher.

I think part of that was associated with the increase in residential mortgage commissions during the quarter as well as the rebrand.

So without those, we would have been right around with the guidance that we provided in the beginning of the year.

So I think we're comfortable with what we've targeted for 2019.

And specific to that, I don't think the first quarter is going to be at the 55%.

I think that's our estimate for where we'll end up for the full year.

And I think as I mentioned in my prepared remarks, and we continue to invest in some technologies that we think will have positive impact to us, the data hub being one of them.

If you look at what we've done in the consumer space, we've increased auto decisions, which should drive down some of the expenses there.

So we do believe that there's going to be some significant positive reductions in noninterest expense as a result of what the expenses were in 2018.

And then just a follow up.

Alan, you mentioned -- you talked about brokered and the growth in the quarter.

Can you just remind us now where brokered stands as a percentage of total deposits and then how much more room you have this year to further increase those levels?

Yes, so first of all, I just think the most important thing if you think about brokered is just another wholesale place could go.

We're comfortable with the level we're at.

The percentage of brokered...

I think close to 13%.

13%.

So again, I think the important thing is, is that we have been able to set some duration out there and I'm not just sitting there overnight, so as we've told you before, the average term on those previously had been about 7 months overall.

So instead of having overnight funding at a higher level, I'm able to do a lower -- higher duration and not have so much volatility.

And also, we have recently been out a little shorter.

We were concerned about going out too long.

So -- and we have brought in some of those costs recently.

I'm sorry, It's about -- let me just clarify, it's about $1.9 billion on the $24.5 billion now.

So it seems like -- I mean -- and Alan spoke to, but it's slowing growth there.

I mean, it seems like you kind of -- you have rollover there but it seems like we shouldn't expect to see increases in that broker deposits.

So I think that was my point.

You're not going to see the kind of growth you saw before.

And our next question comes from the line of Austin Nicholas with Stephens.

Just maybe hitting back on the expenses, can you maybe just help us understand the cadence of getting maybe down to that sub-51% by 2020?

And how that should look as we trend through '19 and into '20, just on a bigger picture basis?

Well, I think what the issues are, you've got branch transformation going on.

We are spending a lot of money, as Ira keeps pointing out, on technology, but I think we have not yet seen all the benefit you're going to see out of the technology changes.

So I think that's where a lot of those efficiencies are going to come in, that we really just haven't seen yet.

We're spending the money, we're getting some benefit.

I think we're going to get a lot more benefit.

I mean, we just started to go into -- on the commercial side, nCino.

Treasury solutions, we've hired a number of people.

That's going to help us on treasury solutions.

So we've got a lot still going on and in order to get that efficiency ratio down, they have to either produce revenues or they have to be less cost.

Yes, Austin, I don't think we want to get into a quarter-by-quarter efficiency target.

But look, if you look back over the last year, while reinvesting a pretty substantial amount of dollars, the adjusted efficiency ratio came down by over 100 basis points, right?

So that reinvestment is going to slow, and what we also alluded to just now on the call was we're taking a decent amount of severance, which will also lower future salaries again, right?

So it's going to be gradual, but to get to a 55% by the end of the year or for the year, we're starting at a place that's 56.7%.

It's going to be chipping away at it.

I think it should be a gradual adjustment lower, but that's not to say there isn't a quarter or 2 here or there that it flatlines or even goes up.

Understood.

And then I guess, I think maybe you addressed this partly before.

But bigger picture, looking at capital, can you maybe just remind us what the message is to investors on capital here with your TCE?

Do you see kind of bumping around the 6.5% level?

Yes, I think exactly the message should be that we have flexibility.

There's definitely internal levers that we have within the organization to look at raising capital without being dilutive to shareholders.

We are extremely sensitive to that component of it.

I think if you just look at where we were from an EPS estimate, I think just based on the Street's estimate, TCE, our tangible equity is about to grow about $175 million.

If you layer that in with the midpoint of our loan growth targets, right there that has about 20 basis points of increase in the TCE ratio.

That being said, I think a large piece of it's going to be how we moderate the overall loan growth.

What we experienced in 2018 regarding to the residential increase of the USAB, not our expectation that that's going to be there.

As that continues to go down, then we should have to invest capital to support the growth that we're looking at, but going out and doing a common raise is something that's not attractive to us at any means.

Being sensitive to the shareholder dilution is really where the focus is.

Yes, don't forget too, there was about $22 million of items that negatively affected net income that shouldn't be there in 2019, right?

So that's -- you might be able to argue there were additional infrequent items that were not included in that.

And our next question comes from the line of Steven Alexopoulos with JPMorgan.

So given the outlook for 6% to 8% loan growth that you guys are looking for in 2019, can you talk about how you plan to fund the loan growth?

Is it mostly going to be retail deposits?

And is the plan to keep the loan-to-deposit ratio relatively flat?

Yes, I think so.

If you look at what we did just this quarter, we did time deposits plus core deposits that probably would've funded a loan growth number similar to what we've targeted for next year.

So the current initiatives that we've already outlined probably support that.

That being said, I think there's a lot of things we're looking at doing.

As Alan mentioned, we hired additional treasury sales people during the year.

I think we're up probably 11 year-over-year.

There's going to be much more of a focus on going after not just Valley commercial customers but as well as noncommercial customers.

Actually, tomorrow we're going to be introducing a brand-new Valley authorizer, just automated callback.

I think we're going to be one of the first banks in the entire country that has automated callbacks for our commercial customers.

We think that the investments like that are going to begin to have differentiations for us as to how we can attract commercial customers.

We've been migrating to a brand-new commercial treasury platform.

We've seen significant growth in commercial deposits as a result of that.

So I think in 2018, there was a lot of investments that we put forth to make sure that we have the ability to grow core deposits in 2019.

We saw massive growth year-over-year in units of accounts and now we just need to make sure that there's balances that come along with those.

And the other thing I'll just point out is that we have also made some changes to our compensation programs for both the deposit people and the lending people in order to attempt to grow deposits at a greater level than we did in the past.

And for a follow-up, Alan, can you give us a sense of the cost of new money deposits, not equity brokered because it doesn't sound like you're going to grow them next year.

But if you look at the quarter, just the cost of customer new deposits, what was the incremental new money deposit cost in 4Q?

Hold on, I'll give you that in 1 second, because I don't have that off the top of my head.

The commercial customer came on at 72 basis points, Steve, and consumer customer came on at 170.

170.

Okay, that's helpful.

And just a clarification, I know I'm only supposed to ask 2 questions, but the loan growth, is that guidance based on period end or on average?

That's based on average.

And our next question comes from the line of Collyn Gilbert of KBW.

Just a question on the mortgage banking.

I just want to make sure I understand your comments.

Can you just clarify where you see that business going in the growth?

I know it sounded like you indicated maybe flat from the fourth quarter into the first quarter on a revenue basis, but yet still expect robust opportunities in '19.

Just kind of frame -- I know you -- Alan, you went through the commission component of it.

But just trying to think about it on the revenue side, what the expectations are there?

Look, I think we grew $700 million in loan growth during the year on residential, largely from a jumbo perspective.

I think what we've done is adjust pricing within the jumbo.

We have introduced additional outlets for the jumbo to create some gain on sale.

And I think what we've seen is the overall pipeline come down as a result of that, but the pipeline in support of, of the gain-on-sale number, that would be reflected in the current quarter.

However, as a result of not portfolio-ing the significant number of loans that we did in 2018, we're going to have commissions come back dramatically.

It's one of the challenges obviously, in being in the mortgage business is the commissions get expensed to a large degree in the current period and the interest income for a loan that you put on your balance sheet aren't really recognized over a period of time.

So in 2019, that will be rightsized a little bit better than what we did in 2018, where the balance sheet growth will be more in line with what we think is appropriate for us, appropriate gain on sale and appropriate commissions that come along with it.

Yes, Collyn, this is Rick.

From an income perspective, or contributor revenue in terms of the efficiency ratio, we would only be -- we're only expecting pretty much exactly what we got this quarter.

So no growth in that category.

For the full year '19?

Like it's...

No, no.

For a fourth quarter annualized number, right?

So gain on sale, that $2.4 million annualized would be all that we're expecting.

That's basically just -- that's just income from conforming flow business, which has been remarkably steady all year long.

While the (inaudible) number stays the same, the expectation is, is that the commission number comes down significantly.

Right.

Got it.

Okay.

And I apologize, I don't have it in front of me.

I mean, I think that's a low -- the mortgage revenue side of this is a lot lower in '19 than what you were anticipating perhaps in the second quarter or even third quarter.

Is that correct?

That's correct.

Okay.

But your point of it is that you're rightsizing the expense side of it, so that it shouldn't have a material impact to the efficiency goals that you've set for '19?

Right.

Correct.

Okay.

And then just -- and I know, limited on the questions.

But I just want to understand too on the taxi side.

The $8.6 million that you drew out in the press release indicating that you'd probably have to add to the reserve this year, what kind of assumptions went into that?

Basically, it does not take any assumptions into place that we go below the current valuation level that we use but rather loans that are renewed or mature and going to TDR status and get impaired, they will have to be written down to the current valuation.

Obviously, if valuations go down further, that number goes up as it does for the rest of the portfolio, but at this point that's what we factored in.

Okay.

And then Alan, what went into the [2 20] valuation estimate that you're using?

No, that's just an analysis of the trend of sales that takes place.

We practice -- it's Tom, Collyn, we track, on a regular basis, the sales in a market.

We're aware of a number of sales that are over the value that we have.

We look at it on a constant basis, and I just want to kind of point out on that portfolio, we have unimpaired over -- about 70% of the portfolio.

We have over 95% of the portfolio still paying, even though we classified 56%, 57% of the portfolio as nonaccrual.

Okay.

Okay, that's helpful.

And then just one final thing on the -- just kind of taking into consideration some of your comments, Alan, on the NIM.

And just obviously, the competitive pricing pressures that are still there on the deposit side, how does all of this tie into maybe what your ROA target would be either near term or long term?

I don't think it negatively -- we don't expect it's going to change our long-term target.

I mean, we're going to have to produce if not exactly on the NIM than -- and again, I think we're more worried about driving NII than the NIM while we're trying to guard against the NIM going down.

NII is important.

So because that really is what drives, at the end of the day, the ROA, as well as the efficiency ratio.

And our next question comes from the line of Matthew Breese with Piper Jaffray.

I wanted to focus in on the salary expense line.

I know the $2.7 million in severance will come out, and there's some positive commentary in terms of mortgage commissions that'll come out.

But to what extent might we see the mortgage commission drop off?

So maybe if you could give us an idea of what the total mortgage commission was in '18?

And what the expectations are in '19 at this point?

I think we gave about $4.2 million or whatever, I think was the number, for 4Q.

That's probably a good estimate as to annualizing that, what we recognized in 2018.

And the expectation is that number will be cut more than in half in 2019.

That will be a contraction in that.

Like I mentioned earlier, we didn't convert USAB until about 3 to 4 months later than what we originally anticipated.

So a lot of the cost saves that we anticipated didn't happen until later in the year.

Now we're getting the benefit of being able to focus on some of the technology initiatives that we had outlined originally for 2018 and implement them for 2019.

So we made significant progress in reducing salary expense in 4Q.

We think that's going to continue.

There's additional branches that we have already outlined that are going to close.

There's additional cost saves that are going to come from the nCino implementation on the back end, from the Encompass implementation on the back end.

Those haven't been recognized at all but now the technology is pretty much in place, and those will get recognized in 2019.

So we definitely got a little bit behind ourselves based on some of the merger integration.

The software there, the other pieces, as I mentioned, we were linked on an annual basis up $20 million in technology.

You're not going to have that increase in 2019 to the same level that you had in 2018.

That's going to be positive when we look at the efficiency ratio when we move into 2019 as well.

So we're feeling pretty positive about what we've set as an objective in 2019.

So as I think about that $4.2 million annualized and the severance coming out, it seems like -- I know there'll be some noise from the first quarter, but it seems like the salary expense line could come down by perhaps $4 million, $5 million on a normalized basis in the first quarter.

Is that accurate?

And then it feels like through the tech spend that there's going to be a push for less FTEs, not more.

And so perhaps that line item has more to go in 2020.

Is that the way to think about it?

I think on the salary side, there's -- gosh, you're going to have -- first quarter is going to have your payroll taxes or anything like that again.

But outside of that, on the seasonal basis, I think your estimate as to what we're looking at in contraction is an appropriate estimate.

Okay.

And then I know you touched on branch initiatives, so with the 9 coming off in 1Q, that leaves, I think, 54 that were essentially targeted for either improvement or closure.

And I wanted to get a sense for how many of those 54 are breaking the right way and improving?

And how many are not and would you gauge are more likely to be closed over the next 12 months?

Yes, I think there's still 11 left to close that we had referenced.

That will happen in 1Q as well, so there's going to be a positive momentum based on just closing those 11 when it comes to operating expenses.

For the 54, I think we really want to give it a year time line to make sure that they have the opportunity to hit some of the objectives that we outlined, and we'll come back to you at the end of the second quarter and give you an idea as to where they're at.

Understood, okay.

The other thing was just, Alan, I think you talked about the composition of growth in 2019.

I missed all the specifics.

Could you just repeat where you expect the 6% to 8% to be -- to come from?

Well, I think we would expect more -- maybe let Tom...

Matt, it's Tom Iadanza.

The good news of '18 is it really was across the board, every region, every department, every product type, C&I and real estate.

We expect to say, and we began, as we referenced in previous calls, some niches in late '17, early '18, of small ticket type of lending programs that really took off during the course of '18, and we expect those to continue to grow.

So I fully expect the growth to come from all segments and all regions.

Okay.

But a little less so on the residential.

That's the message?

Yes.

Yes, I'm sorry.

I am referencing all the commercial.

I think you'll see a reduction in residential as we've talked about, a reduction in the auto side, as your expectation of where the market's going.

And keeping in mind that our core C&I customer, our company's up to $100 million of revenues.

Those loans just take a little bit longer to grow.

We had a strong 2018 in that path but it levels off.

We hired a lot of teams, we brought people in.

You get that splash early and then it starts leveling off.

So we're going to level off on much of what we did in '18.

But we still expect that 6% to 8% to be reasonable.

And our next question comes from line of David Chiaverini with Wedbush Securities.

Just one nitpicky one for me remaining is on the expense line for net occupancy and equipment expense.

Since you've closed 11 branches, I was curious as to why that expense went up $1.5 million from third quarter to fourth quarter, but yet you closed 11 branches?

And then a follow-up to that is, should we assume that, that line item essentially comes down roughly 10% as we look forward once those 20 branches are exited?

There's a lot of reasons.

Number one, even when you close a branch, in some cases, it takes time to get out of a lease or whatever else we may be doing with it.

We have additional depreciation going on based on branding change and other kinds of equipment changes.

We also -- I think that goes in that category as things like snowplow removal.

The winter months for us are always a little stronger in terms of cost on that area.

So there's lots of areas.

I mean over time, you would expect that as a result of the branch closures, we'll see some decline, but we also have transformation going on, meaning that other branches are going to be renovated.

We're going to spend money on them.

So it's not just a one-way street.

You also have just a normal course of rent increases in that.

I think Alan referred equipment expense, obviously, upgrades a lot of machines within...

Real estate tax increases.

I mean all that stuff doesn't stop.

I think on a net basis, David, linked quarter expenses on this quarter number came down, and we anticipate further contraction going into 2019 for each individual quarter.

Yes, and quite frankly, a lot of the branches that were closed to date were closed later in the quarter.

And then if you think about -- so the reference to the branch transformation, I think we had originally estimated around $9 million in annualized operating expense reduction from that and approximately half of that was related to property.

And our next question comes from the line of Arren Cyganovich from Citi.

On the technology side, I know that's probably going to be a ongoing investment for a number of years but I think in the past, we had talked about it being kind of a 3-year plan for the large pieces that you're looking to overall.

Where are you in that time line?

And what are the larger projects that still remain on the technology side?

So we're about halfway there.

We had talked about one of the big ones which is [given] the data center migration, which we think will happen in 2019.

They'll be significant telecom saves that come out of that piece of it.

But I think overall, when we look at it, there's definitely a lot of efficiencies that we're going to begin to see in 2019 as a result of what we did in 2018.

I think when you look at it just from the residential space, where our processing time is down by about 1/3 from where we were just at the beginning of 2018, just by implementing the auto decisioning on the auto side, we're probably able to do twice the size that we were able to do before without increasing staff overall.

The problem is, is those things didn't begin to get implemented until the end of 2018, so the efficiency expectations that we have are not going to come a little bit later into 2019.

If they're going to be real, we're already beginning to see a lot of them.

But the incremental increase in technology expense is not going to be at the same level that we saw in 2018.

(Operator Instructions) And our next question comes from the line of Collyn Gilbert with KBW.

I'm really pushing my limits here by getting back into the queue with a question.

But I apologize, I lost power for a minute.

And it maybe was covered, but I just want to clarify.

Rick, you had said that the loan growth, the 6% to 8% loan growth was average.

But that would indicate then end of period growth would be flat.

I just want to make sure.

I'm sorry, it was an average off of the year, off of the last quarter average number.

Okay.

So not the full year average for '18, just for the fourth quarter?

Right, right.

And I'm showing no further questions at this time.

I would like to turn the call back to Rick Kraemer for any further remarks.

Thank you all for joining us today on our fourth quarter earnings call.

If you have any additional questions, you can reach out to Alan Eskow or myself.

Have a good day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program and you may all disconnect.

Everyone, have a great day.