Valley National Bancorp (VLY) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Senior Vice President of Public Relations, Mr. Marc Piro. Please go ahead.

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

Thank you, Mark. Good morning and welcome to our first quarter 2016 earnings conference call. This morning, we are pleased to review Valley’s first quarter operating results, and provide an update on the Bank’s previously announced strategic initiatives. First I'd like to focus on our Florida expansion. In the fourth quarter, we significantly increased Valley's presence with the consummation of the CNL merger. Valley’s Florida footprint now equals approximately 15% of our entire franchise. With CNL, Valley acquired a talented group of business bankers with a tremendous pedigree, coupled with Valley’s established Florida staff operations are now poised to produce a significant contribution to Valley's earnings and market share. As originally anticipated, in the first quarter we were able to convert CNL’s data systems onto Valley’s computer platform and most back-office operations are now administered in New Jersey. In large part, as a result of the duplicative expenses prior to conversion, CNL negatively impacted Valley’s first quarter operating earnings by approximately $0.01 per diluted share. With the integration substantially concluded, many of the cost saves identified during our due diligence process will begin to be recognized through the income statement in the second quarter. In addition to the expected expense reductions attributable to CNL are the many organizational-wide cutbacks in operating expenses identified through Valley’s strategic planning process. At the end of the first quarter, Valley employed 2,897 full-time equivalent employees, a decline of 32 from the prior quarter with an additional reduction of 35 more persons forecasted for this quarter. Staff efficiency is not new at Valley. In fact, workforce levels at Valley are lower today than after we entered the Long Island market in 2012 with our State Bank acquisition when Valley was approximately $16 billion in total assets. While we are pleased with the direction of operating expenses as noted, we expect further improvement and remain vigilant in identifying additional areas to reduce expense. During 2015, we announced the consolidation of 28 branch locations, of which to-date 14 have been consummated. We anticipate the remaining locations to close in May and June, further reducing headcount and expense. The optimization of our branch network is a perpetual endeavor as the banking environment continues to evolve. As we work to right-size the branch network and provide electronic delivery channels, we anticipate additional branch modifications and closings to materialize. Reducing operating expenses is an integral component of enhancing Valley’s earnings profile. As we previously commented in late October 2015, Valley repaid a large portion of its high cost borrowings and immediately replaced those borrowings with new short-term funds from alternative sources. In late December, the original source of those borrowings offered Valley a significant incentive if we would draw a similar amount of funds for one year. The incentive was recognized in the fourth quarter of 2015 and actually enabled Valley to prepay additional borrowings in December without incurring a net increase in expense. As a result of the additional borrowings, Valley’s liquidity positions spiked during the first quarter, impacting both net interest income and the margin. A large portion of the original October replacement funding has now matured and we have been able to renormalize our liquidity position. Alan will provide additional color on this issue in his prepared remarks. Loan activity for Valley in the first quarter is historically light as many of the banks traditional C&I borrowers reduce line usage following a year-end buildup. Further Valley’s northeast consumer automobile and residential mortgage customer base are seasonally less active in the first quarter. Despite the historical challenge in expanding loan volume in the first quarter of 2016, loans expanded approximately 2.3% annualized, driven by strong activity in Valley’s Florida emerging marketplace. Total organic loan originations in the first quarter exceeded $640 million, nearly 10% greater than the same period one year ago. Valley’s Florida division accounted for over $160 million of the new volume, with net outstanding increasing at a double-digit pace and currently the committed pipeline in the Florida market is up approximately 50% from the prior quarter. The majority of Florida's originations reflect traditional commercial purpose loans similar to Valley’s northeast profile and underwritten to Valley’s customary credit standards. Business activity in Valley’s core New Jersey and New York markets continues to improve at a tepid pace, although we have reason to be optimistic about levels of lending in the northeast for the balance of the year. I made that statement based on the fact that our approved committed pipeline in the northeast had grown to over $500 million by quarter end, nearly double the historical levels for this time of the year. Consumer lending including residential mortgage for the quarter was a mixed bag of activity. Residential mortgage application volumes spiked nearly 100% from the applications received in the fourth quarter. However, as is customary with residential lending, there is typically a six to eight week lag from application to closing. Therefore we expect increased closing activity in the second quarter. As discussed in prior periods, Valley intends to sell a major portion of its residential originations, in part, to manage the Bank’s future interest rate exposures. During the first quarter, approximately $54 million of fixed-rate residential loans were sold, generating a gain on sale income of $1.7 million, an increase of approximately $500,000 from the fourth quarter. Should residential mortgage application activity continue at the pace realized in the first quarter, we expect a future increase in income from the gain on sale of loans as the year progresses. Contrary to the increased volume recognized in residential mortgage lending, Valley’s indirect automobile lending business line experienced a significant decline in origination activity and ultimately loans outstanding. The portfolio contracted over $50 million on a linked quarter basis, approximately 16% annualized. First quarter originations declined to approximately $70 million from $134 million in the fourth quarter. The decline is largely attributable to revised indirect dealer loan level pricing guidelines recommended by the CFPB and adopted by Valley. Credit quality as of March 31 remained pristine, with total non-accrual loans as a percentage of total loans equaling 0.39% for the second consecutive quarter. Net charge-offs for the quarter were a negligible $1.5 million or 0.04% on an annual basis as a percentage of total average loans. Valley’s underwriting philosophy has remained consistent irrespective of the economic conditions and asset class. Requiring borrowers to maintain significant equity in each loan facility is prudent, despite the aggressive advance rates prevalent in the marketplace. For example, as of March 31, Valley’s New York taxicab medallion portfolio equaled approximately $140 million in outstanding. The average loan to value of the portfolio assuming a current market valuation of $750,000 per medallion is 55% of that value. Further, of the approximate 350 medallions the bank has as collateral, only one has a loan value in excess of $600,000. I mentioned the credit characteristics of the medallion portfolio, simply as an example of the credit scrutiny applied to all lending portfolio is at the bank. As I have repeatedly said, banking isn't so much the return on the principals but rather the return of the principal. Before I turn the podium over to Alan, I would like to reiterate that Valley remains on course to meet its performance goals for the year. While we would like to see all of our anticipated expense savings and revenue enhancements scheduled for this year take place on January 1, many of them take months to implement. That said, our expense savings are materializing as we projected. Also our revenue stream is expected to meet our strategic targets despite the protracted low interest rate environment in which we have been operating for the past several years. Alan Eskow will now provide some more insight into the financial results.

Thank you, Gerry. For the quarter, Valley generated net income available to common shareholders of $34.4 million. The quarter's financial results reflected a full period of CNL, which closed on December 1. As Gerry indicated earlier, Valley completed the consolidation of many back-office operations in late February. As a result, the quarter’s total non-interest expense of $118.2 million included numerous integration and duplicative staffing and other operating expenses. As of April 1, the majority of these expenses which we estimate to be approximately $2 million had been eliminated and we expect the second quarter to reflect a more normalized core operating expense figure. In addition during the quarter, Valley recognized $7.3 million of expense attributable to amortization of tax credits. The expense which is recognized above the line in calculating pre-tax net income, directly impacts the Bank’s effective tax rate, which for the quarter was 28.5%. While for the quarter, the amortization of tax credits declined significantly from the fourth quarter, the actual expense of $7.3 million was approximately $2.3 million greater than our previous guidance. In future periods we currently expect the amortization to remain in line with the first quarter of 2016. During the quarter, we closed one branch and anticipate consolidating the remaining 14 previously announced closures by the end of June 2016. Due in part to the timing of these closures, we expect non-interest expense to contract from the first quarter actual of $118 million both in the second and third quarters, ultimately realizing an annual run rate consistent with the $455 million guidance provided last quarter. The net interest margin for the quarter contracted 22 basis points from the fourth quarter as the expected decline in the cost of funds from 0.83% to 0.78% was more than offset by the decline in the average rate of total interest earning assets. The linked quarter decline is attributable to numerous moving parts, some of which we identified last quarter as infrequent in nature and others that were the result of events during the first quarter. The linked quarter decline in interest income attributable to contraction and swap fee income and recovery interest income on PCI loan equaling approximately 12 basis on the margin, where a couple of the items previously identified as adverse to the margin when compared linked quarters. In addition, two specific items not previously discussed also negatively impacted the margin by approximately 12 basis points in the first quarter as compared to the fourth quarter of 2015. Valley’s balance sheet includes approximately $2.1 billion of loans classified as purchased credit-impaired, those largely acquired through whole-bank acquisitions. As a result of the accounting methodology for these loans, Valley recognizes accretion income on a pooled asset basis which represents both the contractual interest earned and any fair value adjustment recorded at the acquisition date. For purchased credit-impaired loans, Valley periodically reforecasts the remaining estimated cash flows based mainly on actual repayment experience within each pool of loans. During the first quarter, we reforecasted the cash flows on a portfolio of loans acquired with our State Bank acquisition in 2012. Based on the reforecast, the estimated life of the portfolio extended significantly from the prior reforecast. On the surface, this is a positive event. However the accounting methodology actually negatively impacts near-term accretion as the acquisition fair value mark is now spread over a longer duration, positively impacting future periods. For the quarter, the reforecast of this portfolio negatively impacted expected interest income by approximately $3 million or 6 basis points on the margin. We expect the reduction in interest income to be static until the next reforecast, which is typically a 12-month cycle. Further impacting the interest income and margin for the quarter was the excess liquidity largely attributable to pre-funding certain debt maturities coupled with the impact of the decline in consumer lending origination volumes. The impact of the additional liquidity adversely impacted the margin by 6 basis points on the margin. In part, based on the current loan pipeline and anticipated closings, we believe the excess liquidity realized in the first quarter will not continue in the second quarter, and both net interest income and the margin will expand accordingly. Further, the second quarter net interest margin will be positively impacted by $182 million of long-term debt which matured in early March and late April. Although the linked quarter net interest margin declined greater than originally expected thus falling short of the guidance provided during last quarter's call, the after-tax net income for the Bank is in line with management's expectations and we are still on track to achieve our 2016 annual budget. Non-interest expense will continue to decline as cost saves are realized in both CNL and Valley’s organic branch consolidation efforts. The seasonality which impacted Valley’s first quarter loan growth is not anticipated to influence future periods, and based on the current loan pipeline, we anticipate annual loan growth consistent with prior guidance averaging 6% to 8%. This concludes my prepared remarks, and we will now open the conference call for questions.

Okay. [Operator Instructions] And one moment please for your first question. Your first question comes from the line of Collyn Gilbert. Please go ahead.

Thanks. Good morning, guys.

Good morning, Collyn.

Alan, just to hop back to your comments there on the loans and the expectation that the loan growth should rebuild, and you're keeping that 6% to 8% growth rate for ‘16. So that obviously means an - a pretty meaningful, I guess, acceleration of loan growth in the latter part of this year. Can you just kind of walk through where are you expected that to come and kind of what gives you the confidence in that line?

I think Gerry mentioned in his comments that we have a $500 million pipeline in the northeast alone besides the expansion of the pipeline we've seen in Florida. The pipeline in the northeast is pool of loans and we expect those loans to be closing shortly. So as those loans continue to close in the second quarter, a lot of them, that will help build us back to the percentage increase that we expected. So I think a lot of it you will see in the C&I and CRE portfolios.

Okay.

Collyn, it’s Gerry. We are also seeing very strong growth in Florida. Remember, the two franchises that we purchased based on just their capital base and their size, didn't go at the loans as large as we are comfortable making, and that gives them the ability to build their pipelines at a much more rapid rate than they were able to do in the past and we are actually seeing that take place. I pointed out in my remarks, the lenders in Florida come in a large measure from much larger financial institutions in their career. So they are very comfortable in handling larger credits. It's not something that's new to them. It just gives them a lot more flexibility since the merger, so we are real excited about what we are seeing take place there.

Okay, that's helpful. And do you have a sort of blended origination yield that you're seeing on the new C&I and CRE stuff that's coming on relative to what’s rolling off?

I'd probably say we are somewhere in the $350 million to $375 million range.

Okay. That’s helpful. And then just - while we are talking about loans, the construction growth that you saw this quarter. Can you just talk a little bit about that, and if you think that's sustainable, do you see that ramping up, so just how that's kind of sitting in with your overall appetite for growth?

Our main emphasis is not on construction, it's more on commercial real estate. It's more on C&I. While we are open, obviously to construction lending and we are happy to do it, at this point in the economic cycle raises some concerns. So we are actually focusing more on established projects.

Okay. And then - and I apologize, Gerry, if you guys commented this in your opening comments. I came on a little bit late. But just around the indirect auto - and I know in the press release you had indicated that you're kind of reevaluating the situation there. Would you guys consider an all - let's say the new pricing structure is set and there is not a lot of variability to that going forward, would you ever consider selling that portfolio?

We consider everything obviously. We never said that we wouldn't consider something. Right now we are looking at - and it's very early in the timeframe to make a definitive judgment as to what we should do with our automobile program. So right now everything is open obviously.

Okay. I'll leave it there. Thanks Alan.

Thank you.

Your next question comes from the line of Brian Horey. Please go ahead.

Hi. I wondered if you could give us an update on the metrics of your taxi medallion portfolio, credit metrics?

Yes, I did say - we have $140 million in New York medallions. We have a very small limited number of $2 million in outside of New York, but most of it is in the New York marketplace. If we use - as I said in my remarks, if we use $750,000 as their value, we are still only at 55% loan to value. We have one loan, of which I mentioned was at - which was over $600,000 of single medallion, and to be more exact it was $612,000 so we were pretty close to being on target when I said 600,000. We are - the entire New York portfolio I believe they are all still current. They are outperforming. So we were always a very conservative lender. We never gauged the value to the medallions that they were actually selling that. We had a house limit, I believe it is around $850,000 when we did it. And then we didn't lend $850,000, we only lend generally 75% or two-thirds or 50% depending on the other factors. We have personal guarantees on a large portion of the portfolio depending on the assets that the borrower - other assets the borrower had [Technically Difficulty] that we would lend. So we’re relatively comfortable with the portfolio at this point in time.

Okay. And then you had a little bit of a bump in the early stage delinquencies for C&I. is there any particular portfolio that's driving that?

Alan…

Nothing in particular.

Okay. Thank you.

Your next question comes from the line of Frank Schiraldi. Please go ahead.

Good morning. Just a couple of questions. First on the 6% to 8% annualized loan growth. Is that - do you foresee that - is that basically just organic growth or would we include the multifamily participations in 1Q and anything you do through the year, I mean, would you need some of that to get there, or is that organic?

I think we are still looking at it as organic. I mean, if we decide as we did in the first quarter to add something, we added, but I think our goal was that to have an organic growth of 6% to 8%.

I want to add a little bit about some of those purchased multifamily loans. That portfolio has performed in an absolutely pristine manner. So if we have excess funds, I would certainly rather put it into that, then I would rather buy a bond that is going to pay us a significantly lower return. So we are looking at - I looking it personally as someone as replacement to investment.

Yes. And I think we told that to you guys before that we really allowed the investment portfolio to kind of like lay flat, even decline, and the alternatives to that was to look at shorter duration multifamily loans that were seasoned that we were comfortable with that gave us a higher return.

Sure. And then, I guess, I would assume that that would - it still includes sort of double-digit growth in Florida. I'm just wondering if there is any areas down in that franchise that are getting - where the expense is getting a little long in the tooth where you're starting to pull back a bit in Florida?

I think the hospitality in general and timing [Technical Difficulty].

Okay, great. Thanks. And then just finally on the margin. Last quarter, Alan, you talked about where we might expect the full-year NIM. You gave a range, I think of 3.18% to 3.25%. And I totally understand that the reforecast wasn't in - the PCI pool wasn't in that range. So just wondering now with that included and given that you talked about a range back in 1Q, would you be willing to sort of talk about maybe where you’re thinking Valley might roll out for full quarter NIM - full-year NIM?

Yes, I think right now based on the way we are seeing things, we’ll probably come in at the lower range of that number. We are not going to come in at the higher range at this point. I mean, we just didn't expect the reforecast. So we are going to be at the lower range to slightly below that. We do believe that it will do better as the year moves on. I think this first quarter really had so many moving things to it that it was difficult to forecast what we would see by the end of the quarter. But I think what we are now looking at relative to the rest of the year, we do see it going back up again from where we are at. We don't expect to be at this level.

Okay. And it’s tough with the volatility from obviously from the purchase accounting, but I don't think in the past you've given a total fair value mark - in the fair value mark that's in the quarterly margin as a basis point number. I mean do you have, if not an exact number, an approximation of what is in the 1Q NIM?

It’s really a small number, Frank, and I don't really have that specific number in front of us. Remember that, that fair value mark comes across a whole bunch of different portfolios and is some addition to their normal interest, contractual interest that we expect to have. So really we are looking at mostly contractual. And sometimes as what happened this quarter a reforecast - spreads that - the fair value mark out over more years than we had originally projected.

Right. I guess that’s the question, I mean, 6 basis points seems like a decent size number. So what was the size of that pool and how long - how many years did it extend?

It went to - and remember, it's only one pool first of all. So we've got three banks and another piece, the PCI loans. This is only one pool pretty specifically within one bank’s acquisition. So while that decline - it declined a couple of years, I mean, that's really what we're talking about here. So where we expected it pay down over a fairly short period of time based on the loans that were in that pool, what ended up happening is - the good news is the loans are of better quality than we originally underwrote them at and risk rated them at. So now what's happening is, is they are not paying down as quickly and therefore while we are being - as I said I think in the remarks, we are being negatively impacted this year. I have no way of knowing for example how the next time we reforecast what that's going to look like. That could turn around all over again. So it's really a lot of the moving target, and that's why when we say there is a lot of moving parts, there are a lot of moving parts.

Well, I guess I'm just trying to figure out how - I mean, if its maybe moved from one to three years then, so it's spread over three years now, something along those lines and how big would that pool be? Would it be - you've got $2 billion in PCI overall. Could this be - could this particular pool be a quarter of that, or are we talking smaller numbers, bigger numbers or…

I said I would respond [ph]. He has got his hands on these things. When he is trying to tell me and I’m going to let him respond.

Frank, again, the State Bank pool is sitting on $400 million, balances right now. So I think that’s what we’re looking at and that’s overall expense. I think one of the things that Alan tried to allude to in some of his comments was the fact that we might have an initial adjustment in this period but there is a positive news as the loans are going now be extended further out and we will get that higher yield for a longer period of time. And the volatility that we had in this specific period was attributable to an adjustment within that reforecast, so we’re now expecting $3 million as Alan mentioned to be the adjustment on every single quarter as we move forward. I think you’re trying to, I guess, frankly still get to what that potential volatility is in other pools and so forth, and this is sort of a unique pool that really doesn’t reflect a lot of what the other pools look like, if that’s helpful.

Okay. That’s helpful. Thank you.

Your next question comes from the line of Matthew Breese. Please go ahead.

Good morning guys.

Good morning, Matt.

I just wanted to walk through some of the dynamics of the margin. This quarter and relative to your guidance for 3.18% or slightly below that for the full-year, I get the redeployment of liquidity. That should impact things positively by it sounds like 6 basis points and some of the maturing debt. That should impact things by another 5 or 6. Should we expect another increase on top of that from a relative normalization of swap income, or can you help me better understand the positive impacts that get you back up to that 3.18% range?

Yes, I mean, you just added up I think - what were your two numbers again? You gave me 6, and how much - what was the other number you gave me?

5 or 6 from the debt maturity.

That’s 11 or 12 basis points right there, so 12 basis points and we showed you what 3.08%, so that gives you close to 3.20% just right there. But that being said, there is no normalization of things like swapping, prepayment income et cetera, all of those things are based upon - well, all of them are based upon the borrower and what the borrower decides to do. We may be telling them about swaps, if they can do it or lock in rates, et cetera. We’ll get fees from that. But that being said, I can't tell you how many loans and how many people borrowers are going to do that. So we are really sitting out there without knowing. So there is like normalization to that. I mean we did have I think $1.7 million of swap income this quarter, so we had a fairly good amount. It just wasn't as big as we had in the prior quarter. So, and the other thing is we have maturing debt that is going to happen throughout the year. We did have, I think, as we stated, which we are not getting any real benefit of this quarter. We had about $182 million of debt that matured between March and April. That's going to bring us a couple of hundred basis points of savings on a cost basis. And then when we get to July, we are going to have another $75 million that is maturing at 5%. So that's going to come in and save us as well some money as we move forward. So there is lot of pieces to this going forward, but I think all of this - based upon the way we are looking at it, loans coming on, coming out of maybe the liquidity issue, it's all going to benefit in the margin.

Okay. And then hopping to expenses. It sounds like there is a lot going on between the first and second quarters. You have number of branches closing plus the systems conversions. So what do you expect to be the drop-off between the first quarter expense run rate and second quarter? Is it going to be as substantial as it needs to be to get you to that $455 million run rate for the year?

I think, first of all, we told you that it's going to take - I told you this on the last call. It's going to take till the fourth quarter before you see this kind of really normalize. I think I said in my comments now that it will start to normalize in the second quarter. So we are going to see about $2 million come off in the second quarter. And then you are going to see another drop-off. Remember, the branches closing in the second quarter and there are 14 of them. They are not closing for almost the end of the quarter. You're not going to see any savings at all on lease expense, on people or anything else until sometime into the third quarter. So getting to $455 million we believe will take another quarter or so before on an annualized run rate basis you will see that $455 million going forward.

Okay. And then pulling on the indirect auto string just a little more. Is the pace of decline we saw this quarter, should we expect that for the remainder of the year until a more formal plan is identified?

Very difficult to project. The acceptance of the dealer network to the flat interest rate scenario that is being employed is difficult to judge. It depends how many other lenders get onto the bandwagon so to speak. Valley has always been a very conservative lender. When we were told by a regulator or somebody like the CFPB that they are going to be looking at despaired income lending and they are going to be holding the banks responsible but here is a way that they think that it should be done so that you don't fine us [ph] of getting a fine through having misbehaved. We got on the bandwagon and that's how we're doing it. It's very difficult to project of what the long-term effect of that is going to be though at this point. I mean it's only been in effect for the last 70 days or so, 80 days.

Got it. Okay. That's all I had. Thank you.

Thanks.

Your next question comes from the line of John Shibles [ph]. Please go ahead.

Hi everyone. How are you today?

God morning.

Good morning.

Just a quick question. Of the 28 branches that are closing - in the 10-K, it says it's mixed, leased and owned. How many of those branches that you're closing do you actually own?

Yes, we haven't really disclosed that. I can tell you that in the first group, there were a number then that were owned. The first 14 that we closed, there were probably five that were owned. A number of them are under contract. I think one maybe as closed already. We have a couple that are still up for sale. So we really haven't disclosed any more details on that at this point.

And then in the beginning of the K, it talks about the Bank’s subsidiary being a REIT. You have a - so does the REIT own the real estate, or does the Bank own the real estate?

We have REITs that were formed lots of years ago, and yes, some of the properties may well be within the REIT, although I don't know how many. The REIT is 100% owned by the Bank. It’s just not an external REIT, number one. And it will not really assess any gain, loss or whatever we may have on the disposition of the piece of properties [ph].

Okay. And then what is the target tax rate for 2016?

Somewhere between 20 - I think we said 27% and 29%, or 28% and 30%. I don't remember, so right in that range. We are right there now at 28.5%.

Okay. And then I planned on attending tomorrow, but last year during the annual meeting, Gerry mentioned growing tangible book. We've not seen much in growth. And then towards the end of the annual report, it talks about performance awards in 2016 through 2018 having some tied to tangible book. Does that mean the Bank is shifting focus and will now start focusing on growing tangible book?

Well, the tangible book is affected a lot by the acquisitions that we do. So if you were to look at a history of the tangible book and I have in front of me from a year ago, we did begin to go up. We went up from March to June from $5.40 to $5.43, then to $5.48, and then we made the acquisition. And as we've announced, it was dilution to tangible book as a result of the CNL acquisition. So that brought that back down to $5.36. And then this quarter, it went back up to $5.40 again. So we do expect that - in addition we heard our tangible book as a result of the borrowings, we prepaid as you know $51 million or we took a penalty of $51 million that had a negative impact on tangible book, and it's probably have got about two year payback in that. So we've been giving the awards that have been granted over the last few years, have been based partially on tangible book growth and we do expect that to continue to grow. But that being said, the Board takes into consideration that when things are done for the purpose of growing the institution and making it more profitable, that they need to - will look at that as well when they evaluate the tangible book value.

I guess another way - I’m going to try asking it in a different way. When I compare you to your peers, other people that have grown tangible book at a faster rate, so looking out over the next three to four years, will there be more of a conscious effort to grow tangible book?

Absolutely.

We will definitely look to grow it.

Okay. All right. Thanks guys.

By the way, part of the issue relative to tangible book in the way we look at it is, remember, we are paying about a 4% dividend which some banks are paying 2% some are paying nothing.

I bought this up last year at the annual meeting. Is there any discuss of maybe cutting the dividend and doing a stock buyback.

I don’t think that would be too popular with most of our shareholders.

Okay. Thanks guys.

Look forward to seeing tomorrow.

[Operator Instructions] Next we’ll go back for the line of Collyn Gilbert. Please go ahead.

Hi guys. Sorry, just quick couple of follow-ups. And I know again the uncertainty on the indirectly is hard, but just curious in the 6% to 8% loan growth that you're thinking for the year, what are your assumptions on indirect growth?

Yes, we’re looking at contraction.

Okay. And then, Alan, and I will go through all this based on your comments, but just trying to sort of summarize. Given the movement on the borrowings and the debt that matured this quarter and everything, are you kind of anticipating then the interest expense should be relatively flat on a linked quarter basis?

Will go down.

Okay.

Probably go down somewhat.

Okay.

Remember we didn’t see any benefit this quarter to really the borrowings that are now coming off.

Okay.

This was only a couple of weeks. A - Collyn Gilbert Okay, right. And the $182 million that matured, you did not replace that. Is that correct? Or you refinance that into…

We had the fund - we really had the funding for that already. A - Collyn Gilbert But I just mean in terms of - you guys are right. I’ll follow-up with Piro offline. I know there is a lot of moving parts. Okay, and then just one final question. Just can you update us on where you guys staying in terms of interest rate risk positioning and you had some movement on the balance sheet, how that’s shaking out in terms of asset versus liability sensitivity?

Yes, we’re still somewhat asset sensitive. A - Collyn Gilbert Okay.

We obviously - I think a lot of things we keep telling everybody is we've done things like even some swaps and some adjustable rates that we acquired et cetera. I mean all of that is to try and make sure that we are not sitting here flat without taking into account that interest rates some day are going to rise, some day. A - Collyn Gilbert Right, exactly. Okay. All right, I’ll leave it there. Thank you.

Okay.

All right.

And at this time, there are no further questions.

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