Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Earnings Release. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Marc Piro. Please go ahead.

Good morning. Welcome to Valley’s third quarter 2016 earnings conference call. If you have not read the third 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, Marc. Good morning and welcome to our third quarter 2016 earnings conference call. We're excited to review Valley's third quarter operating results and provide an update on our previously announced strategic initiatives. For the quarter, Valley generated net income of $42.8 million, an increase of over 10% when compared to the prior linked quarter and 19% when compared to the same period one year ago. Top line revenue growth excluding the provision for credit losses, coupled with a material contraction in noninterest expense provided the foundation for the solid results and increased net income. Furthermore, the continuing restructure of our funding base continues to produce strong benefits to our net income. During the quarter, through a debt modification, we reduced our rate on an additional $405 million of debt from 3.70% to 2.51%. As a result Valley's financial performance metrics continue to improve as the bank's return on average assets increased to 78 basis points for the third quarter, our return on average tangible equity equaled 11.29% and the efficiency ratio dropped to 63.3%. However when adjusted for the amortization of tax credits investments, the number comes in below 60%. The improved operating performance is a function of Valley's diversified balance sheet, combined with the continued execution of the bank's previously announced strategic initiatives to expand noninterest income, while simultaneously reducing expenses. In fact the third quarter's core operating efficiency ratio was the best Valley has produced in over five years. Also third quarter noninterest expense as a percent of total assets was 2.03% on an annualized basis, placing Valley among the best performing midsize banks by this measure. Starting in the fourth quarter of 2015, Valley began the implementation of an aggressive branch consolidation program, coupled with a bank-wide cost reduction program, which when completed, was expected…

Thanks Jerry. Just a couple of remarks, Valley Florida is having a good year and had a good quarter. We are achieving our core double-digit growth plan for C&I, CRE and consumer loans and deposits both commercial and consumer In the consumer business, we introduced the indirect automobile line of business and already boast more than 125 automobile dealership relationships across our Florida footprint. A nine-month-old merger integration of the $1.6 billion asset CNL bank has been an excellent experience. Rest of all the teams have jelled and together are focused on quality growth in the major markets here in Florida. Valley Florida today has a surgical presence I'll call it in Florida's major urban markets and same as we believe in a minimal, but visible core branch footprint and to that end, this year we merged four offices and closed one to contribute to Valley's omnibus and ongoing cost savings and efficiency effort. Deposit growth has been focused on meeting our funding needs and creating a low-cost sustainable base of deposit and keeping with this goal Valley Florida sustains an over 40% non-interest-bearing deposit mix which we believe makes us among the best-of-breed banks in the State of Florida. We're also proud of our CRA commitment activity and projects to date. Valley Florida also formed a CRA advisory committee this year comprised of men and women who operate entities in the State of Florida, serving communities that are in need. So thanks again Jerry and let me turn the program over to our Chief Financial Officer Alan Eskow.

Thank you, Rudy. For the quarter total pre-provision net revenue expanded approximately 7.5% on an annualized basis as strong loan growth, coupled with a reduction in excess liquidity provided the catalyst for increased net interest income, while enhanced mortgage banking revenue led to the growth in noninterest income. Valley's net interest margin remained flat for the second quarter at 3.14%. For the period, the yield on loans contracted four basis points from 4.17% to 4.13%, largely a function of new volume yields in combination with a decline in interest recoveries on purchased credit impaired loans. For the quarter, the blended new volume loan rate was approximately 3.5%, which has remained relatively consistent throughout the last 12 months. The yield is largely driven by the composition of assets originated in the bank's duration target. We believe in maintaining a well diversified loan portfolio, comprised of consumer and commercial asset classes, as each uniquely reacts to varying economic and interest rate environments. Further the rate re-pricing attributes of each portfolio is important and a succinct area of focus for Valley in establishing concentration targets. The total cost of funds declined from 78 basis points to 76 basis points from the linked second quarter, largely due to the modification of $405 million in federal home loan bank borrowings, coupled with the maturity of approximately $75 million of high-cost debt in July. We recognized approximately two months of benefit for each in the third quarter and expect a full benefit for the fourth quarter. Although there is a general perception of excess liquidity within the market it is our experience that is a result of increased competition, the cost of retail deposits has begun to increase. Consumer accounts are expensive on the margin and we typically emphasize significant depository relationships from the majority of…

[Operator Instructions] We do now go to Steven Alexopoulos from JPMorgan. Please go ahead.

Hey. Good morning, everybody.

Good morning, Steven.

I wanted to start out with a few questions on the loan side. Could you guys give more color on the strong growth in the commercial real estate loans really focusing on the organic growth, and do you see that as an area where you could take better advantage because we are hearing of others pulling out of the market?

We've seen strong growth in all of our regions, New York, New Jersey and Florida in CRE. We continue to underwrite using our stress testing metrics, which may be a little bit tougher than the marketplace, but we have had strong demand. I think there are some banks and I'm hearing this from some of our clients that have been pulling back on their commercial real estate, which gives us an opportunity. But as I mentioned in my remarks it is still a very competitive market and while some banks have pulled out, it doesn’t open up the field for us to charge as much as we would like. I do think that there will be continued emphasis on commercial real estate and Valley has always felt very comfortable with its commercial real estate portfolio, largely because of how we underwrite it, but remember with commercial real estate, you always have an asset. You always have something to pull back on. And it's appropriately underwritten, conservatively underwritten, that collateral can pull you out of a lot of problems. So I hope it will continue.

I want to follow up on one thing you said. What is the total loan growth that came from Florida in the quarter across all loan categories?

Rudy?

Yeah, so in year-to-date about $360 million on the commercial front, year-to-date from Florida for example and then I don't have committed to memory for residential though I'm taking the look here let's see in the third quarter for example auto and another 12 in the residential another 18 for example. So that's the mix we tend to do and we are privileged that we've earn the ability to continue to participate in the CRE market. I think to amplify in Jerry's comment what's terrific I think is we have a discipline. We have discouraged sectors for CRE and we stick to our knitting on that. And then in the encouraged area as Jerry says, we conservatively underwrite and the like and I think that it allows us to continue to perform in those areas and yes from time to time we can take advantage of a select participant, but to my surprise, I think in time advances and others, there has still been no lack of competition in CRE. Here in Florida since you nest it down to Florida, I would tell you too that by numbers of loans in select and when I look month-to-month this year, 20% to 40% by number of loans of our loans are C&I. So we've got we think a healthy mix of new loan generation here in one of the three states for Valley.

Okay. And then one of the pressure points on loans continues to be the indirect auto. Can you talk about the new strategies you are implementing? Do you think those will be enough to at least hold those balances flat, or do you still expect contraction?

It's really hard to say at this point. We are looking at using some different metrics so that we can get a little bit better yield on some of our portfolio. We're still a conservative lender while some institutions were told and from what I am hearing from the regulators are lending 175% to 200% on the cost of the automobile. We still hold our metrics way down, which actually in some time -- in some cases act as a barrier to our growing the portfolio as rapidly as we would like, but again, we're just so risk-averse in this area that we're not going to start changing our appetite for automobile loans.

Jerry, can I shift direction for one minute and talk about M&A? Are you seeing opportunities in the market? Maybe can you comment on price expectations? Thank you.

We're seeing some opportunities. We've seeing some opportunities. We have been looking at some. Our particular focus has been and continues to be to expand our Florida franchise. We do not exclude doing something outside of Florida because of the right opportunity where to present itself, we certainly want to consider it, but here in Florida Rudy has been very active. He spearheads all of the Florida acquisitions for us and Rudy you want to.

Sure. We have institutions that our Board has agreed. We have interested and of course you have to wait until those processes until the potential seller is ready. We've participated in various stages of a process for four institutions year-to-date candidly and in all cases we took to a level where we could express by indicative bid our interest or verbalize our levels of interest and so on. And we found that pricing is still robust in our view for those institutions. Good for the seller, but again we have a discipline there too both in the mix of business to quality of the business, ability to retain team in the markets that they serve. So we fortunately again Valley has earned the ability to be invited to processes. In addition to that is I think Jerry was indicating I spent a little bit of time in my car around the state calling on what tend to be largest institutions that I think we could have an interest in and as we always say, we really don't know until we get under the hood to look at the institution. So that would be I guess what I would add to Jerry's comments.

Great. Thanks for all the color.

And the next question is from Brody Preston at Piper Jaffray. Please go ahead.

Hi guys. I'm filling in for Matt Breese this morning. I just want to go back and touch on…

Will you please speak up a little bit. I have a hard time hearing you.

Sorry about that. I just wanted to go back and touch on CRE competition. Typically what you are hearing from the regulators, and I know you said that maybe some smaller institutions are pulling back, but on and off sort of the balance of the growth if it's going to shift more to Florida versus New Jersey or what you are seeing there?

Our growth isn’t focused as far as far as loan growth is concerned to any one market. It's wherever we can get the best loans that's where we're going to be making them. We hear from the regulators that they are not happy with some of the cap rates they had been seeing banks accepting. As I mentioned in my remarks a few minutes ago, we stress test all of our commercial real estate in all of our markets using what we believe is an appropriate cap rate irrespective of the cap rate the appraiser used. So very often we'll find a party will come in here and say well it's a 50% loan-to-value, but they're using every what we consider a ridiculous cap rate when we put a realistic cap rate on it and okay they're really looking to borrow 100% of the value of the property. It's those cases where we have made adjustments in what we would be willing to lend that sometimes takes us out of the market. Sometimes we're able to preserve our situation within the market, but I think it's that type of an approach that the OCC is comfortable with. We also look for debt service coverage that is realistic estate and that when rates go up, we're still going to be able to -- the borrower is still going to be able to carry the project. Again these are numbers that the OCC is looking at and one of the things that we avoid doing that some of our competitors do was we really restrict interest-only situations. We understand obviously if someone is purchasing an apartment house, they want to stabilize it and they need interest-only for a period of six months or a year or maybe. That portion of the loan can go interest-only, but it is a rare case where we would make a commercial real estate loan where we would extend the interest-only for beyond a year. So those are the type of metrics I think the OCC and the other regulators are all looking to hear and I think it's appropriate. Having been a regulator at one time in my career, the last thing we want to do is make loans that are going to keep us up at night.

Okay. Great. And then staying on sort of the CRE topic, I know you can't be specific with this, but from your conversation with the regulators, is there any sense as to how appropriate your back office infrastructure is and your ability to sort of grow this portfolio moving forward in their eyes?

We have a very strong back office doing the analytics. It is not being done by one person. We have a single loan policy throughout the bank and we emphasize that policy to all of our lenders. Like I said before and I've said many times it's return of the capital, not the return on the capital that matters.

Okay. Great. And then shifting gears, I wanted to know if you could talk a little bit about the updated annual loss emergent study and what it was that you found and what sort of caused you to increase it, and what that would mean for your overall reserve level moving forward?

Yeah basically we do this once a year. We go back and we look at how long it takes from the time when a loan first starts to exhibit a problem until the time it gets charged-off. As a result of the economy that we're in at this time that period is extending further and further out to be able to find how long it takes for these losses to occur. They're taking longer. So we saw a little longer period on the commercial side than we had seen previously. We did not see a lot of change in some of the areas mostly on the consumer side. So I would say the period has extended a number of months, but not dramatically changing.

Okay. Great. And then last one from me. I know you said that absent a rate hike, you would expect about two basis points of margin compression each quarter. What would your outlook be with a Fed hike in December?

I don't think it's going to make a lot of change depending again on when examined. If we're talking about a December hike, you're not going to see anything occur until the first quarter and I think that it really will depend a lot more on the long end of the curve than the short end of the curve moving.

Thank you very much guys.

You're welcome.

[Operator Instructions] And our next question is from Collyn Gilbert from KBW. Please go ahead.

Thanks. Good morning, everyone. I just wanted to touch on the expense color that you provided. So it sounds like if we see the fourth-quarter expenses at a run rate comparable to what we saw in the third quarter. That would suggest, I think you guys had said last quarter, that you are thinking more of like a $455 million annual expense number.

That's the number we expect to stabilize it.

Okay. But then I guess that would suggest a much lower expense number then in the fourth quarter of '16 to get to that $455 million.

It's better than the annual run rate going forward.

Okay. So starting in the fourth quarter, annual run rate…

You can't take the core stages that we didn't get in the first and second and assume that that brings everything down much lower. No, what we're talking about is a ballpark $450 million odd run rate going forward.

Got it. Okay. That's helpful. And then just on the deposit side, can you just give a little bit more color as to what you're thinking about in terms of maybe funding strategies or how you're going to price deposits? It seems like there would be room -- or you wouldn't necessarily have to stretch on the pricing of some of the CDs or whatever the case might be. But just kind of walk through how you're thinking about an environment where we are seeing increased deposit pricing pressure and how you will participate in that.

Hey Collyn, this is Alan. I think a lot of it is really has to do with the market competition on the consumer side and we're seeing enhanced rates on some of the CD products. We're seeing all the more market competition on the market base retail products and that being said, we have a very large commercial base of deposit within our organization, largely tied to compensating balances which is a positive for us I think as there maybe surged deposits in other organizations. We don't have any here back to the level as to what they may be in other banks. It's definitely a smaller number. We're looking at other forms of funding sources whether it be brokered CDs, wholesale funding opportunities that we have but which I look at more holistically as to what opportunities we have to make sure that we can manage the overall funding cost down.

Okay. So that's the objective or -- is to try to -- you think you can get funding costs lower, despite what's going on in the market.

I think because of our large commercial base and not just function of the CRE base that yes, I think we can continue to work on driving that overall funding cost down. That being said, the retail deposits are getting much more competitive based on what we're seeing from some of the larger banks.

Okay. That's helpful. And then Gerry, just a question for you, or curious to get your comments on it. With the growth that you guys are seeing on the C&I side, is that a function? You said forever that it seems like the C&I borrower is just not really -- excited to be borrowing or investing in the business. Have you seen any change yet in that traditional C&I customer as to how they are thinking about their business or how they are thinking about the use of increased lines or kind of gross prospects for kind of the organic channels of C&I growth?

We really haven't seen much of a change. I think that there's a lot of caution in the marketplace with an election coming up for the Presidency in Congress and uncertainty. I think a lot of companies hold back until they see which way the country is going. So I don't see any big surge taking place at this point. We're certainly not budgeting for a big surge, although we have been sending more and more lenders out into the field looking for opportunities, but it's interesting. A, we have a higher percentage of C&I to total borrowing in Florida than we do up North, which was might be a little bit surprising, but we are seeing it down here.

Okay. That's helpful. And then just one last question. You indicated that the originations I think you said in the third quarter for indirect auto was $90 million lower than what you guys had done in prior years. What had -- maybe in the year ago period, what did those origination volumes look like?

Last year the same quarter we were about $150 million of indirect auto and I think as Jerry mentioned on the indirect, the solution isn’t just increasing the volume there. It's increasing the yield within the portfolio as well as streamlining and reducing the overall expenses and until we're able to get a number that not only provides increased volume, but increased profitability then we're going to still continue to assess that portfolio and make sense -- and make sure that it makes sense with our cost of capital and that knowing that it's a revenue line that we can be comfortable with as we move forward.

Okay. That's helpful. All right. Thanks, guys.

All right. Thanks Collyn.

And there are no further questions.

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