Valley National Bancorp (VLY) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bancorp Fourth Quarter 2016 Earnings Release. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to Marc Piro, Senior Vice President of Public Relations. Please go ahead.

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

Thank you, Marc and good morning and welcome to our fourth quarter 2016 earnings release. I’m pleased to begin by discussing the executive reorganization announced by Valley earlier this month. With the promotions of Ira Robbins, the President of Valley National Bank and Rudy Schupp, the President of Valley National Bancorp and Chief Banking Officer of Valley National Bank. We have addressed Valley’s long-term succession plans in a prudent and meaningful manner. Each of us working closely together will provide unique strength and experiences which we strongly believe will positively impact the operations and performance of valley as we collectively develop strategic oversight and direction. Rudy will be responsible for Valley’s lending businesses across all geographies. He will spearhead the change in philosophy in residential mortgage banking from a traditional refinance driven originator to one focusing on the purchase mortgage and home equity market. In addition, Rudy will be responsible for setting strategic direction and oversight for Valley’s expanding wealth management businesses. Of course, Rudy will continue to give oversight to our Florida markets as well as focusing on growing the New York and New Jersey segments of our franchise. Ira will be responsible for Valley’s consumer bank getting attention to our retail deposit customer base and the multitude of delivery channels through which our customers interact with the bank. Ira will continue to oversee our human resources and treasury functions as well as concentration on improving Valley’s operating efficiency and technology across all platforms. Although the new responsibilities for Ira and Rudy reflect our expanding organizational hierarchy, we intent to mutually establish strategic direction and collectively collaborate on significant issue across all reporting lines. Personally, I’m extremely pleased with the above changes and I’m convinced that this will be significant in the importance for the long-term growth of Valley. The Board and I believe that the communities and customers to whom we provide banking services, the 3000 plus employees and the numerous shareholders who have trusted us with their financial assets will be well served by these changes. Although I have no near-term plans to retire, the Board and I recognize the importance of orderly succession. I firmly believe that with both Ira and Rudy along with the rest of our management team, the bank is well positioned for the future. I would also like to take this opportunity to thank Peter Crocitto, bank’s Chief Operating Officer for his 40 years of dedicated service to the bank and our customer base. He will be retiring at the end of February. Peter has made significant contributions to the bank without his poise, intellect and leadership prowess, the bank would have never blossomed into the nearly $23 billion company we are today with meaningful operations in three states. Simply stated, thank you Peter. In recent months, we have noted improving consumer sentiment and general economic conditions in each of our primary market. This positive trend should be favorable for Valley as the interest rate environment continues to normalize and the forecasted growth in GDP should have a positive impact on loan growth. As we enter the first quarter, we are excited about our growth opportunity. We finished 2016 as you will here in more detail from my associates, with a very solid loan growth. Historically, the first quarter has presented a challenging operating environment for Valley. In the past, our automobile, residential mortgage and traditional C&I portfolios were often negatively impacted by the weather in the North East. Florida provides counter cyclical balance to Valley’s North East footprint as loan volume typically expands in Florida during the winter months with the additional growth emanating from Valley’s Florida footprint, the previous negative seasonal impact on Valley’s aggregate loan portfolio shluld be somewhat mitigated. As to our operating results reported today, we are very pleased with the strong performance of our company during the fourth quarter of the year. Management continues to direct its attention on improving operating performance of the bank. For the quarter, return on average assets was 0.88% versus 0.78% for the sequential quarter and 0.76%for the entire year. Furthermore, Valley’s annualized return on average tangible shareholders equity was 12.76% for the fourth quarter and 11.07% for the entire year. This compares to 11.29% in the third quarter of 2016 and 7.66% for all of 2015. Our improved annual performance was a function of our strong top line growth in net interest income coupled with a larger contribution from non-interest income. Non-interest income as a percentage of total revenue amounted to 14.31% for 2016 compared to 13.22% one year ago. We are very pleased to report that the expense reductions announced in October 2015 were fully recognized during 2016 and resulting in an annual cost save of approximately $20 million. Our efficiency ratio excluding amortization of tax credits and loss on extinguishment of debt totaled $35.1 million and $13.4 million was 61.2% for the full-year of 2016 and 56.56% for the quarter. both metrics reflects significant improvement versus 2015 when the ratio for the full-year was 66.34% and over 70% just two years ago. We would like to emphasis the fact that all of our financial improvements were accomplished while still maintaining our traditionally high credit quality. At yearend, total non-performing assets amounted to $49.4 million, only 2% of capital and total internally classified assets were approximately 16% of capital. Just last month, we announced project lift and now Rudy and Ira will provide a little more color on this and other projects. Rudy.

Okay, thanks Jerry, thanks for your words and also for everybody participating in the call today. So I would like to talk about our efficiency initiatives as well our lending results. So first, project lift. Our purpose at a global level is really to create sustainable incremental cost savings and revenue enhancements as a driver to future earnings. The process is interesting, we took 19 of our best and assigned them full -time to the project and I’m smiling little bit because the team, the group leaders that had to give up these folks had a pained look on their face because they truly are some of our best brightest, because that’s the way to get it done. All of our line of business leaders are fully entrenched in the project that we have key meetings say in the mall. We are guided by EHS partners which is the firm that we selected, because they are specialize in this. They have done with major financial institutions in America with its work. And the approach is different, it's a bottom-up approach, not a top-down approach, so it's one where we are going to discover these ideas together. True catalyst team members and line of business owners together will identify, will value and then the line of business leaders will own and implement those ideas in the project timeframe. Speaking of timeframe, there is really two phases of the project, the first is bank picked off, actually Monday the teams call us that will run through May, that’s the idea of identification generation period, valuation period, approval of idea period. And then from June 1, basically on out will be the implementation phase, the time when we begin to realize the fruit for the labor. Clearly some of those projects have very different timeline for us to realize the benefit from them, we recognized that but we are ready to go again June 1, implement. So given the bottom-up design of lift, I think it's important for all of you and the investment community to understand that we will be able to talk about outcomes, but really not until mid-year, because again bottom-up will have a discovery period and then we will give you very transparent results as well timeframe for when making realize the benefits for the program. I can promise you the company have called us around this program, the energy in the room is very exciting and it's wonderful because it's not someone telling us what to do, it's us discovering the opportunities ourselves. So with that said, I would like to ask Ira if he has some comments on this.

Thank you Rudy. I think as we look across project lift by Valley National Bank, we are really intending it to be more of an opportunity for us, an opportunity to improve operating efficiency, an opportunity to improve the performance of the organization as well as an opportunity to enhance culture through all factors at Valley National Bank. We intent to take the concepts learned to this project and have it impact the allocation of resources today as well as tomorrow and we intend to have a look at the capital through the bank and today in the future. And then basically how we look at spending the financial assets that we have as we move forward. We hope to take these lessons that we have learned from these 19 people that have been earmarks for the program and validate all different delivery channels that we have throughout the organization, specifically our individual branch network determining the prospects for the future of the branch network as well as accessing the customer relationships that we have, how they seem to evolve in the changing landscape. I think we are all excited about our project list, and we believe it’s going to be a short-term catalyst to improving the operating performance of the organization that it will be a long-term vehicle to really shape the new Valley.

Okay. Thanks Ira. So I would like to talk about residential mortgage. Recently we announced the recruitment of a top mortgage executive to lead our residential mortgage business here at Valley, no pressure Kevin. His name is Kevin Chittenden; he comes to Valley with a truly rich and successful history and is fundamentally important line of business for Valley. What are our goals? At a global level, we want to make Valley’s mortgage business a highly scalable, second we want to reorganize our approach to home equity funds. We want to deliver the very finest customer experience including the turnaround times and more. We want to build the best-of-breed business, particularly in the purchase mortgage business to complement our historically successful refinance business. Purchase in recent history has been just 12% of our business, so we have real opportunities there. Given the rise to a meaningful increase in Valley’s non-interest income that can be derived from this program, we get pretty excited. That would be expressed the in terms of mortgage and sales, that too is another goal. So to do this, Kevin is focused on state-of-the-art mortgage systems along with our [indiscernible] ahead of all IT processes in the mortgage area, recruiting key operations and producing team members in our footprint which is three states and maybe more eventually and collaborating with proven legacy team members like a [little bit] (Ph) millennium secondary market and so on. So we would expect these initiatives to have a positive impact ultimately on our non-interest income all again on sales. At the same time, truly they will increase our non-interest expenses well through salaries and commissions but we expect it well for us. Largely during the second half of 2017 is I think when you will see the fruits of Kevin’s work. Having said this, while residential mortgages what we say under construction, we still have to perform in the current period. So in this connection, residential had a strong quarter in Q4. Kevin’s team post $371 million in new origination as compared to 258 million in the third quarter and only 56 million in the same period one year ago. New Jersey continues to generate the lion share of that activity although it’s important to note that Florida and New York are increasing as approximately 25% of the application was generated outside of New Jersey compared to 18% in the prior quarter. So with that said and the pressure I put on this man, I would like to introduce Kevin Chittenden to you. Just ask him to make a couple of global remarks.

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

Thanks Kevin. Few more remarks now on commercial purpose lending. Having said that our folks a little bit on Q4, again these results are a function of strong leadership in three high performance states; New York, New Jersey and Florida under the exceptional leadership in our view of Tom Iadan. I should mention that when we recently reorganized, Tom works now directly with me and we reorganized such that Tom in addition to being our Chief Lending Officer assumed responsibility for the line in Florida where there are two outstanding regional presidents that report to him. Sandy Hostetter terrific training in this business. And she has responsible for we call Central Florida, let's say from Vero Beach and the East Coast all the way over to the Tampa bay region, North tto Jaksonville. And then Jeff Klink, who would have responsibility - does have responsibility for South Florida below Central Florida both coast, down the Miami, down the [indiscernible]. And Tom works intern with three other fabulous leaders, Mark Saeger as the C&I Department Head in New York, Dorothy Kahlau as a C&I Department Head in New Jersey, and Russell Murawski as the CRE Department Head. In Q4 activity was brisk across all geographies, the teams originated $1 billion of new commercial purpose loans in the fourth quarter and that’s an increase of 30% from the prior quarter. The CRE teams originated $650 million of fresh loans of which 150 million were participation. The teams originated C&I loans of $455 million compared to $390 million in the prior quarter, and in addition the new loan volume line usage which we always care about was steady at 40.7% in the fourth quarter. Let me mentioned that Valley's New York geography experienced the most significant growth increasing line usage from 32.5% in the third quarter to 37.3% in fourth quarter. At 12/31 when we look back over the year that total commercial loan was including C&I and CRE stood at $12.2 billion an increase of over 500 million from just a prior quarter 9/30/16. All of this was accomplished in three fearcly competitive market, the good news is that there is still generous opportunity for growth in all of Valley's footprint. So with that said, let me introduce Thomas Iadanza, who most of you know and ask him to make few remarks.

Thank you Rudy. As was discussed, we recorded total loan growth in all our markets, really thanks to the leadership team that was mentioned by Rudy. In early 2016, we implemented a program to organically grow our commercial loans and deposits. This initiative began paying off in a later part of the as evidenced by our results. We achieved this growth in all our regions while maintaining our excellent credit quality criteria. Over the past few years we implemented a strategy that actively manage out our weaker customers from both a risk and return standpoint. This has allowed us to maintain excellent loan portfolio quality while achieving growth in all our markets. We will continue with these strategies into 2017. Now Rudy, I’ll turn it back to you.

Okay, thanks Tom. So let me turn the program to Ira Robbins, our new President of Valley National Bank. Ira.

Thanks again Rudy. To summarizing to what Rudy mentioned with regards to what we see in our residential mortgage department, we have been extremely active within our technology of Valley National Bank over the last as well. In 2016 as Rudy referenced we hired Bob Bardusch, Bob comes to us with an extremely exceptional technology base, tremendous acumen and a strong focus on customer's facing maximization. He brings such large vent experience and will help provide strategic direction on a multitude of fronts. With Bob’s direction, we are focusing on increasing capital expenditures in 2017 from approximately $14.7 million in 2016 up to about $18 million. Although that increase doesn’t seem like a significant amount, there is a meaningful change in how we intent to allocate the money in 2017. Historically, largely our focus has been on strengthening the infrastructure within the organization. I think if the banking technology environment changes, you are going to see much of $18 million directionally focused on the customer experience across all of our delivery channels at Valley National Bank. We intend to be judicious in how we spend this money, and we are keenly focused on the bottom-line. We intend to understand and maintain the results of Valley National Bank and recognize that performance matters, which is critical to the long-term since the success of the organization. We intend to have more focus on data driven analytics across the bank and making sure that each of our business lines are proficient and how they go about the processes and earn their cost of capital. Specifically as I mentioned earlier, as you look at the branch network, we’ve embarked on a pretty significant focus at the end of 2015 on right sizing our branches. We apply I think what would be considered a typical approach of looking at how we wanted to right size our branches by accessing customer traffic, looking at the proximity of our branches to other Valley locations. While we intend to use these similar metrics as we move forward, we are going to apply much more data driven approach as well incorporating actual opportunities within each individual market, looking at changing customer behavior patterns, as well as looking at our new digital and robust delivery channels that we are offering within each of these markets. We understand that there is definitely more work to be done with our branches as we continue to move forward. We have begun to invest more heavily in digital channels. During the fourth quarter, we introduced an online payment platform and our total online banking customers increased over 130,000 as of December 31st. The mobile app that we offer has [indiscernible] in usage during the last 12 months as well increasing over 30% from where we were just one year ago. We are operating in exciting times with changing consumer landscape and digital environment provide us with an infinite amount of possibilities and how we connect with our customers and shape their user experience at Valley. Now, I would like to turn the call over to Alan to provide a little more detail on the financial results.

Thank you Ira. So we reported strong EPS growth both on a linked quarter and annual basis as Valley generated $0.19 per diluted EPS for the quarter and $0.63 for the full-year. Net income available to common shareholders for the year was $161 million, an increase of 62 million from the same period one year ago. Even adjusting for the $51 million, pretax loss on extinguishment of debt realized in 2015, Valley generated a double-digit increase in earnings and EPS. Strong loan growth as has been discussed across all categories has pulled the loans increased 14.48% annualized for the quarter and 7.44% for the full-year in line with Valley’s internal growth projection. Loan origination activity was robust as the bank generated over $1.5 billion of new loans in the quarter bringing the 12 month total to greater than 4.9 billion of record of Valley. In part, as a result of the strong loan growth, Valley’s net interest income increased $10 million from the prior quarter to a 164 million. The growth in net interest income was also a function of an expanded margin increasing from 3.14% in the third quarter, a 3.27% in the fourth quarter. Linked quarter increases and swap fee income of 3.4 million, loan prepayment fees to 1.6 million and PCI accretion of 2.4 million, all positive impacted the current period's results. As we move into 2017, we anticipate the margins of contract as some of the previously mentioned items were normalized. That being said, both the improving interest rate environment and continued loan growth should have positive future implication on net interest income. On the funding side of the balance sheet interest expense actually contracted on a linked quarter basis, although average funds from deposits and borrowings increased over $550 million. Average non-interest bearing expanded approximately $100 million from the third quarter contributing to the nearly $760 million quarter growth in average total deposits. Valley's loans to deposit ratio as of December 31st, improved slightly to 97.2%. Non-interest income for the quarter increased approximately $8 million from the third quarter as Valley completed the previously disclosed sale of $170 million of performing residential mortgages. Residential refinance, new application volume has declined considerably into Q1 of 2017, however as Rudy indicated as we migrate Valley's origination platform to emphasis purchase mortgage production, we anticipate stronger mortgage banking gain on sale in the second half of 2017. Non-interest expense for the quarter increase to 124.8 million from a 113.2 million in the sequential quarter, largest drivers of the 11.6 million linked quarter increase were number one expansion of amortization of tax credit of approximately 7 million and an increase of 3.3 million in salary and benefits which most was attributable to increases and incentive compensation across of which we anticipate declining significantly in the first quarter of 2017. Improving the operating efficiency is a principal driver of Valley of strategic initiatives and we intend to preserve this focus in 2017 as Valley looks to maintain an operating efficiency ratio adjusted for the previously mentioned tax credit amortization below 60% and trending down. Credit quality has been very solid at Valley and as we stated many times before credit quality is one of the hallmark to Valley. Number one, non-performing assets declined by 1.6 million for the quarter, and almost 29 million year over the prior year. Early stage delinquencies increased linked quarter but mostly related to current mature loans not yet renewed and one payment receives late, otherwise delinquencies remained under control. Net charge offs were only at $110,000 for the quarter. And the total of 3.6 million for the entire year representing 0.02% of average loans. The allowance for loan losses as a percent of non-accrual loans increased to 305%. So that completes my remarks and now we will open up the call for questions.

[Operator Instructions]. Our first question is from the line of Steven Alexopoulos of JPMorgan. Please go ahead.

Hey good morning everybody. I wanted to start on the lift program, I know it’s - we very early in the process and you’re just starting. But how should we be thinking about a range of pretax preprovision benefit from this program? It was more than the 19 million from the branch efficiency initiative?

I think it is little premature Steven for us to provide a little bit of guidance on that. I think as Rudy mentioned we are going to be very transparent about what the actual expectations are for us? I think as Alan mentioned we do have a strategic focus on improving operating efficiency of the organization. We wouldnt have engaged a third-party, if we didn’t think there were significant opportunity here to reduce the overall expenses, improve efficiency and enhance revenue within the organization. So at this juncture, I’m not sure we want to give specific numbers but you know did some that’s important to us.

Ira, how is the consultant compensated for this? Is it a portion of the benefits they drive?

Absolutely.

Okay, thank you. And then shifting to loan growth, you guys ended 2016 right in the middle of that 6% to 8% original range you guided to? Is this still a reasonable target for 2017?

We are not uncomfortable with that.

Okay. Thank you. And then my final one for Jerry, the many banks have had quite a challenge closing M&A transactions with the timing of many of these getting extended. Does this environment lessen your appetite to pursue a deal?

No. As was reported today, we have a strong asset condition, so the regulators from that aspect I don’t believe will have a problem with us. We have a robust AMLBSA program for which we don’t have the credit systems that a lot of the banks that have had problems getting into mergers. And we have been working diligently ever since the First United acquisition on enhancing and expanding our CRA operations and right now we are pretty comfortable. We just met with a group from different community activist groups and they were very pleased with what we were doing. So if they are pleased, I would assume that the OCC would also be happy with the direction that the bank is moving.

Thanks. And is Florida still the target market?

That is our primary target market.

Okay. Thanks for taking my question.

And we have a question from Frank Schiraldi with Sandler O’Neil. Please go ahead.

Good morning.

Good morning.

Just a couple of questions. First I just wondered Alan if you could, in past I believe on the last quarter call you talked about a $455 million expense base run rate for sort of the year. I think that might have just been for 4Q annualized, but is that a reasonable place to be as we head into 2017, ex- whatever the lift program may provide back half of the year?

I think and I did mentioned this previously Frank. We have targets to get to a lower cost and a better efficiency, project lift is going to help us, but in the interim as you have heard we have a number of other projects going on here. We have the residential mortgage deployments that’s going to be hiring people and doing things there, we have technology expenses and things we are going to be doing there. So I don’t know that I want to give you an exact number at this point, I think it's difficult and I think as I did mentioned previously this is a ongoing growing organization and I think for us to try and pinpoint an exact numbers at this point doesn’t really make a lot of sense.

Okay. And then secondly, I just wondered, sorry if I missed this, but in terms of the growth in auto in the quarter, does that give you more confidence now in the business that that’s a viable business for Valley going forward?

I think we are encouraged by the growth. We are encouraged by the improved coupon. Tom I think in that business and the team is certainly very, very dedicated to it, but I mean speak to Tom Iadanza just to grab the mic first, but Iadanza has also been - about taking some cost out of this and make it more efficient along with Bob in terms of technology. So I would have to say we are more encouraged than we were last year about the auto business. But it's always under the magnifying glass for us.

Okay, all right thank you.

And we have a question from Matthew Breese, Piper Jaffray. Please go ahead.

Good morning everybody. Just on the net interest margin, I know there are some factors this quarter that led to the sizeable increase, but if I look back from fourth quarter of 2015, first quarter of 2016 there was some similar items going on there and I wanted to know if on your guidance that we could see some near-team contraction, is it to that extend?

I think the way you should look at on where we are headed on the margin, there is a lot closer to where we were at the end of the third quarter, I think we reported in 2014. This quarter obviously had some unusual items as we reposted. Now some of those items may have been unusually high, but they are not unusual, they are continuing and they are there all the time. I can't tell you exactly how much swap fee income is going to be there every quarter, but we are engaged in doing swap transactions on loans. So we anticipate that will continue. The same thing with things like recovery income or prepayment fees and increase PCI loan accretion. The PCI loans having done a way, we will continue to have accretion. We did look at and we re-forecasted our portfolio at the end of the quarter and a result to that we had a little higher amount during the fourth quarter than we would likely would have had going forward.

I think Matt, if you look at last year we have done about 22 basis points that’s been the fourth quarter of 2015 and the first quarter of 2016. So if that’s your question whether we anticipate another 22 basis point contraction I think the answer is definitely no.

It's in line with, it's around that though. I mean what we are talking about in terms of basis point the double digit move down for the first quarter.

When you look at the factors that are impacting the quarter as Alan mentioned the interest rate environment is more beneficial to us as we continue to look at where we are, getting higher yields on the auto portfolio, we just have some raw benefit as well. We were able to bring down the funding cost last quarter. I think the overall funding cost in the bank went down from 76 down to 73 basis points. So those are all positives for us and I think those were trends that really were prior fourth quarter to first quarter. So let’s say we are not nearly as negative as we were last year at the time with regard to expecting where that margin will lead to.

Understood, okay. And then just going back to the expense front, I understand that the lift program is too early on to identify potential cost savings, but maybe you could help us with what the right efficiency ratio, the overall company has identified as where you want to go and is that a 2017 or 2018 event or longer term. Where do you want to bring that efficiency ratio to?

Well I think we certainly like to describe to get to the mid-50s or lower if we can. Again, the amortization of tax credit which is a large item really has nothing to do with the operations of the bank and that’s why we continually talk about it without that number in there, because it really reflects the effective tax rate of the company. So when you look at the efficiency ratio, in my opinion you have to take that out. That being said, we also have some things that are little bit out of our controll, let’s take the FDIC insurance. There was an additional bump on the larger institutions about $10 billion and so that caused us some extra money. Those are things really out of our control and as I mentioned earlier, I think the issue with other cost, we are trying to get those down, project lift is going to continue to help us do that. Already as Jerry mentioned had a $20 million savings from last year but as I have also told, this is dynamic organization and its growing. So we’d like to be at that mid-50% range or lower if we can get it there and that’s what our goal is.

Understood okay. And then whatever the expenses are from lending, will those drop to the bottom line or what percentage of the cost saves you expect to be reinvested?

I don’t think we can once again answer that question at this point. I think its too early.

Typical with our design model from the bottom-up. I think you hit it right, the target efficiency ratio because the companies that we admire from an efficiency perspective are in that zone in the low 50s to just shy of mid-50s, so that’s what we are targeting. So many puts and takes this year that we are going to invest in the residential mortgage business. At the same time we know that has I think gain on sale has [Technical Difficulty]. And we are going to invest in technology incrementally which we should, the other things in the list if we are doing the bottom-up. Honestly, we think its the right way to go because we think ownership of the ideas modestly will be highest and best by virtue of doing a bottom up approach rather than staying at $20, $30, $40 where we are saying let’s do a bottom up there with the discovery yield. So we are not trying to dance around it truly a lot of put and take but we are committed to having effeciency ratios that i think as Alan said low 50s would really be the target mid 50s to give first half and sustainable.

Right.

I think if that look at where we are moving to and I think as we overlay some additional CapEx on the technology side as we bring on some additional people with residential and mortgage area. The focus still is on the bottom line in the organization and that’s the number one drivers. So as we going forward, it going to be level head is I think it's how we approach that. If that’s your question with regard to lift. So our incentive is on a net basis and the consultants depend upon net basis as well. So it's not as just a consultant gets paid based on gross savings, if there is technology expands associated with that savings and that’s what the consultant gets as well. So in our mind it is all on a net basis after any kind of concession that’s required and we think that’s the significant opportunity for the organization.

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

A lot sooner than five years.

Sure, I think we need to look at that as in the next one to two years, we need to see at that level.

Understood. Very helpful, thank you guys.

[Operator Instruction] And at this time there are no - we do have a question Collyn Gilbert KBW. Please go ahead.

Thanks, good morning guys. Just kind of as you think about the loan growth and the opportunities that you guys are seeing in both your legacy markets up here as well as Florida. How do you see that mix of all being throughout the year? And especially with what you are trying to do on the auto side, I know you kind of hedge your comments and the press release that you could see balances decline there. But just where do you see the better opportunities for how that mix such to change as the year goes on?

Well Collyn as I mentioned in my comments that Florida is kind of cyclical to our New York, New Jersey markets, and as Florida becomes a larger piece of the pie so to speak that offset becomes more and more important. We traditionally would drop down particularly in the auto and the residential markets in December, January, February up here, because that’s weather issues, you get a snow storm people doesnt like to buy cars, they doont go out and by homes. But in Florida, that’s the busiest season, that’s when the population gets all of the snow birds coming down and the visitor going down there. So I think in the long run that’s going to be a good calendar balance to what we do up here. And we are quite excited, I think that is going to add significant amounts to our loan volumes. We are refocusing ourselves again as was mentioned on the automobile business. Historically we always did a quarter of our business and I don’t think it will get back to that quite soon, but we used to do a quarter of our business in automobiles. And I would like to see a larger percentage of our business coming from that area again. While it doesn’t have the highest yield, it has a very short durations, so it would always gave us great liquidity. So there are other measures as to why you like to plant the money there. It's a certainly a better yields and putting in short-term treasury and historically the performance has been good.

We don’t engage in sub-prime auto lending, it’s really a high-end customer base with an appropriate yield for our risk.

okay, and then apart from those two things how do you see sort of the CRE, the CNI and component playing out?

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

Colin its Rudy. As a bank and led by really the emphasis, lot of emphasis on stimulating C&I growth for exchange purposes and some improved coupons, shorter term loan that revolve and like again a takeaway from this quarter is a $455 million of - relation with 615 sounds really nailing this and elevating C&I and lending. So I think that’s a sustainable emphasis throughout the company. Including Florida which is an important fraction but a fraction [indiscernible] in New York that is Florida has got a big emphasis on C&I lending as well and really put in all the shares. So within its time for leadership I think is beginning to change the mix of the margin takes a while with an aircraft carrier to turn it but and we love CRE lending especially as we are good at it [indiscernible]So I think that’s a remarkable thing to take away from Q4.

Okay, that’s helpful. And then just on the deposit side and deposit pricing and crossing down this quarter, I mean how do you see sort of that trending given need for deposit funding and competitive dynamic fund over the marketplace. Where do you guys see the deposit cost going as we look out to year?

I think our markets by the end maybe a little bit different since some other markets. There is a lot banks in our space that have loan-to-deposit ratio that are quite greater than other areas that represents the country. I think on the margin, the cost of deposits of acquiring into deposits by the yield is more expense in our geography than some others. And that being said, we have a very strong non-interest bearing customer base. We have a lot of C&I business that’s mandated and compensating requirements on the deposit side. Those are the benefits as we move forward. So on the aggregate I think acquiring that net marginal cost to deposit that is leaving more expense and what we are seeing in other spaces. With that being said, I think the ability to understand the activity and the data what we have on our book right now probably aren’t sensitive as much.

Okay that’s helpful. Thanks guys.

Alright. Thanks.

We have a follow-up question from Frank Schiraldi. Please go ahead.

I just have one follow-up on the efficiency ratio discussion. Just want to make sure how this ratio, so Alan when you were talking about efficiency ratio you said you really should take out the amortization from the tax credits, and so I think there was 7 million increase this quarter, I guess that’s 13 million total about in the quarterly result. So the best way to think about the mid-50s or the efficiency ratio you want to get to maybe mid-50s hopefully below that is to first exclude that expense.

Exactly right. Yes, again because it has nothing to do, I mean efficiency is suppose to measure the efficiency of what it caused you to produce revenue. It's a tax related item and it's only because of the way we accounting requires us to account for it that is not included down below in the tax line. So it's included up above, but that the instead really only effect, it has an impact on the tax line, it has no impact on the rest of the operation.

Sure, I just want to make sure I am thinking about what the reported efficiency could get to because if you think of that 13 million in this quarter, I know there was some extraordinary items maybe in the margin or some outside items in the margin, but you are already kind of add that, if I exclude that 13 million sort of already add that mid 50 efficiency ratio, so?

Yes, we are trying to be there on a - I think if you look at our numbers for the full year and excluded I think we are right around 60% to 61% as compared to 56% in this quarter, that was a quarterly number. I want to see that we get there on a consistent basis and then below that, I mean I think Rudy pointed that out, we want to get not just to 55 but to a lower number than that. But it's needs to be more consistent I think.

Got you. Okay thanks.

And at this there are no further questions in queue.

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

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