Valley National Bancorp (VLY) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank’s Third Quarter Earnings Release. At this time, all lines are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. And I would now like to turn the conference over to Senior Vice President, Investor Relations, Marc Piro. Please go ahead.

Good morning. Welcome to Valley’s third quarter 2017 earnings conference call. If you have not read the third quarter 2017 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.

Thanks, Mark and good morning. This has been an exciting quarter for Valley. It has been just over 1.5 year from when we first established our strategic plan. The core strategy remains unchanged focused on three principal areas diversifying our revenue streams, reducing operating expenses and expanding the franchise. We use a range of metrics to judge our performance, but in the medium-term, we are committed to meeting profitability and efficiency targets equal to our high-performing peers. At the same time, we are investing in technology to ensure that over the long run, our business model is one that allows us to compete effectively adapt to external pressures including the changing economic landscape and meet the needs that our customers value the most. The environment remains challenging, but has grounded us in the notion that we must remain nimble and concentrate on the things we can control for which our strategic plan has positioned us. On today’s call, we would like to share with you the achievement of some of our significant milestones. First, we have been recruiting and retaining the best-in-breed talent from senior level managers to junior employees. With a firm foundation in place, we have begun to transform culturally, structurally and operationally. To that end, we are thrilled about the progress on our previously announced acquisition of USAmeriBank. We have already received regulatory approval from both the Federal Reserve and the Office of the Comptroller of the Currency to move ahead. These approvals came in the shortest timeframe that we have seen in many years, which is a testament to the quality of our operations. The acquisition will bring together two banks rooted in strong performance, which will seamlessly fit into Valley’s culture and enhance our strategy as a premier commercial banking franchise. In terms of geographic diversification, this merger will boost our Florida region to represent approximately one-third of the bank’s total assets. This was the goal we outlined over 3 years ago to fuel our strategic priorities. We celebrate this significant accomplishment and are excited about the road ahead. In particular, the opportunity that exists in our Florida franchise to enhance our earnings is tremendous. We have taken significant strides in building a residential mortgage origination program across our footprint that offers us a path to sustainable revenue diversification. Rudy will speak in some detail about our efforts to leverage the existing program to build a household name in the residential mortgage finance business. Finally, technology will remain a focus for us. It is core to every part of our business. We believe our strategic investment in technology will be an important way. Valley enhances the customer experience, drives efficiency and ultimately differentiates us from the competition. In fact, already we have begun to recognize some of the near-term benefits. Our overhead expense at a bank-wide level has been largely stable with our efficiency ratio dropping below 60% after excluding the effect of our tax credit amortization during each of the past two consecutive quarters. Before I turn it over to Alan to discuss the financial highlights for the third quarter, I just want to reemphasize our three strategic priorities. We are not growing for the sake of growth. We are prudently building our franchise, furthering the diversification of our revenue streams, and investing in a scalable infrastructure to enhance our efficiency. Ultimately, we are positioning the bank to create long-term sustainable value for our shareholders and we expect to achieve profitability and efficiency targets that will equal our highest performing peers. Our financial performance since the plans introduction reflects these achievements. And now with that, I will turn it over to Alan to discuss in more detail the financial performance of the bank for the third quarter.

Thank you, Gerry. Good morning, everybody. I would like to direct your attention to the slide deck that we have provided for you. It’s an 11-page deck. And obviously, the forward-looking statement is the first thing you should be aware of and then we can go to Page 3 and we can talk a little bit about the earnings during the quarter and some of our visions. So, during the quarter, we had some adjustments to our earnings, the earnings were $39.6 million as I am sure you are all aware of at this point and we had some adjustments for our LIFT expenses, our merger expenses and those numbers were $6.8 million after-tax and therefore on an adjusted basis, our earnings were $46.4 million and that compares with last year at $42.8 million. Our return on assets as shown here again adjusted was 0.79% as compared to 0.67% on an unadjusted basis, pretty much slightly ahead of the prior period. And the efficiency ratio, which Gerry just mentioned, comes in at 69.4% on an unadjusted basis and once we take out the various charges, including the amortization of tax credits, we show up at 59.2%. And I would like to make sure that you are aware that on Page 11, there is a non-GAAP disclosure reconciliation, which shows you how I got from the unadjusted to the adjusted numbers. So, on the right side, we talk a bit about what our goals are. Our goals as outlined in our Vision 2020 were to have an increase in our return on assets and efficiency and to perform better than our high performing peers. So, part of that is sustainable growth and we have seen that in the current quarter for all of our business lines and geographies. And Florida, once we complete the USAB acquisition, will represent one-third of our franchise. We are attempting to improve our efficiency that’s the second part of our vision and as you can see we – core continuous earnings are improving our driving efficiency in short-term investment in long-term scalable growth. So, those include our LIFT program, our residential mortgage program, which we have been increasing with many consultants and selling those loans and technology, which is a big part of our push going forward. Enhancing non-interest income, again that goes back to the residential mortgage fees and we have been realigning that we have added many mortgage consultants throughout all of our geographies and that will help to continue our gain on sale. And in the expense side, which I think Ira will talk about a little later, you will see some higher commissions as a result of that driving those gains. So if you turn to Page 4, our highlights. I would like to start out by just talking a little bit about our interest income, interest expense and net interest income on a year-to-date basis comparing ourselves to the prior period. The interest income increased year-over-year by $56 million and interest expense by only $14 million giving us an increase in net interest income of $42 million. So, during the most recent quarter, we had some decline in net interest income. A lot of that is the result of swap fees and that shows up right down below this. If you see earning asset yields, we have – I apologize, let me start out by saying there is the blue line and the yellow. So, the yellow shows you the yields on our earning assets when you include the swap fees. So, there is an incremental benefit obviously to those swap fees. And you can see from period to period, there is some ups and downs in those swap fees. When you go down below that to the blue, you can see the continued – almost continued increase from the third quarter of ‘16 right through to the third quarter of ‘17 of our yields on earning assets. So, we continue to bring in loans with higher yields and as well as other investments and we are happy that, that continues on an upward path. Everybody should be aware that swaps are really generated mostly by customer’s decision-making on how they want to run their business. If they want a longer term outlook, they will hence look for longer term loans for which they might put a swap – we might put a swap on. But it does show the choppiness that we can have in the net interest income and the margin. So, for the quarter, the margin did decline by 12 basis points and again most of that as we indicate here is a result of the decline in swap fees and interest recoveries on a quarter-over-quarter basis. Through the hikes that we have had, we have done a pretty good job of controlling our funding costs. And if you look down below, we did give you a funding data which includes both our deposit costs and our other funding costs, which might be from the home loan bank or otherwise. So, beginning in the third quarter 2016, if you look in that first box there, you can see that the Fed Funds target at that time was 50 basis points and the cost of funds was at 76 basis points. Following that of course, you can see the incremental increases in the Fed Funds rate and then below what our increases in overall funding costs. During the first couple of quarters, we have been running somewhat lower in terms of beta relative to the movement in the Fed Funds rate. However, we noticed that we have been legging more than maybe we should have. We needed some adjustments in order to make sure that we protect our deposit base looking at our balance sheet you can see deposits did not grow as much as we would like. So, we felt the need to increase some of our deposits. That is beginning to show some benefits as we move into the fourth quarter. Ira will talk a little bit about that and how we have seen some nice increases in deposits and that is resulting in a decline in funding costs from outside borrowings. So, there is a benefit to doing that even though during the current quarter, it may not have looked like it. On the next page, Page 5, we talk about our superior credit quality. Some of the highlights as indicated here, past dues and non-accruals declined by 7 basis points to 40 basis points, provision was $1.6 million during the quarter, but in addition to that, we had net recoveries of $1.2 million. That net recovery included a $1.8 million large recovery from a credit that was charged off back around 2012. So, it goes to show that we stick – we stay after our customers whether they pay today or they pay in the future, but we do expect to get paid back. The medallion portfolio continues to perform reasonably well. We do have a fair amount of impaired loans. We do have about $5 million in reserves as we indicated. But at this point, almost all if not all of our loans are currently paying and the impaired is really a matter of how these loans have been restructured. So, $40 million of the $139 million have been restructured. Our non-performing assets, just I will point you to the last piece year up on the right, you can see the decline from back in 2013 to today at 23 basis points currently. And then the bottom chart, our net charge-offs, our net charge-offs have been historically very good. This is a chart that shows you year-to-date 2017 compared to the peer group and you can see the breakdown by the various categories, but overall, it’s 2 basis points as compared to the peer group, which is $10 billion to $50 billion in assets at 70 basis points. So, we should stay we do substantially better on net charge-offs. So with that, I am going to turn it over to Rudy.

Okay. Thanks, Alan. Our lines of business indeed delivered high-quality results in the quarter. So, I would like to spend a few minutes to highlight the loan growth acceleration, residential lending results, purchase mortgage program as a subset, and our USAB merger and planned integration before I turn it over to Ira Robbins. So, on our lending summary, I think you saw our loans outstanding increased $491 million or 11% annualized year-over-year and that’s net of declines and payoffs in the PCI portfolio. So, we are really very gratified by another good lending quarter. In all things commercial lending, our strong performance was realized in all product lines and in all three states. Our commercial loan pipeline remains strong. It’s over $1.1 billion today for example although results I should say in the quarter although results can sometimes be lumpy quarter-to-quarter depending on customer preferences for closings. Many have asked about Hurricane Irma, in our particular case, it did impact to some extent certain of our Florida regions. We offered payment deferral program to customers and yet only 60 or so commercial and residential customers took us up on the offer. The loans are well secured and the permits are less than 90 days in term and none are adversely classified at this time. We do not expect any material losses. As to residential lending, the trust is to build a world-class mortgage bank with a full product suite to complement our legacy refinance programs in order to grow residential loan portfolio, loans outstanding in other words and also to elevate the bank’s non-interest income through gain on sale and mortgage fees. We have hired to-date 53 what we call home loan consultants or residential lenders, primarily in New Jersey and New York and we begun the recruiting effort in the state of Florida. We achieved in terms of loans outstanding our plan. We also achieved in the quarter our gain on sale goal and we managed our expenses to plan. The year-to-date purchase business which again is arguably the net new piece of our mortgage-backed, which is the year-to-date $360 million of loans closed as nearly 280% for the purchase business that was done in all of fiscal 2016. So, we are off to a dam good start with respect to influencing the mix of residential mortgage loans that we make. So, our new and improved mortgage bank in a nutshell was on a rise. As announced to you this past summer, we are indeed on track with USAmeriBank acquisition. And as Gerry said, we received enabling approvals from our primary bank regulators. So, we have work yet to do of course with shareholder meetings and the like which we expect to be held in December. We did also in July issue $100 million of preferred stock to support our capital ratios post acquisition of USAmeriBank. I would say succinctly that matters of cultural, organizational and technical integration for USAmeriBank are really well underway and the USAmeriBank team has just been already a terrific partner for Valley in all things merger. So, with that said, I will turn it over to Ira.

Thanks, Rudy. We continue to invest in different technologies and infrastructure to enhance the operating leverage of the organization both now and as we continue to grow. On Slide 8, we have given a little bit of an overview as to what non-interest expense look like on a quarter-over-quarter basis. We realized $133 million of expense for Q3 versus $119 million for the second quarter of 2017. Of that $14 million increase, approximately $10 million of it is attributable to the LIFT initiative, which we have previously announced. The $10 million is expected to have an annual recurring benefit to Valley of $22 million once all the initiatives have been executed. We expect about $9 million of the annual benefit to be realized in the second quarter – the fourth quarter of 2017 which should be about $2.3 million for that specific period. Most of the reduction will be in compensation and benefit expenses. Throughout the organization, we continue to monitor the benefit of LIFT as executing on the initiatives and capturing all the identified cost saves and revenue enhancements continue to be a critical initiative for the organization. Further, there was about $1.2 million of linked period increases of expense associated with the results – with the merger of USAB. As Rudy mentioned, we continue to be on target, but more importantly, we continue to believe that the earnings accretion numbers that we identified previously 3% in 2018 and 6% in 2019 are definitely achievable and we are excited about those opportunities. Further, there was an increase of about $1.3 million in residential mortgage expense during the quarter. While the increase of expense impacted the specific non-interest expense number, you can see there were positive impacts on gain on sale in originations throughout that period as well. And we anticipate continued operating leverage to benefit as a result of those initiatives. The remaining expense growth of $117.8 million to $118.8 million during the period really reflects the continued investment that we have in technology and skilled human capital. For the period, we actually declined 54 on our headcount. Last year, we were only up about 3 people. So, we continue to be focused on making sure that we don’t expand the organization when it comes to the headcount fees. As we shift from manual processes to automated solutions throughout the organization, we continue to be positive on the operating leverage although that per individual employee expense will continue to really grow. On the next slide, we talk a little bit about the deposits throughout the organization. As Alan referenced earlier, deposits continue to be a challenge for Valley and mainly throughout the industry. The high loan to deposit ratios in many of our peers exacerbates the issue as pricing becomes more competitive from marginal deposits and excess balances each of our customers which – retain on deposits. That said, we continue to invest in providing digital solutions to complement Valley’s strong branch network. Our technology focus is centered on delivering a robust customer experience by enhancing customer touch points in a frictionless manner. During this last year, we introduced a significant amount of improvements to our mobile delivery channel. As a result, mobile usage at Valley now runs around 32% of our overall consumer households, which is an increase from about 20% last year. Generally, the on-bank adoption rates continue to grow at Valley as well. Our consumer households now about 81% of them continue to use online banking, which is a significant increase from the prior year as well. These two are important metrics for us as we believe both of these metrics enhance the customer retention throughout the organization. Within the next 6 months, we intend to emphasize and introduce additional technology advances, whether it would be a redesign of our website, replacing the current business online banking portal and introducing a new business mobile app. And efficiently, we are working with third-party vendors such as sales force to improve Valley’s CRM capabilities. For the quarter, as Alan mentioned, deposits only grew slightly and for the year-to-date they are actually contracted. While on the surface, these results are unfavorable. For the most part, the volatility reflects normal ebbs and flows within Valley’s customer base. As an example, three accounts of loan contracted approximately $380 million at the beginning of the year. It is purely a function of a state settlements and customers selling their businesses. Since quarter end, deposits are up over $200 million since 9/30 and over half of those are non-interest bearing accounts. So, we are excited about the opportunities we continue to move forward and funding the balance sheet. Further, as we outlined on Slide 9 here, there are additional initiatives that we are putting forth to grow core accounts. If you look at the core account number for 2017 for the first 9 months, we have increased approximately 30 – we opened 30,000 new core deposit accounts. These don’t include CDs or any other state of maturity accounts. This is approximately 20% more than we had done in each of the prior 2 years in 2015 and 2016 when we only generated 24,000 accounts. Valley’s funding base is comprised of over 320,000 individual well-diversified households. While the deposit numbers may have gone in a negative direction on a year-to-date basis, we believe the foundation and the surrounding initiatives that we have put in place should provide strong growth for us as we continue to support the earning assets as Rudy discussed earlier. With this one, I open the call for additional questions.

[Operator Instructions] Our first question comes from line of Stephen Alexopoulos with JPMorgan. Please go ahead.

Yes, good morning. This is Catalina in for Steve Alexopoulos. So, you mentioned – my question is around NIM. You mentioned on your prepared remarks that swap fees tend to be choppy in the short-term. So, I wanted to know in the short-term, how should we think about this say going into 4Q? And then my second question would be related to the deposit growth, is this – and the rates, is this a one-time adjustment or you think that the rates will continue to go higher? Thank you.

So, in terms of the swap fees as I said they are quite choppy and they are really based on customer desire, customer preference. So, it’s a little hard for me to tell you exactly where they are going to be in the fourth quarter, because we are only in the first month of the fourth quarter. We do know that we have some swaps that have already closed and we expect more to close as the quarter goes on. But I can’t really tell you exactly where that number is going to be, you can look back and I think we have been giving you some information on how much the swaps have been. And again, they move from quarter to quarter. So, I really can’t give you any specific guidance on where they are going to be. In terms of the rates, I think we are controlling the rates pretty well. We did have as I said some adjustment in the third quarter. I don’t think you will see any kind of an adjustment like that. I talked about our beta. The beta was a little higher in the third quarter than it had been in the previous three quarters. We don’t expect to see that again going forward. So, I think you will probably see that level off and you probably see the margin is probably hitting its bottom for what we can see at this point.

Okay. And if I may, a follow-up on asset quality. Can you provide some color on what you think on the NCO ratio going forward? I mean, I think, overall, this quarter, across the industry, we see the NCO ratio still beating our estimates and improving overall for the system. So, any thoughts on that?

Not really. I mean, you can see the past dues and where they are and how we have been able to manage all that, I can’t give you any guidance on where I think net charge-offs are going to be quarter by quarter. We have been I think doing a very good job managing credit quality and we were very happy that we are able to get, have some collections this past quarter and put us into a not – in a recovery position instead of a charge-off position, but sometimes it works to our benefit and sometimes it doesn’t. So, I can’t really give you again specific guidance, but I think we have been tracking pretty low in net charge-offs.

Thank you.

Okay. And our next question will come from the line of Collyn Gilbert with KBW. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Collyn.

So, just starting I guess with the NIM discussion and kind of thinking about that more broadly as we look out into next year, I guess you are sitting a couple of things. I guess, my question is so you are sitting with a loan yield that’s probably quite a bit higher than where you are portfolioing loans? Number one I guess is the question. Number two, on the borrowing front, I know it sounded like you extended maybe and I missed your opening comments, so I apologize, but you extended some borrowings this quarter which inflated some costs there. So, just trying to think about kind of the trajectory of the NIM going forward in a much more broader sense, and if there are opportunities for you to enhance it beyond what you have done so far to-date?

It’s one of the things that is going to help us and I think Ira just pointed it out was the issue of bringing in approximately $200 million in deposits that we saw coming in or have seen coming in, in October. So, if you picture that and you made the point of the fact that a lot of that was non-interest-bearing. So, I have got borrowings out there, let’s say, the best way I can get today is 130 overnight. We know that’s going to escalate. So to the extent we can bring in more deposits that brings down the borrowings and it brings down my borrowing cost and all that gets reflected in the course of the funding whether it’s deposits and/or borrowings. So, yes, we did extend a little bit that did cost us a little bit extra during the quarter, I am not sure whether we will do that again as I think I said before, we expect the margin to be relatively flat. I don’t expect a lot of change at this point. Asset yields are coming in better than where they have been. We are seeing a tenure that’s up right now. So, I think everybody is going to be happy about that in the banking side. The spreads will increase somewhat. But we also know that short-term rates would continue to go up. So, we do expect that to happen and that will continue to have some compression results for all banks, but I think in our case at this point, we have increased rates enough that we are comfortable with where we are and we expect some benefit again out of the deposit side.

And Collyn, just following up on the loan yield, I think in the first quarter of 2017 or maybe the fourth quarter of 2016, it’s really the period that we hit our inflection point where the new loan yields that were coming on were greater than what was running off. So, we continue to expect the asset yields to pickup outside of what’s going on with the swap fees. As Alan mentioned on the deposit side, there really was more of a recalibration this specific quarter and just some natural volatility within our deposit base based on the types of customers we have to be able to grow $200 million in 3 weeks in deposits and half of will be non-interest bearing deposits should also have a positive, but that’s just sort of what happens with us here and there with each individual quarter. So, overall, I think you were positioned to see some positive improvement as we move forward.

Okay, okay. That’s helpful. And then just on that deposit discussion. So you had indicated, Ira I think you did or maybe Alan, so you had three accounts that comprised $380 million of deposit outflows. Are there other large deposit accounts that you have, I mean what would be kind of the average size of the say your top 5 deposit relationships?

So, those types of accounts were one customer sold their business, the other two just normal fluctuations and escrow accounts. So, there are certain customers, those customers still keep their core accounts with us, it’s about $50 million just within those three customers and we are seeing a few customers leave and one of our customers left, because they were getting a 2% rate from some of our competitors. So, that sort of takes place within our marketplace. But as I mentioned, we have 320,000 households of deposit customers within our organization. So, there is volatility here and there. That is a pretty solid customer base, spread evenly between consumer and commercial customers. There is volatility here and there, but overall, we think it’s a solid foundation.

Okay. Actually on that point, do you know what your households would have been a year ago, 2 years ago or how that number has changed? Are you guys there?

Yes, yes. We don’t have that – I don’t have it in front of me, Collyn, I will make share we try to put that into our next release.

Okay, okay. Okay, alright. That’s helpful. And then just trying to sorry reconcile Slide 8 with your expense discussion and the LIFT initiatives, so what run-rate base is going forward, what should this breakdown to be once the LIFT is fully implemented?

So, we are thinking it’s $23 million still as what we had announced last quarter $19 million of that annual benefit on the expense side, $3 million of an annual benefit on the revenue side. And we are forecasting right now what we have already put in place $9 million of that on an annualized basis would have already been captured and we will begin to show up in 4Q of 2017, so the $9 million just about $2.3 million. So that should be the benefit in the fourth quarter as a result of LIFT that will continue moving forward, but we anticipate still about $22 million. We are ahead of where we had originally anticipated on that capture rate. I know, last quarter we gave some projections as to what was going to show up in 2018, what was going to show up in 2019. So, some of that benefit that we were forecasting in 2019 will likely pushed a little bit further into 2018. We are really excited about what we have done here and about the positive operating leverage that this is going to generate for us.

Okay, okay. Alright. That’s helpful. Thanks.

Alright.

[Operator Instructions] Our next question comes from the line of Brody Preston with Piper Jaffray. Please go ahead.

Good morning, guys.

Good morning.

Ira, I guess just sticking with the expense guide real quick. So, the $2.3 million you expect to see in 4Q that would be coming out of the $118.8 million base that you have outlined on Slide 8, correct?

Correct.

Alright, great. And I guess net of sort of the non-operating numbers and expenses this quarter, it looks like numbers are still a little bit high and some of that was tied to salaries and benefits. Is it fair to say that mortgage banking was what drove that increase?

I was definitely a part of it, I think as Rudy mentioned earlier, we have hired a significant amount of home loan consultants during this period. We had great originations for the period. We had over $300 million of residential mortgage originations for the period. So as we highlighted on Slide 8, some of that incremental change in quarter-over-quarter was really attributable to commissions and other salary expenses associated with those individuals. So, the only other point I will make is that there was the fair amount of IT expense going on. Part of the LIFT program is changing the way we do things and I think we have talked about this in our release and changing the way we do things requires a fair amount of technology spend and we have been bringing on. And I think and I talked about this a few quarters ago, so we have some reductions in staff as a result of the LIFT program, but you are going to have incremental increases as we continue to run the business and drive that towards better efficiency the way you are going to drive that efficiency is technology. So, we have technology spend going on. And I expect that will continue to happen. It’s not going to necessarily offset the savings we are going to get, but we are going to continue to have some cost both on the resi side and on the technology side.

A good example of that Brody is we are converting to Encompass360, for example, which is all in plan by the way and on plan, but it’s an expense that again we are having a budget that will enable us to continue to support the growth in our mortgage bank. So, all out, a growth, if you will at LIFT.

I think by the way just to include it in there is to say that besides the technology changes we are going through, we have an acquisition we are going through. So, we have all this going on at one time. And so there has to be in our mind some spend in order to get the benefit of the acquisition and LIFT.

Okay, great. I guess maybe sticking with this…

Brody, you need to speak up, because we can’t hear you.

Sorry about that guys. Sticking with this on the mortgage banking what would you say of the $2.7 million that you have highlighted on Slide 8, which is a $1.3 million increase. What is sort of the breakdown between I guess maybe new hire versus commissions versus technology spend within the mortgage banking business?

Yes. So, the technology spend at this point is really de minimis compared to really the addition of staff right, of the 53 people added to-date and in the quarter that was over 20 people for example in the business development side. None of which have hit maturity yet of course and we are on-boarding them. It takes time for them to get up to scale. So, I would say easily that people and the associated expense trumps the IT piece at this point. I make to mention simply because it’s the right direction for us to support a business that we intend to grow materially again the mortgage bank itself and the use of technology applications like Encompass360. So having said that, this is in plan and on plan just to say it, so when we invoked LIFT, it was to do really a process improvement search through the company that gave rise to a decision of course to eliminate some positions and spend on IT and other outcomes. And I think that does not mean that we are not going to spend to grow the business in place as that gave rise to earnings. In that latter comment is consistent with our overall several strategic initiatives, one of which again was to grow mortgage bank with a full suite of products to give rise to not only a mix in loan mix, change of loan mix, but also give rise to non-interest income, which was a bit of a shortfall for Valley relative to its high performance peers so that we can enjoy non-interest income through gain on sale that would get the job done and so far again on plan.

Okay, great.

Brody, I will just point out to you, of the $2.7 million, we have got about $1 million increase quarter-over-quarter in commissions. And again, that is driving the increase in the $200 odd million of loans quarter-over-quarter in resi and the gains on sale that will begin – will continue to see as we move into the fourth quarter.

Okay. So if it – is that $1 million I guess, I am assuming that there is a tight sort of correlation there in the commissions paid versus I guess the gain on sale that you are booking?

Without a doubt, because we pay very small base compensation to our home loan consultants by design, so it’s a WYSIWYG, we get what we want. And if we get the loans closed in the subsequent gain on sale and increase in outstandings, it’s a function again of our spending on commissions. So, it’s certainly earned compensation and has a direct correlation to growth in portfolio and gain on sale. As you saw in the quarter, we nailed $5.5 million of gain. And if you look at the chart that’s in our PowerPoint, you see this year that we are trying to create if you will a pleasing trend upward to the right in terms of gain on sale behavior for the company and we fully expect to deliver again in Q4.

Okay. So I guess when I think about it Europe at $5.5 million this quarter for gain on sale which is about a little over $700,000 increase from the previous quarter, but you are saying that commissions were about $1 million. So, I guess when I think about operating leverage moving forward, if commissions are moving relatively lockstep with gain on sale, how do you drive efficiency in that business line?

You can’t necessarily correlate commissions paid today with gain on sale, because the commissions may be on loans, for example, that closed in the second month of the quarter. The gain from those loans may not occur until the next quarter. So, it’s not a perfect correlation there. I mean, what you see on Page 8 is $307 million of originations. While those originations were not necessarily all of the ones that were sold during the quarter, there is a pipeline that builds. You closed the loan and then you have to deliver the loan. That takes a little bit of time. So, the commission may be ahead of the gain, for example.

Net-net, it’s a profitable business, very profitable business. And again, as I said it accretes again to loans outstanding, which we may or may not choose to sell for gain on sale purposes and by the way for the host of what we sell we retain servicing. So, we build the servicing portfolio as well. So, we don’t mean to make this difficult, you can’t call draw a direct line if you will between net comp number and just gain on sale, both as to timing and as to purpose.

Okay, great. And then my last question would be you guys talked about deposit growth, I just wanted to ask, Ira, you said about half of the $200 million increase in deposits that you guys are seeing this quarter has been non-interest bearing. So, would it fair to say that you expect non-interest bearing deposits to increase in the fourth quarter?

I think we are just sort of giving an overview as to what we are seeing to-date with a lot of ins and outs with regard to our deposit base, but we are happy with what we have seen for the first couple weeks of October so far.

Thank you very much guys.

Thank you, Brody.

Our next question comes from the line of David Chiaverini with Wedbush Securities. Please go ahead.

Hi, thanks. So I wanted to follow-up on the mortgage banking discussion. With residential mortgage loans currently representing 16% of the loan portfolio, should we expect this percentage to increase over time or do you plan to sell most of the incremental mortgage production with all of the new hires you have made of these consultants?

From a beauty of this business right, as we get to choose to some extent when we want to harvest gains, we also get to choose to keep outstandings. And with respect to mix change, when you look at the totality of our loan portfolio comprised of all form of consumer purpose loans and commercial purpose loans and this call is discreetly residential purpose loans. Now, we would expect their portfolio to grow as to their percent of mix. That’s a choice that we’ll make as we manage the portfolio in the years ahead. We would expect this proportion to likely be at least similar to what it is today and then we will make choices from there, but you can you can expect too that we are going to amp up our gain on sale as conditions allow over the years ahead, because that’s a big purpose in building our mortgage bank.

Okay. And then shifting gears to the loan pipeline, you mentioned that it’s over $1 billion was that – to a specific, was that related to mortgage banking or is that across all of the various lending categories?

It’s largely driven by commercial purpose lending, but it certainly includes our consumer loans as well.

Okay. And how does that pipeline of over $1 billion, how does that compare to what it was last quarter and the year ago quarter?

We are pleased to tell you that we have really been able to sustain the pipe in recent periods, particularly this year at about $1 billion or to a $1.2 billion. So, we feel good about that aggregate range. Our goal candidly is to have a qualified pipeline. It’s typical when you – in my career, when you talk to financial institutions about the quality of the pipeline, you may get a different answer. I think in our particular case, Tom Iadanza and the other folks, Kevin Chittenden and others, in the various disciplines try to be sure that if it’s in our pipe, it has the qualities that are likely to achieve a closing subject to customer decisions. And so our pipe is we believe high quality and it’s been tracking at over $1 billion on average in the period, which has been a nice improvement for us. We have had years with very strong pipelines in different quarters. I think part of a watchword for Valley today is sustainability and we wanted to get it over $1 billion, have it be high-quality and sustainable. So, we would expect to continue to grow again to the extent that our markets and the market naturally allows if you will knowing that we will be highly competitive.

Also, the loans that are in the pipe are not the same loans that we are in the pipe 3 months or 6 months ago which is an important factor. I mean, if we have a lot of loans people put into the pipe and they just never closed. It may look like you have a strong pipeline, but it doesn’t produce anything.

Good morning. This is Tom Iadanza. Just to elaborate a little bit more on that and give you comparison to previously, we break our pipeline into two categories, work in process and the loans we have approved here were in the process of closing. The approved piece probably ran a third of that total of $1.2 billion say. Today, that approved piece is 50%. So, we have run an approved to be closed at $600 million relatively consistently and a year ago that was probably $300 million, $400 million and we continue to backfill that with active work in process pipeline. So, we have maintained a very strong pipeline from a point we have increased that approved piece and a funnel to our system much more efficiently in the last year.

Thanks for all of that color. And then looking at the commercial real estate loan growth over the past few quarters, I see that it’s had decelerated for the past few quarters in a row. I was wondering is that due to a conscious pullback in commercial real estate or is that due to elevated pay-downs and payoffs?

I think again, Tom Iadanza here, I think if you look at it, we in the first quarter conscientiously purchased some participations with another institution. We have stopped that program for now and the growth you are seeing is organic and that’s been very consistent if not on a slight uptick quarter-to-quarter, so that we are getting good organic growth in the business. We still like the business. We still have capacity and we will grow it at appropriately maintaining the same risk criteria that we have always been comfortable with.

And to Tom’s point, I think we are about a third of the purchases this year than we were last year and it really was centered in Q1 only, so we really had no purchase activity in the June and the September quarter. So, we feel very good about that just to amplify it. Those are good comments, Tom.

And on the C&I loan side, I saw there was a nice pickup in the third quarter after some sluggish growth in the first and second quarter. What are you seeing in C&I, do you expect that growth to continue over the next couple of quarters?

It’s very hard to predict. It’s the most competitive piece that we are in. We are out there consistently trying to build that. It’s been a real focus of ours, but it’s hard to predict what it will look like quarter-to-quarter.

And just the last question from me housekeeping, so on Slide 8, for the non-interest expense I see that the merger charge of $1.2 million when I compare that to the press release, it looks like it was listed, the merger expense was about $4 million, I was wondering what the difference was between the two?

I am not sure where that would have in the press release, but it was $1.2 million for the period, the $4 million might have included the breakout of some of the other LIFT items.

Got it. Okay. Thanks very much.

Thank you. I appreciate it, David.

And the last question we have in queue comes from the line of Frank Schiraldi with Sandler O'Neill. Please go ahead.

Hi, good morning.

Hi, Frank.

Just a question on – if you could talk a little bit about deposit gathering by geography, I mean where are the betas greatest, where are you seeing the greatest pressure and if you can maybe estimate a relative beta say between Florida versus Northern New Jersey?

I think what we are seeing here in the Northeast is definitely a challenging environment, many of our peers at pretty high loan to deposit ratios, excess capital that they need to deploy and they need funding to support that asset growth. Like I mentioned earlier, there was a peer out here that was bidding 2% for some significant size deposit. That’s just a number that we are not comfortable with. And that said, I think overall we have a well diversified funding base and I think we got 17% when you look at over a 12-month period on our betas, little higher than we were historically, but that will probably definitely not may have had 17%, I think if I go down – back on to our normal levels. Florida is definitely a little less competitive I would think on the betas, but there is still people out there that are paying up for deposits. So, I don’t necessarily see that there is geography that’s maybe less competitive. The New York marketplace though is pretty competitive market for core deposit. Rudy, is there anything else you want to talk about?

No, I think that in all the geographies, the commercial purpose component of the deposit base has a different behavior and yes, but again a lumpier behavior because we win relationships when that customer chooses to sell a business or sell major assets then deposits tend to contract as a function of the business. So, I just say that I don’t mean to talk Dick and Jane, because I know you know that. It’s just that I would say since that’s such an important part of our business over 40% of our mix is commercial brokers, commercial derived here at the company. And so we do find again a lumpier different kind of behavior that’s more event-driven in our deposit mix. We like it by the way. We would rather have it all stay in the net inflows and many, many periods. That’s what it is. But I think Ira was pointing out that very point for this quarter, where we had three relationships that were significant, that were net outflows and they revolve around the events selling the business was one of the components.

And then just on loan to deposit ratio, is it fair to say this is sort of at expected peak levels for Valley or maybe if you could just remind us what the comfort level is there on that ratio?

I think we are a little higher right at the moment, I think we are at 104. When I looked at we’d probably be right around 100 on a much more normalized basis maybe even 98. But as we said, we lost some larger deposits during the course of the year and we are working our way back down from where we are. We would like to say that we don’t expect to be this high.

And Frank, I mean, I can’t stress enough how much we want to highlight that the incremental change and the positive growth that we have seen a number of household accounts on the non – on the core checking account basis and savings accounts. That’s a big change for us. We have historically been right around that 24,000 number over a 9-month period for many, many years now. So to be able to actually grow 20% over the first 9 months is a big change for us since largely attributable to what we are doing on the commercial side as well some of the new initiatives that we are putting in place on the technology side. We have 210 approximately branches that are pretty ingrained within the communities that we operate in to now be able to offer some of the additional capacity that many of our peers have should continue to really grow that number and we are really excited about that.

Yes. So, when we look at the quarter honestly 11% year-over-year growth in our loan book in the aggregate. We look at couple of $100 million of net new deposits that we are creating in October. We can’t tell you, I think our team is more energized than I think we have ever seen throughout the business. Retail side, commercial purpose side and so on, we are about to close on a significant acquisition for us with USAmeriBank that will onboard $3.6 billion or more of deposits, we would expect that’s where we were recently and $3.5 billion of loans in a giant geography, plus adding Alabama. So, the team’s stocked at the moment I think good growth for the period, maybe imperfect on the deposit side, but we are clawing that back. So, we feel really good about it.

Great. And then just finally just Ira, I think in terms of capture rate from LIFT, you mentioned the $9 million I guess in run-rate next quarter, is there any update or did I miss an update in terms of capture rate from LIFT by the end of 2018?

We are about 40% of the total annualized target. I think earlier we have provided we would have been about 32% we thought by the end of Q4. So, it’s accelerated a little bit. Hopefully, that will continue to move forward in 2018 and we will give a little more of an update in next quarter.

And the USAmeriBank data I just gave you, so we reviewed in July and it was March dated just to be clear.

Okay thank you.

Thank you. Thanks, Frank.

And speakers, we have no further questions in queue.

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

And ladies and gentlemen, that does conclude today’s conference. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.