Valley National Bancorp (VLY) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter Earnings Release conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now turn the call over to Investor Relations Officer of Valley National Bank, Rick Kraemer. Please go ahead.

Thank you, Kevin. Good morning and welcome to Valley National Bancorp fourth quarter 2017 earnings conference call. Leading our call will be our President and CEO, Ira Robbins and Chief Financial Officer, Alan Eskow. Before we get started, I want to make sure everyone is the way that you can find our fourth quarter earnings release and supporting documents on our newly designed Company website valleynationalbank.com. Additionally, I would like to point everyone to Slide 2 of our 4Q 2017 earnings presentation and remind everyone that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements. And now it’s my pleasure to turn the call over to Ira Robbins.

Thank you for joining us this morning. Before we get started, I would like to acknowledge the recent retirement of Jerry Lipkin and Rudy Schupp. Jerry has been a colleague, a mentor and a friend of mine for over 21 years. He led Valley to a leading of economic environment while always maintaining the utmost integrity. I want to thank him for all the energy, time and advice he has given to both me and Valley over this leadership 10 year. I only had the privilege to working with Rudy, a relatively short time. I also want to thank him for service and contribution to Valley. The foundation has been established under both Jerry and Rudy is meaningful to me. I’m very appreciative and excited by the opportunity provided to me by Jerry and our Board of Directors and look forward to successfully leading Valley. A change in leadership brings about the opportunity to create a new Valley. Currently, we are enhancing the capabilities and direction of the bank of front end delivery channels such as our recently launched new website to the automation of processes and the integration of new data processing platforms. We are actively changing the way we interact with our customers and how we are viewed by potential new customers, analysts and shareholder. My vision for Valley in many ways from my predecessor. The new direction of the organization as reflection of my strategic focus in terms of urgency I had to enhance profitability and with that the potential for greater shareholder returns. From the senior management perspective, we have built an incredibly strong team of individuals. Many of whom are new to Valley within the past 18 months with support of our board, our management incentive program has recently been further aligned with shareholders facing greater emphasis on growth intangible book value and relative shareholder returns. This will create more accountability across the organization and keep greater focus on increased earnings per share and our uses of shareholder capital. I believe the new Valley will represent an organization and operates more efficiently, enhances earnings and uses the balance sheet more effectively [indiscernible] our core underwriting standard. I believe the new Valley will represent experience for all of our retail and commercial customers to provide an even greater opportunity to attract new relationships in the markets we serve. Finally, I believe the new Valley will generate and more consistent profitability over the long-term. And now on to our fourth quarter results. Please turn your attention to Page 3 of the slide deck. 2017 was a busy year for Valley. We continue to deliver on many important initiatives all things of goal of driving greater profitability. Valley reported a fourth quarter and full year 2017 adjusted earnings per share of $0.18 and $0.59 respectively while full year adjusted earnings per share grew to a rate of 9.5% from the prior year. That number alone doesn’t tell the entire story. When we entered 2017, our strategic planning was filled with many ambitions. Our expansive implementation of our technology roadmap will create a better experience for our customers by enhancing digital and mobile offerings and also enabling far greater efficiency. In addition, we aim to have project LIFT, our rightsizing plan to address redundancies in our expense structure. Lastly, the Company announced and closed its largest acquisition to-date in USAmeriBank, $4 billion bank with offices in Tampa, Florida and Alabama. Monumental events and changes occurred at Valley during the past year would be of significant understatement. The foundations we have laid in 2017 are anticipated to lead to significant improvements in growth, efficiency and profitability for years to come. To-date we are approximately one-third of the way through our technology roadmap. This will increasingly enable us to become more relevant to our customers and target customers as well as the markets we serve. We have implemented new retail and commercial products and software and there is many more to come. Our mobile offerings will rival the largest banks and our new website just launched earlier this week, reflects the new image of Valley we are presenting to our clients. These are important investments for the future of Valley enabling us to better compete in this ever changing banking environment. While all this comes with substantial price tag, we remain laser-focused on keeping control of our expenses throughout this process and we will continue to do so as we complete building out the infrastructure necessary for our future success. When we announced project LIFT this past summer, our intention was to use this program as an earnings enhancement plan. We are on-track to deliver the results on time or even ahead of schedule. It’s important however not to get lost in the details of it, as this doesn’t signal the end of our efficiency goals. There are continued opportunities for Valley to create more streamlined process across many business lines. For example, our technology roadmap is providing new software in our residential mortgage business allowing us to move to entirely paperless environment limiting many manual processes from the past. We are presently parallel testing the software and expect to be fully operational by March 31st. The emphasis on efficient is quite real and present in the laws of Valley and the future holds a very different look for efficiency and profitability. At the end of the day, we remain committed to building a platform that provides the best service to our customers. We believe this will create an environment of more efficient growth and greater profitability by adhering to our stringent underwriting standards that the Company was founded upon. On Slide 4, we provide an overview of Valley’s historical M&A success. To-date I’m very pleased with the integration of USAmeriBank as the executive team led by Joe Chillura has enthusiastically introduced Valley to the market. Joe and his team has successfully retained customers and more importantly key employees throughout this entire process and we are excited for the full systems integration in the second quarter. The integration of core systems coincides with Valley’s independent technology roadmap which provides an opportunity to integrate the best and most customer-friendly products across platforms. This difference versus historical transactions Valley’s legacy software and systems which simply prevail. As an example, Valley is adopting USAmeriBank’s commercial treasury solutions platform across the entire organization. Valley’s legacy customers will experience a significant improvement in functionality as well as look and feel. For the USAmeriBank customer, the ultimate system integration with Valley will appear seamless while achieving enhanced functionality. With USAmeriBank we will have a strong footprint in Florida serving the major markets. Additionally, the Alabama locations provide Valley the opportunity to deliver enhanced consumer products while obtaining access to quality funding sources. Additionally, although not included in Valley’s pro forma financial analysis, we believe there are likely significant revenue synergies as Valley introduces our comprehensive residential mortgage product while USAmeriBank simultaneously expands this SVA program throughout Valley’s geographic footprint. On Slide 5, we highlighted the stronger positive growth with across all categories during the fourth quarter. We were able to pay down a significant amount of wholesale borrowings, we placed bonds with longer duration deposits and improved costs. Deposit competition across all the Valley’s geographies remained competitive. In our New Jersey footprint macro pricing has dated somewhere from prior quarters although we still experienced various competitors offering over 2% rate for promotional deposit. Coupled this with my monitoring and $500 per new account and these are understand by Valley’s expanded geographies. On a pro forma basis with USAmeriBank approximately one-half of Valley’s retail branch deposit base is upside New Jersey. We believe the geographic diversity in funding provides a competitive advantage versus our Northeast peers and we had a disproportion of positively affected earnings a short-term interest rates continue to rise. Inclusive of USAmeriBank approximately one-third of Valley entire deposit base will be located in Florida and Alabama those states which start to low deposit base. During 2017, aggregate deposit base including government were approximately 19% as to the rate adjustments in the third quarter and part to get ahead of the impending increase in certain rates. Due to recent cycle, our aggregate deposit bases were only 8% and flat in both Florida and New York. The diverse funding base in excess to deposit in four unique stages provided a positive benefit to our margin and a solid funding to support Valley extend in loan portfolio. The annualized loan growth for the quarter was only 2.49%. For the full year, loan growth was approximately $1.1 billion or 6.4% annualized. As reflected on slide 6, this growth in net on residual mortgage sales is largely reflects entirely organic originations. The net growth was achieved by Valley dramatically shifted the strategic direction of its residual lending platform and one focus on refinance activity largely driven by inbound employees to a more proactive model focused on outbound sales initiative. As a result of the strategic shift [indiscernible] sale origination income, the residential mortgage and loan portfolio was relatively flat year-over-year. Excluding these two asset classes, Valley’s loan portfolio grew in excess of 8% on a year-over-year basis. In 2018, we are targeting total loan growth of 8% to 10% was held by 10% to 12% growth in Valley’s Florida market. Origination volume for the fourth quarter was strong reaching $1.3 billion. We anticipate continued growth into 2018 as the commercial pipeline exclusive of USAmeriBank presently exceeds $1 billion. This compares favorably versus prior period as a greater proportion have already been approved and are expected to close in the first half of 2018. With the addition of USAmeriBank, growth in Florida should be enhanced where this is not dealing market where we are focused. Commercial loan growth values New York marketplace during 2017 with double digit and we recently hired new loan officers. Further, we are actively seeking additional commercial lenders to provide expertise and expand our New York and New Jersey presence and I stated earlier, we are laser focused on growth. That said, we are Valley National Bank and credit quality remained a hallmark of the Company. The [indiscernible] growth we are targeting does not come at the expense of credit and we intent to strike an appropriate balance less than $2 historical standard and maintained the pristine quality we have demonstrated across multiple business cycles. On Slide 7, we provided three year trend on a charge off in nonaccrual loan. As expected the year end 2017 metrics are absolutely solid. I would like to speak briefly on the Valley’s taxi medallion portfolio which reflects earnings of $137 million and only 0.75% of the entire loan portfolio. In the fourth quarter, we increased the portfolio reserve allocation as the portfolio continues to wind down. Our borrower performance to-date within this category has been good and is largely a function of normal underwriting approach within the bank which assesses multiple sources of repayment and origination. Valley is not a collateral, only lender. With that, Alan will now provide a few comments on Valley’s profitability and capital.

Thank you, Ira. Good morning. So we are going to talk a little bit about net interest income and margin right now on Slide 8. If you look at this, the first item is to try and give you a better indication of what the volatility in the margin has been as a result of the swap fee income that we have reported from quarter-to-quarter in the line net interest income. So the chart that you see up top in the left hand corner shows you in grey the reported net interest margin. And you can see how that’s fluctuated quite a bit from quarter-to-quarter. As we extract the swap fee income however, you can see that there is much more stability in the margin that might appear without being able to see that information. So we are showing you this now because we believe that you will see that our margin really has done fairly well and has been quite stable. During the quarter we obviously increased six basis points which we were very happy about. Down below you can see charts that do show you what the net interest income numbers look like and that also shows that volatility as it includes the net interest margin - I’m sorry, the swap fee income. Going forward, we see a lot of good favorable balance sheet trends and our loan yields have been increasing both as a result of the marketplace change as well as the Fed moving interest rates. So we think that bodes well for our net interest income going forward. Additionally, and Ira has talked about USAmeriBank and coming on board, we do anticipate that we should see about a six basis point increase to our margin as a result of USAmeriBank coming on. They do have a higher loan yield than we are seeing up here in the New York, New Jersey market. So there is a couple of items that I think we should focus on going forward that will impact the margins, so you are aware of it. So first I mentioned USAB and the six basis point. Two, as we move into the first quarter there are two less days in that quarter versus the fourth quarter. So we will likely see some decline as a result of that by probably about three bps. In addition, we have seen some increase by the Fed as late as December 14th and that should be a net positive for Valley in terms of its net interest income and margin. As I pointed out, loan yields are rising. So that’s a good sign for us. Additionally, one of the negatives will be the tax impact if you will be on the margin as a result of our non-taxables. And we do anticipate that that might negatively increase by about two basis points going forward. So that all being said, we do expect that at this point in time that we will have a net positive to the margin going forward into net interest income. So if we go to Slide 9 and we talk a little bit about non-interest income and our trends, one of the things that we have set out to do is attempt to use residential mortgage better than it was in the past in terms of increasing our non-interest income level. So what you see right at the top on the left hand side is how during 2015, 2016 and even part of 2017, we had a large focus on refinance market, that market we know cannot last forever especially as interest rates begin to climb. So began and you can see by the way that 15% was the number we were doing on purchase versus 85% on the refi market. Beginning in 2017, we began to shift and as you can see the purchase became 54% and refi was only 46%. So we have begun that focus. And as you look into what we expect for 2018, we believe we will see 73% of our new volume coming on from the home purchase market as compared to 27% on the refi market. The chart shows you obviously the non-interest income levels in each of these years. And you can see in the line chart, right in the middle there that we are expecting about $1.5 billion or $500 million more in new loan production out of the residential market as compared to what we saw in 2017. So we do see these numbers going up. That being said, we expect that that will result in a larger gain on sale of loans as we expect that about $1 billion of those loans will be sold and then the remaining amount will go into portfolio net of normal pay downs and refis. And you can also see how we have added USAmeriBank as they will add to our pro forma numbers going forward into 2018. Our application volume during the fourth quarter was extremely good at $450 million for residential mortgage and as I said we do believe we are on-track to close about $1.5 billion going forward. The two other things I will point out. Number one, our loan size has increased dramatically as a result of us going after the purchase market. Back in 2016, loan sizes averaged about $250,000. Today, we are over $400,000. So that bodes well for the future in terms of servicing fee income and other fees that we might see. The other thing I will mention lastly is that on USAmeriBank. We have not factored in residential growth at this point. So what I’m giving you in terms of a $1.5 billion really is for the Valley that was in existence as of 12/31 prior to USAmeriBank. So if we turn to Page 10, I will just spend a little bit of time talking about expense management. We know that’s always on everybody’s mind and they ask a lot of questions about it. So if we start on the left hand corner, will give you a little idea of where our LIFT project is at the moment. Ira mentioned it and obviously has been a big thrust for Valley going forward. So beginning in the third quarter as you can see here each of the different quarters into ‘18, we saved about $3 million in that first quarter by the time in the second quarter, we saved 2.6 million that’s the most recent quarter. So on a year-to-date basis, the actual savings at this point in time that we recognized is $5.6 million of our total $22 million that we expect to save. So going forward, now we get into 2018 and we expect to save another $11.9 million by the end of the first half of 2018 given this is a total of $17.5 million that will have been saved from the beginning of the project through the end of the first half of 2018. So that moves us a little bit a work less to go and as you look in the last column there, the last column shows again what I just went over which is the 5.6 million of actual savings and the remaining of 16.4. So we are well on our way to meeting our goals by the timely meet or in the first half of 2018 will only have about another $4.5 million left to ago in order to meet our goal of $22 million. If you move to the right, our efficiency ratio has shown adjusted. So we have adjusted this for a number of items especially in the most recent year 2017 which you see 58.9% efficiency ratio. So we have taken a total expenses reported we reduced it by lift cost of $9.875 million, merger cost of $2.6 million and the for all of the tax credits that we reported during 2018 so that 41 million 747. So that gets you down to a 58.9% number and you can see the trend line showing that we expect by the time we get passed 2019 we should be looking at less than 55% efficiency ratio. Down below, we gave you a little idea of what the build up and what our base non-interest expense looks like so you can see in 2016 were 476.1 million. We have got a lot of little bars going on in 2017 to get you to the phase and show you what’s happened. So in total, we had 509.1 million of total non-interest expense included in that number and that’s what I’m going to deduct out to get to the 485 million is the residential mortgage commission not that we are not spending, but that’s a variable number based upon growth in non-interest income. $2.6 million comes out as a result of USAB merger expense, $9.875 million the LIFT expenses reported and the tax credit adjustment which was a write down of the valuation if you will of our investment in tax credit by 4.3 million and that’s above the line not the tax number itself. So that will when you put all those numbers together that will get you down to a base number of $485 million Now as we go into 2018, you can see a number of different things happening. Number one, at the top, the resi mortgage commissions. As we expect more volume to come on, as we expect more gain on sale to happen, we expect that that number will continue to trend upward from where we were in 2017. The light blue color in the USAB non-interest expense. That number will come on pretty much in full and then we will begin to trend down as we go into 2018, probably not until the second half though because we are not scheduled to do our conversion until we get to the -- sometime in the second quarter. So the expense savings from USAB will begin to go down in the second half of 2018. And then you can see our own numbers in the dark blue down below the base number is beginning to come down as we reflect upon our cost saves taking place as a result of LIFT and other items. Now as we go into 2019, you can see again we anticipate resi mortgage commissions will go up as cost saves come in USAB expenses will go down. They will be fully implemented by that time and we will also see continued savings at Valley as the continued LIFT savings are fully implemented in other processes that we are changing going forward. One of the things that I will mention is that some of what we are doing is salary expenses going down as a result of not having any operating leverage or zero leverage and we are replacing that with a lot of people that are coming on board on the resi side which will give us an operating leverage number. Just for the purpose of understanding why you are not seeing salary expense and some of our non-interest expense go down from quarter-to-quarter even though we are saving on project LIFT. During the course of 2017 we did add a gross number of over $5 million of mortgage people that came on in order to generate the income that we are seeing. We did have some reductions in staff and other areas there. So the net is about 3.5 million or so of net expense for the resi mortgage area without commissions. In addition, on the technology side, and understand that the technology - the money had to be spent in order to get the technology in place so that we could make the cost savings for LIFT and we can continue on the roadmap. So there was a substantial amount of investment there in order to save the 19 million. So those numbers have really been netted out. Our net expense in 2017 was about $1.5 million of just staffing people which has been as I said netted out against the savings that we will see in budget LIFT. So overall, I would say during the fourth quarter alone, we probably had additions between staff, commissions, benefits, et cetera of probably $4 million. That $4 million is obviously greater than the project lift expenses that we told you about $2.5 million during the quarter. So that’s one of the main reasons why you are not seeing salary expense by itself going down.

Hey Alan let me just add a couple of comments to that obviously LIFT is an important initiative for us and everyone within the entire organization is focused on ensuring that we capture what we presented to the street here. So as Alan mentioned, there is a significant piece of our salary expense line in 2017 that go to the mortgage and commission. There was an incremental positive obviously in the gain on field number associates with that. With that said, the technology expense that Alan mentioned those were numbers that were actually backed into our lift numbers already. Now the time becomes a little I guess disjointed, but what happens is when we tell the street we are going to $19 million of effective cost save that was net of the gross incremental increase Alan mentioned when it comes to technology expense. So as Alan mentioned that we had $1 million or $2 million and the incremental salary expense associated with technology people then the gross savings are LIFT of actually $21 million not the 19. A $19 million in expense exactly what we intent to execute net of all additional cost associated with that on the technology people. Just going back to we talk about on the timings for that so that $11.9 million that we intent to capture by second quarter 2018 will basically imply that 54% every idea that we identify through lift has already been completed, right. So there is still another $10.1 million that we had to capture between third quarter of 2018 and basically the second half of 2019. So within the first year of the entire project will be 54% complete well on our way what we had initially forecasted.

Thanks for clarifying for everybody. So if you turn to Page 11 on the slide deck, tax act implications and capital. So first of all our common tier 1 equity remained the same at 9.2% free flat. We have given you in the press release and is mentioned again here our go forward effected tax rate is expected to be in a range of 21% to 23%. We expect the real earned deck that charged that we had this during the end of the year of about $22.6 million within the first two quarters of this year. So the earn back on that is fairly quick. We do plan to reinvest some of that not some but a percentage even I should say of that money about 15% of that will be reinvested. It will be reinvested in a number of different areas as we indicate here facilities and infrastructure. So not included in our LIFT focus was the branch optimization that was done earlier on before LIFT and we still have more to go and we recognized that and people are working on it as we speak. That being said, we are going to push forward some of the work that we were going to be doing in order to take advantage of the benefit we are getting from the tax moving forward if you will. And so we will be working on optimizing our branches, we will look at change in some infrastructure, et cetera. In addition, there will be some additional intensive compensation that will be available to people especially in the branch area that may not have been able to get that before that we will be spending as a result of the 15% of the benefit on Tax Reform. So just to the left again, you can see there is not really much change in most of the numbers. The only thing that really changed at all was the tangible common equity went down a little bit. That’s the result of the fact that we did have lower earnings this quarter because of the impact of the Tax Act and we did have slightly higher shares outstanding. So that really did impact that somewhat. The other thing I will mention regarding what occurred and our tax credits in the future. So first of all, tax credit amortization during the quarter was if you will negatively impacted by the number I mentioned before about $4.3 million where we had to take an impairment charge because of the Tax Act and the benefit of these investments that we had going forward. Additionally, we also had a fairly large and I will call it somewhat seasonal increase in the amortization. And the reason for that is because we are allowed under GAAP to recognize the expected benefit of the tax credits in our effective tax rate as we move through the year. However, the credits themselves we don’t necessarily get into day one, many of them are not offered until we get into the fourth quarter, where you can’t amortize those expenses until such time as they’re on our book. So hence the fourth quarter numbers are always a lot larger than they are in the first, second and third quarters. So just trying to give a little clarification on that. And I think at this point that ends my comments. Ira?

In closing, Valley is in the largest transition the Company has in tested history. We have completed several phases and we expect to get tangible results in the near and long-term. While there is still much heavy lifting to be done, I can’t emphasize enough the amount of change that has already occurred here. All of management and our employees are committed to making Valley more relevant to both existing and target customers as well as the communities we serve. We confident that this will lead to improved growth and profitability. Thank you. Operator?

Yes, Kevin you can go ahead and open up the lines for Q&A please.

[Operator Instructions]. First question, the line of Frank Schiraldi, Sandler O'Neill. Please go ahead.

Good morning. first I just want to ask on the NIM. You talked about the swap fee income. In the release you talk about higher interest accretion on purchase accounting in the - I guess in the quarter versus 3Q. I’m just wondering if you can may be quantify what that is and then if there is a better run rate we should think about pulling some of that back out for a more normalized NIM starting in 1Q?

So first of all let me just say that we through a reforecast generally once a year. That might change, but at this point we are doing a once a year reforecast. That forecast was done during the fourth quarter which is what caused the change. The numbers around a $2 million number that came through. But that being said, giving you a better run rate I think at this point would not make a lot of sense Frank because we are going to be putting on a little of the USAmeriBank loans which are $3.8 billion of loans and they are going to go on and during the first quarter. So as a result of that whatever I tell you today or you might learn today is really not going to help you until we go through and we are able to book and go through what the accretion numbers will look like going forward with USAmeriBank.

Frank this is Ira. I think in the guidance that we provided with regard to where that's margin's going to trend to I think is probably a better focus. You know as Alan mentioned you know we do a reforecast annually there is an adjustment this period but it’s a positive adjustments as we move forward into 2018 as well, so Alan mentioned the $2 million that's a number that you have had you should look to remove from 2018 start by any means.

So that's the adjustment and then that's going to be in the run rate going forward and so for the NIM I guess I don't know the best sort of strategy in thinking about the NIM might be just using that stability the - while the swap fee income you still have some level of that obviously and then you add in the six basis points from USAmeriBank and then you add the benefit from the Fed.

Right.

And I just wondered how you think about if there's any change to how you're thinking about investment in tax credits going forward and how that might impact your tax rate guidance up 21 to 23%.

So our 21 to 23 takes into account everything that we think we know as of this point in time, as everybody knows this happened very late in the year, Dan McCarthy our tax director spent a lot of time trying to come up with those rates and we're only giving you a range at this point because we think it’s a pretty good number but obviously that could fluctuate. That being said he has taken into account the tax credits and we do anticipate that that number will probably drop by about 60% or more from where we were in prior years. So that doesn't mean it can't change again going forward I think we'll need to evaluate or continually reevaluate where we think our tax rate should be and what things we should be looking at or not.

Okay, in terms of dropping 50% will that the amortization and the tax credit from the expense line that would drop by 60% is that what you're saying or no.

Yes, let's say approximately that.

Okay, alright, great thank you very much.

And next question from the line of Jake Civello, RBC Capital Markets, please go ahead.

How far along are you on the hiring effort for the mortgage consultants?

In our budget for next year we have about another 50 people that are already baked into the budget, baked into what our expectations, baked into what the initial forecast that we have for next year. So I think there would be a large focus of them down in the Florida marketplace, but it's part of the plan I think you will begin to see that portfolio stabilize as we go into 2019.

I think we're probably about half way through the entire hiring process.

And I assume that will transpire as the year progresses it’s not a one lump sum that you will see most of your hiring?

No, I think again we saw from what I mentioned early about what kind of hires we had during the quarter and during the year. The year was spread out so it wasn’t like that hit us in one quarter what happens quarter-by-quarter I would say.

I think Jade when you look at the overall efficiency ratio, we were able to had this people on still bring down the efficiency ratio in 2017 and I think we expect to have this expense in 2018 as we bring this additional 50 people on to the bank we are continue to be based on everything that we are doing within the organization and our contraction that efficiency ratio.

Sure. And on that topic actually in terms of the efficiency ratio that your assumptions for the improvement to the longer term goal of 55% include any benefit to net interest income from rising rates or is that just assume kind of a static interest rate environment that where we are today?

No, it is not taken down any changes in interest rates.

And that does take into account the additional 50% that Alan mentioned that we can took back into business from the tax benefit. So very significant improvement on the overall operations of the organization based on a lot of the technology that we have implemented through LIFT and some other initiative here.

Okay, great. Thanks.

And next we have Collyn Gilbert, KBW. Please go ahead.

Thanks. Good morning, guys. So I appreciate all the color on LIFT that helpful, but I just wanted to drill down a little bit on specifics of this quarter for some of the movement there. So do you increase an FDIC expenses is that level going to be the new run rate level as you guys go forward?

Remember though that is affected by USAmeriBank.

Okay. So I would imagine that the rate would come down right would you get a better premium with them than what you are carrying on your own balance sheet?

The premium remained about the same I think as a percentage basis and total assets will be flat obviously the expense would increase just based on the increase in total assets, but as a percentage it should be given that where we are today.

Okay. Alright. That’s helpful. And then just on the professional fees, the jump again this quarter is that due to maybe kind of what was driving that and is there anything within the short-term oriented that we can see those drops in the first quarter?

Well actually let’s see professional fees went down by $5.5 million, you are looking at it compared to went off.

Sorry, I thought that went up linked quarter.

No, they went down. Remember last quarter, we had the fees related to LIFT in there that was about $6 million to our partner there. So between the third quarter 11 going down 57 takes into account from debt.

Got it. So this quarter is the better run rate that was the unusual item in the third quarter. Okay, got it. Okay. And then just also on the expense discussion so, can you just remind us or tell us the mortgage commissions obviously that’s get backed out or how those get accounted for in terms of following through that expense line to make sure we understand that?

They flow through the expense line, they are in salary and employee benefit expense I was just isolating those. So they are included in that number. Now they are growing number as a result of more people coming on, more loans being brought on et cetera, et cetera. So it is in there and it grew I believe from quarter-to-quarter about $1 million from where we were in September. So we have recorded this year about 7.1 million in total commissions. However, as we grow the gain on sale and we grow the number of staff, we expect that number will continue to grow. That’s what we showed for 2018, a growing number for commission expense.

Add just a little more color there. So the incremental increase in commissions is going to have obviously a duplicative impact on the gain on sale number. Right now, the gain on sale is probably at about a 50% efficiency. So for every dollar of gain on sale, probably commissions and the all-in cost is probably $0.50 against that. That said, I think once we finish the build out in 2019 we can probably drop that down to about 40%.

Okay, okay. And I guess that was going to accompany my question. You talk about I guess showing obviously increase in mortgage origination assumptions, increase in gain on sale expectation. You guys have been running like - for the last couple of quarters now I think about a 15% quarter-to-quarter growth in mortgage banking fees. I mean that growth rate given everything you are describing has really accelerated.

Absolutely. And again, that was part of what I talked about also about us investing in things that were going to give us operating leverage. Again, the point is as you cannot see all of this day one because we are putting the people on. People take time to get going, bring those originations in as [apps] (Ph) then until they close. There is a period of time for that to occur.

Okay, okay. That’s helpful. And then I just want to clarify, so the six basis points of NIM benefit that you are expecting in the first quarter from USAB, is that just simply because they run a higher loan yield or within that number is their accretion income embedded?

It’s basically because they have a higher loan yield.

Just the higher loan number, okay. Okay. And just I know.

I think that’s important but I think what you are raising here Collyn is that an important distinction, we are not forecasting, incorporating, adding sort of numbers, any additional accretion that’s going to come from an additional mark that we are taking. Whatever you are going to see from the accretion that’s going to come from USAB is going to be contractual and repeatable that will not be an adjustment two years down the road or loss of interest income as a result of that.

Why is that? Just the way, you are accounting treatment, is that right?

Yes, isn’t a separate market yield and adjustment that we are saying okay they had a 4.5% yield as an example, we are going to mark-to-market 5% beginning to recognize that that’s going to run through our P&L. We are not doing that. Whatever the contractual yield is on those, they are coming on that. And that’s just going to flow through the income statement as we move forward.

Okay.

Which generally means that more of a market rate.

Got it.

And that’s reason you would be making an adjustment.

Okay, okay. That’s helpful. Okay, good. And then, you guys have been great obviously in giving kind of your targets. Can you just may be Ira give some thoughts on how you are thinking about the ROA and kind of the trajectory there and what you hope to achieve on a ROA basis?

I think we had originally guidance before the taxes that we are going to get to 1% on the ROA within a reasonable timeline. I think that is going to increase and when we look at our long-term plans you know we have a goal of you know 120,125 on that ROA number.

Did you want to frame the timeline on that at all? Come on Ira.

In the future.

You said profitability, improved profitability like four, five times in your opening comments, okay.

You can now see it with the future Collyn.

Okay, alright that's helpful. Alright that's all I had thanks guys I'll leave it there.

[Operator Instructions] We do have a question from the line of Matthew Priest, Piper Jaffray, please go ahead.

Alan just on the tax amortization front so I have that clear, would a $15 million or $16 million rate in the P&L or expense in the P&L would that be kind of in the ball park.

It's a higher number than that, you came down too low.

So I should be thinking that's 60% of the - in the higher.

It's probably just south of 30 million, 25 million to 30 million in that range.

Okay, understood and then as you think about loan growth just curious as far as hires go or other changes you have made. You know where's the point of acceleration gets you to that high single digit you know excluding what's held for sale, gets you into that 7% to 9% range what is from the changes you have made to get to that run rate.

I think more emphasis into the Florida market's going to be a big positive for us, we definitely expand it from the business lines that we're in, there's definitely much more of a focus here on growing the overall portfolio you know extending some of the relationships that we have with our customers having the ability and capacity to generate some larger loans in Florida becomes a positive as well. Like I said in my opening comments you know we generated over a double digit loan growth in New York just since last year, but we've already begun to see a lot of the growth expectations that we forecasted you know really already come to fruition. So as some mortgage consultants begin to come on and where that portfolio gets going to more back to the origination volume goes into portfolio as well, that will definitely add to it. But we're pretty confident the numbers that we're forecasting.

Got it, okay, and then Ira there's obviously a lot collectively on the value plate with USAB and lift. Where does M&A stack up in terms of the priority wise from here?

I think right now we need to make sure we get our house in order, you know the integration of USAB is really important for us, it's a large franchise making sure we execute that we retain the employees as well as the customer significantly, focus for us as well the technology equipment we have. But we think if we internally focus on some of these initiatives that we can generate internal growth that would far outpace any M&A transaction today.

And then maybe along the same line, I would believe the tax reform helps the bottom line just wanted to get your thoughts on the dividend and the dividend payout and kind of the sustainability of that item.

I think overall the tax reform is going to be a net positive to us as well as the communes we operate in, it gives us the ability to outgrow our, increase retain earnings to support the growth that we're outlining here, that's a big positive. So I think it puts us in a pretty positive position, I don't think presently we have any intentions to have a share buyback or a dividend increase but if we hit our targets down to the road those are options that we could potentially look at, but right now we definitely believe that reinvesting the capital back in the organization to support the growth is the best use of it.

Our payout should probably go down to 50% or lower.

And you feel comfortable with that level?

Yes.

Okay. That’s all I had. I appreciate it. Thank you, guys.

And we do have a follow-up from the line of Frank Schiraldi, Sandler O'Neill. Please go ahead.

Hi guys. Just a couple of follow ups. Just make sure I understand first on just back to the tax credit amortization I mean the decent size numbers if you take the $37 million in tax credit amortization this year excluding the $4 million adjustment in Q4. Is it a best way to think about this as to just reduce that by or takes 60% of that and that’s a decent estimate of 2018 expenses or is there better way to do or is it too difficult to say at this point?

I think you need to go back to the guidance regard to the FCU number that Alan referenced $25 million to $30 million so that’s probably a better way to look at 41 going down to that type of range to that couple of reduction in values effected tax rate that provides a significant improvement to us.

Okay, fine. It’s 25 to 30 for the full year amortization. And then just on the NIM just want to go back to closing AmeriBank and bringing that over and I guess I thought Alan you mentioned that the idea would be this launch coming over close to market so there is less of a reason for a market that what you were saying or no?

Yes.

Okay. So less remarks so we would expect less creatable yield as well from this portfolio.

Yes.

Okay, alright. Great. Thank you.

You are welcome.

Okay. At this time, we have no further questions in queue. Actually we do have final question from Erik Zwick from Stephens. Please go ahead.

Good morning, guys. May be first one or two questions on the margin I know it’s been discussed in detail, but within the press release you mentioned that part of the benefit in the quarter was also related to a loan prepayment, penalty fees just curious if you could quantify the improvement from the third quarter to fourth quarter how much that contributed?

Difference from quarter-to-quarter I believe the number this quarter was about 1 million.

It was a minor impact, it’s not something that should really be that volatile as we move forward.

Okay. And then just trying to make sure I get all the puts and takes with the margin. You mentioned the six basis point benefit from USAmeriBank but in two days minus three basis points the tax impact is minus two, but some increase from the last December rate increase so as I think about the quarter that’s may be two or three basis points positive, is that the right way to put all that together?

All else being equal, yes.

Okay. And then on Slide 6, you mentioned kind of targeting total loan growth of 8% to 10% for the year but in the parenthesis you got that 7% to 9% after portfolio sales is that kind of that number that we should be looking for?

Absolutely. And keep in mind when we look at our loan growth that is an annual number. There is some seasonality in the trend value when it comes to loan growth, but that is the number that we think throughout for 2018.

Okay, great. And just final one from me. If I look at the bottom chart on slide 10 and I realize there is no number on the 2018 and 2019 ex-targets but directionally the size of the bar 2019 a smaller than 2018 or is that something you are actually expecting that you would see improvement in the total level of expenses from 2018 and 2019 or should that not being into the sides of the bars there?

No, that’s the way you should look at it.

You should definitely read into the side of the bars.

Okay. Any quantitative guidance in terms of percentage improvement we can see from 2018 to 2019 or dollars or?

In financial terms I think the way that you should may be think about is the target on the efficiency ratio and where we are going to.

Got it. That’s helpful. Great. Thanks for taking my questions.

Hey Erik, just to go back on your improve thing, that was about $600,000.

In 4Q?

Yes.

Oh that was the increase, okay. Got it, great. Thank you, guys.

You are welcome.

At this time, we have no further questions in queue.

I would like to thank you all again for taking part in our fourth quarter earnings conference call. If you have any additional questions, please reach out to Alan Eskow and myself. Have a good day.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining by using AT&T Executive Teleconference. You may now disconnect. Have a good day.