Ladies and gentlemen, thank you for standing by and welcome to the Valley National Bank’s First Quarter Earnings Release. At this time, all participant lines are in a listen-only mode. There will be an opportunity for your question. Instructions will be given at that time. [Operator Instructions] As a reminder, the call is being recorded. And I now turn the call over to Mr. Rick Kraemer. Please go ahead.

Thanks John. Good morning and welcome to Valley National Bancorp first quarter 2018 earnings conference call. Leading our call today will be Valley President and CEO, Ira Robbins; and our Chief Financial Officer, Alan Eskow. Before we get started, I want to make everyone aware, that you can find our first quarter earnings release and supporting documents on our company website valleynationalbank.com. Additionally, I would like to point everyone to Slide 2 of our 1Q 2018 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 Form 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, Rick. Good morning and thank you for joining us this morning. The first quarter 2018 while no easy from a financial perspective, was tremendously successful as we continue to execute on many of the initiatives necessary to provide future relevance to our franchise, enhance profitability and create the foundation for greater shareholder returns. Our technology roadmap remains on course as we continue to focus on enhancing the customer experience through new frontend delivery channels, while simultaneously improving the operating efficiency of the entire organization. During the first three months of 2018, we launched the dynamic website through which our customers have access to a modern digital account opening experience, avoid the traditional pinpoints. Additionally, we introduce our new residential mortgage loan origination platform, which incorporate an end-to-end paperless process. Approximately 50% of their originations today are utilizing this technology and we anticipate reaching a 100% by the end of the second quarter. Investments and technology such as these will help shape the customer experience at Valley and to a greater degree supports scalable growth and improved operating efficiency. Our goal of becoming one of the premier regional banks in the country is not going to be easy, nor is instantaneous. There are going to be many apps to close to overcome some known and many unforeseen. That said, the foundation we are improving upon today will lead us in a position to capitalize on in the future. On January 1, 2018, we closed our acquisition of USAmeriBank. We are excited to have all of our new teammates onboard including Joe Chillura and Al Rogers USAB's former CEO and Chief Lending Officer respectively and look forward to their valued contributions. Our systems integration is on track come for mid-May and we should begin to realize some of our projected…

Thank you, Ira. That commentary is a good segway to our overall net interest income and margin discussion on Slide 6. After listening to many requests from the analyst community, you will notice we reclassified swap fee income from net interest income to non-interest income. In theory, this should create less volatility to the NIM moving forward. Consequently, our net interest margin was flat linked quarter. The margin and net interest income include the acquired loans from USAB, which have a coupon of 4.47%. However, as a result of our purchase accounting valuations, we brought their loans over at a market rate of 4.29%. As stated in other acquisitions, we do not temporarily inflate net interest income or loan yields to purchase accounting. Two notable items that had a negative impact to our previous quarter outlook was the timing of the transfer of USAB’s federal home loan bank borrowings from Atlanta to New York, which came with higher than expected cause combined with the impact of loan prepayments and pay down that were also higher than anticipated and higher rates. Also while factored into our previous guidance, it’s important to remember the lower day count in the first quarter, which does not reflect the full margin benefit of the USAB acquisition. Overall, we are pleased with how margin held up given the moves in market deposit pricing, we saw late in the first quarter. Echoing Ira’s earlier comments, we continue to see a steady climb in new originations yields reaching the 4.4% level for the month of March. Even though, we are anticipating the positive betas of 50%, we believe our floating rate assets should keep pace with any migration in higher funding costs. We remain focused on defending the margin while growing loans to fuel net interest expansion. Turning…

[Operator Instructions] And first line of Frank Schiraldi with Sandler O'Neill. Please go ahead.

Just want to start with the strong loan growth in the quarter and just given that growth, I wondered if you could talk a little bit about how confident you are, Ira, in hitting your targets of 7% to 9% growth for the year? And half coming out of Florida like we saw in the first quarter is a reasonable expectation?

I think just starting from where we ended up. First quarter as we mentioned, previously is seasonally like quarter for us based on typical line pay downs, slow activity in New Jersey, New York market with the auto book as well as some residential historically for us. So to show the 9% organic growth was a real positive for us and I think is a testament to Tom and some of the changes that we made within the entire lending book to how we go about attracting customers here. I am pretty comfortable with where the targets are for the rest of the year and maybe Tom wanted to talk a little bit about -- a little bit more guidance on that.

Thank Ira. I think what you saw in the first quarter was exactly was laid out it was organic, it was very diverse, every market contributed, every product that contributed. The half that we attribute coming out of Florida also includes the legacy Valley portion of Florida which had a relatively strong quarter. So, we -- the positive to this we've seen it on the C&I side, we've seen it on the real estate side and our pipelines continue to build. Our pipeline is above where it's been in the past, followed by a good 10% to 15%, not including what USAB is contributed to us. A lot of it is based on a program we implemented probably 18 months ago, with a more focus sales culture, reallocating resources to have more feed on the street generating business as well as strategic hires in all our marketplaces to bring and experience people that have a pretty good following of business opportunities. So we believe we’ll hit the guideline of 7% to 9%. Our April will turn out, looks like it's going to be okay, and we’re optimistic that will reach our budgeted numbers.

Then on the branch, you talk about the branch transformation plan that I guess you guys are in the mid seven. I don’t know if you can give any more color there. Really, I’m just kind of wondering as you start to think out off, if you’re thinking this is additional potential cost savings or you’re just thinking, you’ll be redeploying expense differently. What is the initial thought there?

The thing is pretty macro approaches how we want to address this. I mean anyone can look at the FIDC guidance see what our average branch size is in some of the markets we’re in. And they're probably smaller than where they should be for some of the market that we operate in. So, how do we go about making sure that we’re attracting deposit out of efficient costs, it’s something that’s really important to us throughout the entire organization. What is those branches look like, how inviting are they customers to come in. So, it’s a pretty holistic approach as to how we want to go about allocating or capital in allocating or individual resources. And in July, I think we’re excited to provide the shield the more guidance as to what that’s going to look like for us.

And then just finally. If you can just remind me, what are your ROA targets and just the timing behind those targets?

We had up targets to about 125 after the tax change and that’s about 2020.

Our next question is from Ken Zerbe with Morgan Stanley. Please go ahead.

I guess first question for Alan. You mentioned the third quarter expenses could be a better indication or cleaner I suppose. Could you give us what that level might be for expense in 3Q? And also what is implied for second quarter expense?

Well, I don’t think. First of all, a lot of the more in frequent items are going to disappear. We hope in the second quarter, we don’t expect to see the same kind of large and frequencies that we saw. So that’s number one for the second quarter. But remember in the second quarter, we still have all of USAB systems until the conversion is complete. And then there is a process of reconciling and making sure everything is running properly on Valley systems. So, I think our guidance is that we expect to see about 30% benefits from USAB’s expense based in the second quarter. And we’ll see a little more that as we go into the third quarter.

Hi, Ken. Let me just -- this is Rick. Let me just clarify. So, it’s going to be 30% of one quarter -- one full quarter in 2Q. So, we’re thinking $6.5 million a quarter in a quarterly run rate. You'll get about 30% of that about 2 million in 2Q. And then in 3Q, you should until you get the full amount of that as well as in 4Q and then go forward. We’ve laid out that 143.1 kind of base, which is Valley ex-OEM frequent item. It includes our mortgage number and then also includes the full run rate of USAB. So, if you back off that 143 maybe just very simplistically. I don’t want to give you a third quarter number, but 143 minus to 6.5 million get you lead so where we should be in 3Q.

And then just, another question. Just on the CDs, this is I guess Page 18 in your press release. There was a decline obviously an increase in the balances, which I’m assuming is USAB, but decline in the yields. Can you explain that little bit? I understand a sort of USAB but every other category looks like went up, not down. I am just wondering the dynamics there?

And I think it’s a great question, Ken, and that leads into how excited we’re about the geographic diversification we have within our funding footprint. On an absolute basis, CDs as well as other deposits are much cheaper in the Alabama and Florida footprint. They are less competitive today as with the New Jersey footprint looks like. So, the acquisition of USAB and the merger with their deposit franchise definitely drove down some of those costs. What happens with deposit betas in that market, you know, we’ll probably move just like every other market, but maybe not to the same degree, but the absolute cost isn’t much lower than what our historical footprint is.

Our next question is from Collyn Gilbert with KBW. Please go ahead.

Ira to follow up on that comment. Do you have what the loan-to-deposit ratio is for your New Jersey, New York franchise and then what it is for Florida and Alabama?

We do -- [indiscernible] found it without Collyn. We definitely look at it. It's important for us to make sure that we're self-funding in each of individual geography as well as different asset classes as best as we can. We'll maybe try to put something in our next deck.

Yes, we can get you the numbers. I would just say generally speaking they are fairly comparable across all regions. So it's roughly for Alabama, as you grow Alabama into Florida includes than the other all -- they're all pretty much comparable on loan to deposits.

And then just in terms pricing dynamic, Ira, you've touched on that from a deposit standpoint, but maybe just getting a little bit granular as to what the incremental loan yield is coming on at in the Florida market versus what we are seeing in the New Jersey, New York market. I know it's going to depend on segmentation, but I'm just trying to monetize what the -- how that competitive differences in your Florida, Alabama market versus what we’re seeing up here? So either if you could give us some pricing dynamics around that or and I don't know Ira you mentioned you think deposit betas are going to be lower, but just trying to get a little bit more quantification of that dynamic?

Historically, we were running around 25 basis points higher in new volume yield on the Florida footprint, all else being equal type of loan that we had. We still see that to be appropriate today and we’re modeling that as if that’s going to maintain for the rest of the year. So I think deposit betas will be a little bit less than the Florida and Alabama footprint, but I think as Alan mentioned, we are forecasting potentially a 50% betas up here in New Jersey based on the competition levels we are seeing. So, obviously, we’re going to try to focus as much as we can on having deposit growth coming from the Florida and Alabama footprint.

And then you had indicated that half of the loan growth this quarter was from Florida, half of the organic growth was from Florida. Do you have -- do you know what it was on the deposit base, the split between Florida and up here?

There was a large brokered Florida deposit account that had a 100% beta that we move to wholesale funding. So, it's skewed the number a little bit, but the growth was pretty equal across that.

Okay.

New Jersey has been a pretty big growth market for us on deposits actually, and we have been able to maintain the funding costs there a little bit, but it is getting definitely more competitive than what we've seen in the last couple of quarters.

And then just lastly on the mortgage banking outlook, I know you had given color indicated 65% of it was purchased this quarter in your origination volume. Can you just sort of -- how you’re sort of seeing that growth evolves throughout the remainder of the year within mortgage banking? And I just want to confirm, the mortgage commission expense is part of your 550 million OpEx guide, right?

Yes, and look I think we’re continuing to see shift from a refinance activity to a purchase mortgage, and we’re actually entering into that market today. So, I would gather, we probably see an increase of consideration going towards purchase versus refinance in the next couple of quarters. Our goal here let’s be clear is do not have a national mortgage franchise like what you’re seeing from the industry trends of some others or getting out for some others are actually doing. Our goal here is to really get our fair market share. If you look at our market share on purchase mortgages for the branches we have, for the customers we have. We didn't have nearly what we should have within our actual footprint. Our goal is really to acquire that and we think we can do that economically and provide some real shareholder value there.

And then just one last question and haven’t run through all this specifics of what you’ve offered to us yet. But it just seems like that efficiency ratio is going to be trending lower. But then your 2020 goal of 55%, I mean 2020 far away and that 55% were not that far off. I just, is that a very conservative goal? What, I don’t if you could…

Yes. So, it was a very conservative goal and we refreshed it to be 53% maybe we were too conservative in some of the numbers. So, I think in the guidance that we put forward today is 53. But I think when you incorporate LIFT, when you incorporate the cost save that we’re going to get from USAB. When you incorporate some of the other technology improvements we have with the new organization today that's how we think we can grow loans without having that next marginal dollar of expense come in. We think the expense story is going to be a story for us.

But you’re still sticking to 2020 for 53?

We'll leave it for now and then.

All right, it’s a conservative goal. I am going to go on record to say that.

Next question is from Matthew Breese with Piper Jaffray. Please go ahead.

I really just wanted to hone in on the $550 million expense guidance. And then the starting point sounds like a 143 million this quarter. And I just want to make sure, I had the component rights. So, does that include the amortization of intangible assets? And does that include the amortization of tax credits?

Yes.

So, that’s an all in number were at 143 million.

Yes.

And then as I think about progression here, we have the conversion and the clean numbers in 3Q, that’s a $6.5 million drop. By the end of year, we'll be on a run rate basis of less than that 550 and that accurate as well, right?

Yes.

And then I just want to make sure. So the branch plan, I’m assuming the goal is less of a footprint, less of a square footage and therefore less costs. Is that accurate?

I think our goal overall is to change the cost to deposits we have today. I believe it’s too high based on the infrastructure we have, and we can in my opinion drive that down. So to grow deposits the more efficient manner is what our goal is across the entire organization.

Right, but is any of that included in the existing the $550 million expense guidance, the 53?

No.

Is that included in the 125 ROA by 2020 guidance?

No.

Okay. So, if there were additional cost save that would all be grading?

Correct.

Okay. Given what you're seeing on the deposit front and the dynamics of the competitive environment. Is margin stability is still the outlook?

Yes.

Okay.

Yes, we decided. It's 313 plus or minus two basis points. So I think we're pretty comfortable that the asset sensitivity within in the organization and we saw a big run up in new volume yield this quarter while I think linked quarter, we're maybe not going to see this same incremental increase, but is moving in the right direction.

I am sorry just going to back to the branch strategy. Again, you noted it could take a multiyear timeframe. Is that a five year plan or a two year plan? Is it overlaid on LIFT?

I think we’ll give you -- so LIFT did not include anything with the branches, really that we sort of took it out, because we want to make sure we get it right. We have been in certain market and done business in a certain way for very long time, and we want to make sure that we maintain deposits and grow deposits some of these markets, and we’ll talk about how we go about doing that whether that laying in a digital piece with what those branches look like, changing the footprint of some of those branches. We yell it to you to make sure we give you a complete plan as to what looks like. So, I won’t go too much detail. But I think in July, we’ll provide a little bit more guidance.

Understood, okay. Last question just what’s the good tax rate from here?

I think we gave 20% to 22%.

[Operator instructions] And next go to David Chiaverini with Wedbush Securities. Please go ahead.

I had a follow-up on the net interest margin question. So, the expectation is for it to be flattish in the second quarter, if we looked out further. Should we assume that it should remain flat in out quarters as well? And I was curious as to, how many rate increases you guys are expecting this year?

We think that based upon what we are seeing at this point in time and I think Ira pointed out. We have a sufficient amount of floating rate assets and maturities of or turnover of loans that we think will be reinvested at higher rates that we’ll be able to help offset the increase in deposit course. So that we think that at this point, we don’t see any major move one way the other in the margin.

And, David, it's Rick. We haven’t forecast, since we’re only giving 2Q guidance, we’re going to stick with that 2Q guidance. But within that, there is only one additional rate hikes factor of it.

Got it, and then a follow-up on the branch transformation initiative. Have you guys thought about or willing to put out there what sort of deposit attrition you could expect from that? Or do you think that your deposit pricing strategy could offset any potential attrition?

In our investor presentation last time we talked about deposit attrition on one of the branches that had, that actually burned down. And I think that’s probably what our focus is from the guide as to where we think we could be. And there is normal attrition in every single branch, but hopefully it's offset by new customers back and then. And we have net growth within those branches. So, the goal is obviously to have as little attrition as possible, but we want to make sure we’re still in market to support the growth of the organization.

Yes, let me just follow-up. We actually -- in our presentation, we showed the attrition related to the’15 and ’16 closings as well as that one branch that happened overnight and we thought it was around 88% with capture, right. So, it’s helped some attrition. Keep in mind, our mobile and digital capability of that time were relatively limited to what they are now to. So, we think that will only help improve that rate.

And then lastly, I was curious about. So you put a pretty good, very good loan growth, organic loan growth in the quarter. Are you guys -- on the pricing front, is tax reform allowing you to be a bit more competitive on loan pricing?

I don’t see that today. I think it's still function of the competition of the market wherein the type of products we’re going to after. Most of our customers are generally desirable customers for many within the -- for many of our competition. So, we need to make sure that we are competitive, but still knowledge as to where the market is. We don’t think the tax has any impact on it today.

And to the presenters on the call, we have no further question. Thank you.

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

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.