Valley National Bancorp

NASDAQ:VLY

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I will now turn the call over to Investor Relations Officer of Valley National Bank, Rick Kraemer. Please go ahead, sir.

[Rick Kraemer, executive]

Thank you, Kevin. Good morning, and welcome to the Valley National Bank Corp. Fourth Quarter 2017 Earnings Conference Call. Leading our call today 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 aware 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 '17 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.

[Ira Robbins, executive]

Thank you for joining us this morning. Before we get started, I would like to acknowledge the recent retirement of Gerry Lipkin and Rudy Schupp. Gerry has been a colleague, a mentor, and a friend of mine for over 21 years. He led Valley through a litany of economic environments 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 his leadership tenure.

While I only had the privilege of working with Rudy for a relatively short time, I also want to thank him for his service and contribution to Valley. The foundation that has been established under both Gerry and Rudy is meaningful to me. I'm very appreciative and excited by the opportunity provided to me by Gerry and our Board of Directors and look forward to successfully leading Valley.

A change of leadership brings about the opportunity to create a new Valley. Currently, we are enhancing the capabilities and direction of the bank from 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 shareholders. My vision for Valley is different in many ways from my predecessor. The new direction of the organization is a reflection of my strategic focus and sense of urgency I have to enhance profitability. And with that, the potential for greater shareholder returns. From a 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 the support of our board, our management incentive program has recently been further aligned with shareholders, placing greater emphasis on growth and tangible 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 that operates more efficiently, enhances earnings, and uses the balance sheet more effectively while remaining true to our core underwriting standards. I believe the new Valley will represent a better experience for all of our retail and cost commercial customers, and provide an even greater opportunity to attract new relationships in the markets we serve. Finally, I believe the new Valley will generate greater and more consistent profitability over the long term.

And now, onto 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 with the cumulative goal of driving greater profitability. Valley reported fourth quarter and full year 2017 adjusted earnings per share of $0.18 and $0.69 respectively. While full year adjusted earnings per share grew at a rate of over 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 would create a great experience for our customers, by enhancing digital and mobile offerings, and also enabling far greater efficiency. In addition, we unveiled Project LIFT, a rightsizing plan to address redundancies in our expense structure. Lastly, the company announced and closed its largest acquisition to date in USAmeriBank, a $4 billion bank with offices in Tampa, Florida and Alabama.

To say monumental events and changes occurred at Valley during the past year would be a 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 1/3 of the way through our technology roadmap. This will increasingly enable us to be more relevant to our customers, and target customers, as well as the markets we serve. We've implemented new retail and commercial products and software, and there's 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 a substantial price tag, we remain laser-focused on keeping control of our expenses throughout this process and 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 LIFT as this doesn't signal the end of our efficiency goals. There are continued opportunities for Valley to create a 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 an entirely paperless environment, eliminating many manual processes from the past. We are presently parallel testing this software and expect it to be fully operational by March 31. The emphasis on efficiency is quite real and present within the walls of Valley, and the future holds a very difficult 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 while 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 have successfully retained customers, and more importantly, key employees throughout this entire process, and we're 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 differs from -- versus historical transactions where Valley's legacy software and systems would typically 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 now have a strong footprint in Florida, serving the major markets.

Additionally, the Alabama location has provided 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 its SBA Program throughout Valley's geographic footprint.

On Slide 5, we highlight the strong deposit growth witnessed across all categories during the fourth quarter. We were able to pay down a significant amount of wholesale borrowings, replacing the funds with longer-duration deposits and improved costs. Deposit competition across all of Valley's geographies remain competitive. In our New Jersey footprint, macro pricing has abated somewhat from prior quarters, although we still experience various competitors offering over 2% rate for promotional deposits. Couple this with monetary enticements up to $500 per new account, and it's easy to understand why Valley expanded geographies. On a pro forma basis with USAmeriBank, approximately 1/2 of Valley's retail branch deposit base is domiciled outside of New Jersey. We believe the geographic diversity and funding provides a competitive advantage versus our northeast peers and will have a disproportionate positive effect on earnings, as short-term interest rates continue to rise. Inclusive of USAmeriBank, approximately 1/3 of Valley's entire deposit base will be located in Florida and Alabama, both states with historically low deposit betas.

During 2017, Valley's aggregate deposit betas, excluding governments, were approximately 19%, as we instituted rate adjustments in the third quarter, in part to get ahead of the impending increase in short-term rates. Through the recent cycle, our aggregate deposit betas are only 8% and basically flat in both Florida and New York. The diverse funding base and access to deposits in four unique states should provide a positive benefit to our margin and a solid funding source to support Valley's expanding loan portfolio.

Although 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 is net of residential mortgage sales and it largely reflects entirely organic originations. The net growth was achieved by Valley -- dramatically shifted the strategic direction of its residential lending platform from one focused on refinance activity, largely driven by inbound inquiries to a more proactive model focused on outbound sales initiatives. As a result of this strategic shift and thrust to drive gain on sale origination income, the residential mortgage and home equity and loan portfolios remain 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%, propelled 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 periods 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. However, this is not the only market where we are focused. Commercial loan growth in Valley's New York marketplace during 2017 was double digits, and we have recently hired new loan officers. Further, we are actively seeking additional commercial lenders that can 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 remains a hallmark of the company. The accelerated rate of growth we are targeting does not have to come at the expense of credit, and we intend to strike an appropriate balance while staying true to our historical standards and maintain the pristine quality we have demonstrated across multiple business cycles.

On Slide 7, we provided 3-year trend on net charge-offs and nonaccrual loans. As expected, the year-end 2017 metrics are absolutely solid.

I'd like to speak briefly on the Valley's taxi medallion portfolio, which reflects outstandings of $137 million and only 0.75% of the entire loan portfolio. In the fourth quarter, we increased the portfolio reserve allocation and 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 at origination. Valley is not a collateral-only lender. With that, Alan will now provide a few comments on Valley's profitability and capital.

[Alan D. Eskow, executive]

Thank you, Ira. Good morning. So we're going to talk a little bit about net interest income and the 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 recorded 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 gray, 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's much more stability in the margin than might appear without being able to see that information. So we're showing you this now because we believe that you'll see that our margin really has done fairly well and has been quite stable during the quarter. We obviously increased 6 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 net interest -- 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 onboard, we do anticipate that we should see about a 6 basis point increase to our margin as a result of USAmeriBank coming on. They do have a higher loan yield than we're seeing up here in the New York, New Jersey market. So there's a couple of items that I think we should focus on going forward, that will impact the margin, so you're aware of it. So first, I mentioned USAB and the 6 basis points. Two, as we move into the first quarter, there are 2 less days in that quarter versus the fourth quarter, so we'll likely see some decline as a result of that by probably about 3 bps. In addition, we have seen some increase by the Fed as late as December 14, 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 impact -- the tax impact, if you will be on the margin, as a result of our nontaxables, and we do anticipate that, that might negatively increase this by about 2 basis points going forward. So that all being said, we do expect at this point in time that we'll 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 up top on the left-hand side is how, during '15, '16, and even part of '17, we had a large focus on refinance market. That market, we know, cannot last forever, especially as interest rates begin to climb. So we 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 only -- was only 46%. So we have begun that focus and as you look into what we expect for 2018, we believe we'll 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're 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 paydowns and refis. And you can also see how we've added in 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're on track to close about $1.5 billion going forward.

The two other things I'll 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're 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 that 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 $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 in the left-hand corner, we give you a little idea of where our LIFT project is at the moment. Ira mentioned it and, obviously, it's 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 recognize 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 -- or cumulatively, excuse me -- no, I'm sorry, another $11.9 million by the end of the first half of 2018, giving us a total of $17.5 million that will have been saved from the beginning of the project through this -- the end of the first half of 2018. So that leaves us a little bit of work left to go, and as you look in the last column there, the last column shows again what we -- what I just went over, which is the $5.6 million of actual savings and the remaining of $16.4 million. So we're well on our way to meeting our goals. By the time we meet that -- or end the first half of 2018, we will only have about another $4.5 million left to go in order to meet our goal of $22 million. If you move to the right, our efficiency ratio as shown adjusted. So we've adjusted these for a number of items, especially, in the most recent year of 2017, of which you see a 58.9% efficiency ratio. So we've taken our total expense as recorded, we've reduced it by LIFT cost of $9.875 million, merger cost of $2.6 million and the adjustment for the tax credits, the amortization -- excuse me, not for the adjustment, but for all of the tax credits that we recorded during 2018. So that was $41,747,000. 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 past 2019, we should be looking at less than a 55% efficiency ratio.

Down below, we gave you a little idea of what the buildup and what our base noninterest expense looks like. So you can see in 2016, we were at $476.1 million. We've got a lot of little bars going on in 2017 to get you to the base 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 deduct out to get to the $485 million, is the residential mortgage commissions. Not that we're not spending that, but that's a variable number based upon growth in non-interest income. $2.6 million comes out as a result of the USAB merger expense. $9.875 million, the LIFT expense, is recorded and the tax credit adjustment, which was a write-down of the valuation, if you will, of our investment in tax credits by $4.3 million. 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 volumes 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 is the USAB non-interest expense. That number will come on pretty much in full and then will begin to trend down as we go into '18, 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'll be fully implemented by that time, and we'll also see continued saving 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're 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're 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 Project 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 of $2.5 million during the quarter. So that's one of the main reasons why you're not seeing salary expense by itself going down.

[Ira Robbins, executive]

Hey Alan, let me just add a couple of comments to that, and 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 was attributable to the mortgage and commissions. There was an incremental positive, obviously, in the gain on sale number associated with that. And that said, the technology expense that Alan mentioned, those were numbers that were actually baked into our LIFT numbers already. Now the timing becomes a little, I guess, disjointed. But what happens is, when we told The Street that we were going to do $19 million of effective cost saves, that was net of the gross incremental increase Alan mentioned, when it comes to technology expense. So as Alan mentioned, we had $1 million or $2 million in incremental salary expense associated with technology people, then the gross savings of LIFT would have actually been $21 million, not the $19 million. The $19 million in expense saves is exactly what we intend to execute, net of all additional costs associated with adding on to the technology people. Now just going back to what Alan talked about on the timing for LIFT. So that $11.9 million that we intend to capture by second quarter of 2018 would basically imply that 54% of every idea that we identify through LIFT has already been completed, right? So there's still another $10.1 million that we have to capture between third quarter of 2018 and basically the second half of 2019. So by -- within the first year of the entire project we'll be 54% complete, well on our way, I think, to what we had initially forecasted.

[Alan D. Eskow, executive]

Okay. Thanks for clarifying for everybody. So if you turn to Page 11 on the slide deck, Tax Act Implications & Capital. So first of all, our common Tier 1 equity remained the same at 9.2%, pretty flat. We've given you in the press release, and it's mentioned again here, our go-forward effective tax rate is expected to be in a range of 21% to 23%. We expect that we'll earn back that charge 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 of it, I should say, of that money, about 15% of it 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 recognize that and people are working on it as we speak. That being said, we're going to push forward some of the work that we were going to be doing in order to take advantage of the benefit we're getting from the tax windfall, if you will. And so, we will be working on optimizing our branches, we will look at changing some infrastructures, et cetera. In addition, there will be some additional incentive compensation that will be available to people, especially in the branch area, that may not have been able to get that before, that we'll be spending as a result of the 15% of the benefit on tax reform. So just to the left again, you can see there's 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 in 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'll call it somewhat seasonal, increase in the amortization. And the reason for that is because we're 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 1, many of them are not offered until we get into the fourth quarter. But you can't amortize those expenses until such time as they are on our books. 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. Thank you, Ira.

[Ira Robbins, executive]

In closing, Valley is in the largest transition in the company's impressive history. We have completed several phases, and we expect to see tangible results in the near and long-term. While there's 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 are confident that this will lead to improved growth and profitability. Thank you.

Operator?

[Rick Kraemer, executive]

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

[Operator]

[Operator Instructions] First question from the line of Frank Schiraldi with Sandler O'Neill.

[Frank Schiraldi, analyst]

Just questions on -- first I just want to ask Alan on the NIM, you talked about the swap of fee income. In the release, you talk about higher interest accretion on purchase accounting in -- I guess, in the quarter versus 3Q, I'm just wondering if you can maybe 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?

[Alan D. Eskow, executive]

So first of all, let me just say that we go 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 -- excuse me, during the fourth quarter, which is what caused the change. The number is 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 all the USAmeriBank loans, which are $3.8 billion of loans, and they're going to go on 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 Schiraldi, analyst]

Okay. But I guess -- yes.

[Ira Robbins, executive]

Sorry, Frank, this is Ira. I think the guidance that we provided with regard to where that margin is going to trend to, I think it's probably a better focus. As Alan mentioned, we do a reforecast annually, there was an adjustment this period, but it's a positive adjustment as we move forward into 2018 as well. So Alan mentioned a $2 million, that's not a number you that you should look to remove from 2018 start by any means.

[Frank Schiraldi, analyst]

Got you. 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 and thinking about the NIM might be just using that stability, the -- while the swap fee income, you'll still have some level of that obviously, and then you add in the 6 basis points from USAmeri trade -- USAmeriBank and then you add the benefit from the Fed.

[Alan D. Eskow, executive]

Right.

[Frank Schiraldi, analyst]

And then I just wondered about 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 for up 21% to 23%.

[Alan D. Eskow, executive]

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 McCarty, our Tax Director, has 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.

[Frank Schiraldi, analyst]

Okay. In terms of dropping 60%, would that -- the amortization and the tax credits on the expense line, that would drop by 60%, is that what you're saying, or no?

[Alan D. Eskow, executive]

Yes. Let's say approximately that.

[Operator]

Next question is from the line of Jake Civiello with RBC Capital Markets.

[Jake Civiello, analyst]

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

[Ira Robbins, executive]

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

[Alan D. Eskow, executive]

Yes, I think we're probably about halfway through the entire hiring process.

[Jake Civiello, analyst]

And I assume that will transpire as the year progresses. It's not like a Level 1 lump sum that you'll see most of them -- most of your hiring.

[Alan D. Eskow, executive]

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

[Ira Robbins, executive]

I think, Jake, when you look at the overall efficiency ratio, we were able to add these people on, could still bring down the efficiency ratio in 2017, and I think, we expect to have similar success in 2018, as we bring these additional 50 people onto the bank. That will continue to be based on everything we're doing within the organization of contraction and add efficiency ratio.

[Jake Civiello, analyst]

Sure, sure. And on that topic actually, in terms of the efficiency ratio, did 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 assumed kind of a static interest rate environment with where we are today?

[Alan D. Eskow, executive]

No. No, it did not take into account any changes in interest rates.

[Ira Robbins, executive]

And that does take into account the additional 15% that Alan mentioned that we are going to put back into the business from the tax benefit. So there is significant improvement coming in the overall operations of the organization based on a lot of the technology that we've implemented through LIFT and some other initiatives here.

[Operator]

Next we have Collyn Gilbert with KBW.

[Collyn Gilbert, analyst]

So I appreciate all the color on LIFT, that's helpful. But I just wanted to drill down a little bit on the specifics of this quarter for some of the movement there. So the increase in FDIC expenses, was that -- is that level going to kind of be the new run rate level, as you guys go forward?

[Alan D. Eskow, executive]

Yes. Remember, though, that, that is affected by USAmeriBank.

[Collyn Gilbert, analyst]

So I would imagine that, that will -- the rate would come down, right? Would you get a better premium with them than what you're carrying on your own balance sheet?

[Alan D. Eskow, executive]

No.

[Ira Robbins, executive]

The premium remains about the same, I think, as the percentage basis of total assets will be flat. The -- obviously, the expense would increase, just based on the increase in total assets, but as a percentage, it shouldn't be different than where we are today.

[Collyn Gilbert, analyst]

Okay, okay. All right, 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 that was kind of short-term oriented in there that we can see those drop in the first quarter?

[Alan D. Eskow, executive]

Well, actually, let's see, professional fees went down by $5.5 million, you're looking at it compared to when, though?

[Collyn Gilbert, analyst]

Oh, oh, shoot. Sorry, I thought they went up linked-quarter.

[Alan D. Eskow, executive]

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 $11.1 million going down to $5.7 million takes into account that.

[Collyn Gilbert, analyst]

Got it. So that's the better -- this quarter is the better run rate, that was the unusual item in the third quarter. Okay, I missed that. 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 gets backed out. Or how those get accounted for in terms of falling through the expense line? I just want to make sure we understand that.

[Alan D. Eskow, executive]

They fall 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 a 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've 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.

[Ira Robbins, executive]

And maybe, Collyn, just a little bit more color there. So the incremental increase in commissions is going to have obviously, a duplicate impact on the gain on sale number. Right now, those -- the gain on sales probably had about a 50% efficiency. So for every dollar of gain on sale, probably commissions in the all-in cost is probably $0.50 against that. That said, I think once we finish the buildout in 2019, we can probably drive that down to about 40%.

[Collyn Gilbert, analyst]

Okay, okay. And, I guess, that was going to be kind of my question. You talk about the increase -- showing, obviously, the 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, I would imagine, given everything you're describing, is clearly going to accelerate?

[Alan D. Eskow, executive]

Absolutely. And again, that was part of what I talked about also, about us investing in things that are going to give us operating leverage. Again, the point is, as you cannot see all of this day 1, because we are putting the people on, people take time to get going, bring those originations in as apps and then until they close, there is a period of time for that to occur.

[Collyn Gilbert, analyst]

Okay, okay. That's helpful. And then, Alan, I just want to clarify, so the 6 basis points of NIM benefit that you're expecting in the first quarter from USAB. That is -- is that just simply because they are -- they run a higher loan yield or within that number is there accretion income embedded?

[Alan D. Eskow, executive]

Oh, it's basically because they have a higher loan yield.

[Collyn Gilbert, analyst]

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

[Ira Robbins, executive]

Collyn, I think that's an important, but I think what you're raising here, Collyn, is definitely an important distinction. We are not forecasting, incorporating, adding to our numbers any additional accretion that's going to come from an additional mark that we're taking. Whatever you're going to see from the accretion that's going to come from USAB, is going to be contractual and repeatable. There will not be an adjustment 2 years down the road or loss of interest income as a result of that.

[Collyn Gilbert, analyst]

Why is that? Just a way you're just accounting -- you just -- your accounting treatment is different?

[Ira Robbins, executive]

There isn't a separate market-yield adjustment that we're saying, okay, they had a 4.5% yield as an example, we're going to mark them up to 5% and begin to recognize that, that's going to run through our P&L, we're not doing that. Whatever the contractual yield is on those loans, that's what they're coming on at and that's what's going to flow through the income statement as we move forward.

[Alan D. Eskow, executive]

Which generally means they're more of a market rate and that's the reason you would be making an adjustment.

[Collyn Gilbert, analyst]

Okay, okay. That's helpful. Okay, good. And then -- you guys have been great, obviously, in giving kind of efficiency targets. Can you just maybe, Ira, give some thoughts on how you're thinking about the ROA and kind of the trajectory there, and what you hope to achieve on an ROA basis?

[Ira Robbins, executive]

I think we had originally given guidance before the taxes that we were going to get to 1% on the ROA within a reasonable timeline. I think that obviously is going to increase and when we look at our long-term plans, we have a goal of 1.20%, 1.25% on that ROA number.

[Collyn Gilbert, analyst]

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

[Ira Robbins, executive]

In the future.

[Collyn Gilbert, analyst]

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

[Ira Robbins, executive]

In the not too distant future, Collyn.

[Operator]

[Operator Instructions] And we do have a question from the line of Matthew Breese with Piper Jaffray.

[Matthew Breese, analyst]

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

[Alan D. Eskow, executive]

No, it's a higher number than that. You came down too low.

[Matthew Breese, analyst]

Okay, so as we think about 60% of the higher --

[Alan D. Eskow, executive]

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

[Matthew Breese, analyst]

Okay. Understood. And as we think about loan growth, just curious as far as hires go or other changes you've made, where is the point of acceleration to get you to that high single-digit, excluding what's held for sale and get to that 7% to 9% range. What are some of the changes that you've made to get you to that run rate?

[Ira Robbins, executive]

I think, more emphasis in the Florida market is a going to be big positive for us. We've definitely expanded some of the business lines that we're in. There is definitely much more of a focus here on growing the overall portfolio. Expanding 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. And like I said in my opening comments, we generated over double-digit loan growth in New York just in this last year. So we've already begun to see a lot of the growth expectations that we forecasted really already come to fruition. So as the mortgage consultants begin to come on, and more of that portfolio gets to go into -- more of that origination volume goes into portfolio as well, that will definitely add to it. But we're pretty confident of the numbers that we are forecasting.

[Matthew Breese, analyst]

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

[Ira Robbins, executive]

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

[Matthew Breese, analyst]

Understood. And then, maybe along the same lines, obviously, the tax reform helps the bottom line. Just wanted to get your thoughts on the dividend, and the dividend payout, kind of the sustainability of that item.

[Ira Robbins, executive]

I think overall the tax reform is going to be a net positive to us as well the communities we operate in. It gives us the ability to help grow or increase retained earnings, to support the growth that we're outlining here. So that's a big positive. So I think it puts us in a pretty positive position. I don't think presently we have any intention to have a share buyback or a dividend increase, but if we hit our targets down the road, those are options that we can 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.

[Alan D. Eskow, executive]

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

[Matthew Breese, analyst]

And you feel comfortable with that level?

[Alan D. Eskow, executive]

Yes.

[Operator]

And we do have a follow-up from the line of Frank Schiraldi with Sandler O'Neill.

[Frank Schiraldi, analyst]

Just a couple of follow-ups. Just wanted to make sure I understand. On the -- first on -- just back to the tax credit amortization, I mean, because it's decent-sized numbers, if you take the $37 million in tax credit amortization this year, excluding the $4 million adjustment in 4Q, is the best way to think about this is to just reduce that by -- or take 60% of that, and that's a decent estimate of 2018 expenses or is there a better way to do it or is it too difficult to say at this point?

[Ira Robbins, executive]

I think you need to go back to the guidance with regard to the absolute number that Alan referenced, $25 million to $30 million. So that's probably a better way to look at $41 million going down to that type of range. So that coupled with a reduction in Valley's effective tax rate provides a significant improvement to us.

[Frank Schiraldi, analyst]

Okay, and then. Okay, fine, so $25 million to $30 million for the full year amortization. And then, just on the NIM, just wanted to go back to closing AmeriBank and bringing that over, and I guess I thought, Alan, you mentioned that the idea would be that these loans are coming over close to market, so there is less of a reason for a mark, is that what you were saying, or no? Okay.

[Alan D. Eskow, executive]

Yes.

[Frank Schiraldi, analyst]

Okay. So then, there'll be less of a -- so less of a mark, so we'd expect less accretable yield as well from this portfolio.

[Alan D. Eskow, executive]

[indiscernible]

[Operator]

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

[Rick Kraemer, executive]

All right, I would like to thank...

[Operator]

Actually, we do have a final question from Erik Zwick with Stephens.

[Erik Zwick, analyst]

Maybe first, 1 or 2 questions on the margin. I know it's been discussed in detail. But within the press release, you mentioned that part of the benefit and the quarter was also related to loan prepayment. Penalty fees, just curious if you could quantify the improvement from the third quarter to fourth quarter, how much that contributed?

[Alan D. Eskow, executive]

Difference from quarter-to-quarter, I believe the number this quarter was about $1 million, $1.5 million.

[Ira Robbins, executive]

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

[Erik Zwick, analyst]

And then, just to make sure I've got all the puts and takes with the margin. You mentioned the 6 basis point benefit from USAmeriBank, but then 2 less days is minus 3 basis points, the tax impact is minus 2, but then some increase from the Fed's December rate increase. So, as I think about the quarter, that's maybe 2 or 3 basis points positive, is that the right way to put all that together?

[Ira Robbins, executive]

All else being equal, yes.

[Erik Zwick, analyst]

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've got that 7% to 9% after portfolio sales. Is that the kind of the net number that we should be looking for?

[Ira Robbins, executive]

Absolutely. And keep in mind when we look at our loan growth, that is an annual number. There's some seasonality in the trends here at Valley when it comes to loan growth, but that is the number that we think that we'll commit to for 2018.

[Erik Zwick, analyst]

Great. And just one final one for me. As I look at the bottom chart on Slide 10, but I realized there's no numbers on the 2018 and 2019 expense targets, but directionally, the size of that bar in 2019 is smaller than 2018? Is that something you're actually expecting that you would see improvement in the total level of expenses from '18 to '19? Or should I not read into the size of the bars there?

[Alan D. Eskow, executive]

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

[Ira Robbins, executive]

You should definitely read into the size of the bars.

[Erik Zwick, analyst]

Okay. Any quantitative guidance in terms of percentage improvement we could see from 2018 to '19 or dollars or...

[Ira Robbins, executive]

I wouldn't go to actual dollars, but I think, the way that you should maybe think about it is the target on the efficiency ratio and where we're going to.

[Alan D. Eskow, executive]

Yes, Erik, just to go back on to prepayment, it was about $600,000.

[Erik Zwick, analyst]

In 4Q?

[Alan D. Eskow, executive]

Yes.

[Erik Zwick, analyst]

Okay. Do you have the amount in third Q handy?

[Alan D. Eskow, executive]

Increase.

[Erik Zwick, analyst]

That was the increase.

[Operator]

At this time we have no further questions in queue.

[Rick Kraemer, executive]

Okay, I'd 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 or myself. Have a good day.

[Operator]

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