Valley National Bancorp's (VLY) CEO Gerald Lipkin on Q4 2015 Results - Earnings Call Transcript

| About: Valley National (VLY)

Valley National Bancorp (NYSE:VLY)

Q4 2015 Earnings Conference Call

January 27, 2016, 11:00 AM ET

Executives

Marc Piro - Senior Vice President, Public Relations

Gerald Lipkin - Chairman, President and Chief Executive Officer

Alan Eskow - Chief Financial Officer

Analysts

Frank Schiraldi - Sandler O’Neill

David Darst - Guggenheim Securities

Collyn Gilbert - KBW

Brian Horey - Aurelian Management

Matthew Breese - Piper Jaffray

Operator

Ladies and gentlemen, thank you for your patience in holding. Welcome to the Valley National Bank Fourth Quarter Earnings Release. [Operator Instructions] And as a brief reminder today, today’s conference is being recorded. And I would now like to turn the conference over to Marc Piro.

Marc Piro

Good morning. Welcome to Valley’s fourth quarter 2015 earnings conference call. If you have not read the fourth quarter 2015 earnings release that we issued earlier this morning, you may access it from our website at valleynationalbank.com. Comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.

Now, I would like to turn the call over to Valley’s Chairman, President and CEO, Gerald Lipkin.

Gerald Lipkin

Thank you, Mark. Good morning and welcome to our fourth quarter earnings conference call. This morning, we are excited to announce Valley’s fourth quarter operating results and provide an update on many of the strategic initiatives announced last quarter. For the quarter, net income was $4.7 million continuing Valley’s streak of never reporting a losing quarter. Although the bottom line results weren’t stellar, we are extremely pleased with the core earnings and the foundation established to generate increased revenue in 2016 and beyond. Many infrequent items impacted the quarter results such as the expense incurred on the extinguishment of $845 million in high cost debt merger expenses related to the CNL acquisition and infrequent expenses associated with the previously announced strategic cost reduction initiative. Alan will provide additional detail on each of those items in his prepared remarks.

Last quarter, we announced the prepayment of $795 million in long-term debt, which was originally scheduled to mature in 2017. In the latter half of December, we prepaid an additional $50 million, which was scheduled to mature in the first quarter of 2018. The total expense recognized in the fourth quarter to extinguish the $845 million was $51.1 million, and we anticipate net of the cost of replacement funds and annual interest expense savings of approximately $27 million.

For many years, we have assessed the potential benefits of restructuring our high cost borrowings. While the reduction in interest expense would have been beneficial to all of our performance metrics such as our net interest margin and our return on assets, until now the long-term implications would have been severe as the prepayment penalty would have been so large that it clearly would have necessitated a significant injection of capital and thereby negatively impacted our cash dividend as well as earnings per share indefinitely. Waiting until now to prepay this portion of the high cost debt is justifiable in our thinking as the prepayment expense became more manageable and the reduction to current period net income absorbed the expense without necessitating the infusion of additional capital. In addition, the forecasted reduction in interest expense attributable to the above-mentioned debt extinguishment during March and April of 2016, an additional $182 million of long-term debt with an average cost of 4.69% will contractually mature and be replaced with less expensive funding.

Further, in July, another $75 million at 5% will mature. We believe the benefit of the maturing debt coupled with the recent increase in the U.S. prime rate will have a positive impact on the bank’s net interest margin and more importantly net income. The prepayment of the Valley debt was only one of the important initiatives implemented in 2015 to improve the bank’s long-term earnings. As a result of the changes in customer behavior and additional delivery channel alternatives, in 2015 we announced the consolidation of 28 redundant legacy branches representing nearly 13% of the Valley branch network pre-CNL. Of the 28 announced closures, 13 have been consummated and the remaining 15 are expected to be completed during this calendar year. Expenses associated with these closings also were recognized in the fourth quarter, for which Alan will provide additional information.

The optimization of our branch network is a perpetual endeavor as the banking environment continues to change. As we work to right-size the branch network and enhance operations, additional branch closures may materialize. We firmly believe in the long-term advantages of a well-structured branch system positioned to serve the needs of our current and potential clients, both living and working in our marketplace. With the continued growth of Internet, remote deposit capture, and mobile banking technology strategically positioning our offices within a few miles of each other, accomplishes our objective to better control expenses and more importantly provide banking services that current and future customers demand. The age of locating a branch on every street corner clearly no longer makes economic sense.

Valley’s future earnings across banks are expected to improve based upon each of the aforementioned initiatives. Supplementing the branch closings and balance sheet enhancements during the fourth quarter, we also completed our acquisition of CNL, which further expanded our operations to some of the most attractive markets in Florida. With the consummation of the CNL merger, Valley’s Florida footprint now equals approximately 15% of the deposit franchise with 36 branches in the Sunshine State. Our outlook for Florida remains positive, and we anticipate continued double-digit organic growth within this market. Valley will benefit by the many seasoned and highly experienced bankers at CNL. When combined with Valley’s established Florida team, CNL should be a significant contributor to the bank’s earnings and market share. We anticipate having CNL completely integrated into our core data systems next month and expect to recognize our projected cost saves shortly thereafter.

The CNL acquisition, as expected, impacted the linked quarter comparison of Valley’s balance sheet. Approximately $813 million of the just over $1 billion in loan growth was a result of the merger. Although total net loans, excluding those contributed by CNL, grew approximately $200 million from the third quarter, total loan origination volume was strong with over $1 billion of new originations. The fourth quarter new volume was solid and represents a significant increase from third quarter total new loan originations of approximately $800 million. Loan purchase activity during the quarter was largely limited to residential mortgages, which enabled Valley to meet its CRA goals. The strong organic origination activity reflects the value of Valley’s multifaceted consumer and commercial origination platforms coupled with its diverse regional footprint.

For the full year of 2015, Valley originated over $3.3 billion of loans, excluding loan purchases compared to approximately $2.8 billion of organic originations in 2014. In addition to the 2015 organic originations, Valley purchased approximately $1.2 billion of residential mortgages and multifamily loans. The combined $4.5 billion of new loan volume in 2015 delivered $1.8 billion, or 13.15% annual loan growth, excluding CNL, net of normal repayment and refinance activity. While the U.S. economy is growing at a tepid rate, most of the markets that we operate in appear to be showing stronger growth than the nation as a whole. This is reflected in Valley’s loan pipeline, which remains very strong and we are beginning 2016 with a very positive outlook.

Furthermore, our loan portfolio ended the year in excellent condition with total delinquencies equal to 0.55% of total loans and aggregate non-performing assets of only $78.2 million. At this time, our client base as reflected in their most recent financials, generally appear to be in good condition. The competitive landscape remains challenging, both as a result of the competitions liberalization of leading terms, coupled with the interest rate environment. We are pleased with the level of loan origination activity within Valley’s geographic footprint in spite of the external hurdles. During 2015, we were able to expand the loan portfolio at a double-digit pace while maintaining Valley’s conservative underwriting standards. We believe the bank’s diverse product fit and geographic footprint provide a tremendous foundation for continued growth in 2016. Further, the recently executed cost reduction and borrowing initiatives, in combination with the additional $257 million of maturing high cost borrowings support Valley’s strong belief of improved operating performance during 2016.

Alan Eskow will now provide some more insight into the financial results.

Alan Eskow

Thank you, Gerry. For the fourth quarter, there were numerous moving parts which impacted the financial statements. My commentary will provide a detailed overview of each section, highlighting some of the infrequent items. For the quarter, Valley’s fully taxable equivalent net interest margin was 3.30%, an increase of 21 basis points from the third quarter. The linked quarter expansion is largely attributable for a reduction in interest expense from our borrowing portfolio combined with an increase in customer swap and recovery income from the loan portfolio.

During the fourth quarter, Valley prepaid $845 million of long-term debt, which directly reduced the linked quarter interest expense by approximately $4.5 million or 10 basis points on the margin, net of the new funding costs. The majority of the debt was extinguished by the end of October. And as a result, Valley anticipates approximately $2.2 million of additional reduction in the first quarter interest expense resulting from the transaction. All else being equal the further reduction in interest expense will likely increase the margin by approximately 5 basis points.

The yield on earning assets for the quarter was 4.12%, an increase of 11 basis points from the third quarter yield. Included in fourth quarter interest income, was $2.7 million of interest income from closed purchase credit impaired loan pools, which added approximately 6 basis points to the earning asset yield. In addition, customer swap fees increased $2.5 billion on a linked quarter basis, which resulted in a further benefit to the earning asset yield of 5 basis points. In the aggregate, these two items positively impacted the fourth quarter net interest margin by approximately 11 basis points. In future periods, we anticipate continued customer swap income and on occasion recovery income. However, the amount recognized in the quarter is greater than what the bank typically realizes quarterly.

Further impacting the margin and net interest income during the quarter, albeit to a lesser degree was the impact of the CNL acquisition which closed on 12/1/15. The fourth quarter margin was positively impacted by approximately 1 basis point, which we expect will increase to 2 basis points from a full quarter of earnings. The market interest rate environment, coupled with the competitive landscape continues to pressure new loan volume yields, resulting in downward pressure on the margin. That being said, the aforementioned items, in conjunction with the December increase in the targeted Fed funds rate, as well as the additional high cost borrowings of $257 million maturing in 2016 should positively impact net interest income and the margin. Total linked quarter non-interest income increased $3.1 million to $24 million, largely the result of an increase in gain on sale of assets. During the quarter, Valley recognized approximately $4.8 million in net gains on the sale of two branch facilities, while also incurring fixed asset impairment expense of $1.9 million associated with the scheduled 2016 branch closures. Both items, which net to $2.9 million, are infrequent in nature.

Total non-interest expense in the fourth quarter of $174.9 million, represents an increase of $66.2 million from the prior quarter, mainly the result of multiple infrequent items coupled with one month of normal expenses equal to approximately $2.3 million attributable to the CNL acquisition. Infrequent items, which we do not anticipate recognizing in the first quarter of 2016, equal approximately $64 million. The loss of $51.1 million on the debt extinguishment, an incremental increase of $7.9 million in amortization of tax credit, combined with $1.5 million of merger expenses and $3.5 million in charges associated with the previously announced cost saving initiatives comprise the total infrequent items.

As Gerry stated earlier, we anticipate integrating CNL’s data systems in February. As a result, many of the anticipated cost saves will not be realized until the second quarter of 2016. In addition, Valley’s first quarter non-interest expense is typically slightly inflated as a result of increases in payroll taxes and weather-related expenses. A portion of the income tax benefit of $6.3 million realized in the fourth quarter is largely attributable to an increase in the investment tax credits linked to the aforementioned incremental increase in amortization of tax credits, coupled with lower pretax net income. For 2016, we anticipate the effective tax rate will range between 27% and 30% in conjunction with a normalized amortization of tax credit expense equal to approximately $5 million a quarter.

Asset quality as of December 31 was solid, as total non-accrual loans as a percent of total loans remained flat from the prior quarter at 0.39%. Total accruing past due loans declined slightly to $26.1 million from $29.1 million in the prior quarter, largely the result of a decline in loans past due 90 days or more. The allowance for credit losses increased from $106.7 million at the end of the third quarter to $108.4 million as of December 31, 2015, as the provision for credit losses realized during the quarter of $3.5 million exceeded total net charge-offs of $1.8 million. As a result of the increased allowance, coupled with the increase in non-PCI loans, the allowance for credit losses as a percent of non-PCI loans was 0.79% for the fourth quarter and equal to the prior quarter. The loans acquired from CNL were accounted for as purchase credit impaired loans and a fair value purchase accounting mark of approximately $38 million was recorded at the acquisition.

In conclusion, we are excited about the bank’s future prospects. The cost save initiatives outlined in today’s release will begin to impact non-interest expense in the first quarter of 2016. The benefits associated with the debt restructuring favorably impacted fourth quarter earnings and we anticipate the full quarterly benefit in the first quarter of 2016. Further, additional high cost debt will mature in March, April and July of 2016, providing a reduction in future period interest expense. These items when viewed in conjunction with expected growth in loans and benefits from the CNL merger provide an improved outlook for Valley in 2016.

This concludes my prepared remarks. And we will now open the conference call to questions.

Question-And-Answer Session

Operator

[Operator Instructions] It looks as if our first question comes from the line of Frank Schiraldi of Sandler O’Neill. Your line is open, sir.

Frank Schiraldi

Good morning. Just a couple of questions. First, on – Gerry, I think you mentioned that you still anticipate extracting the targeted cost saves from CNL. After extracting those, and then given your efficiency plans that will start bearing fruit, I guess, in 2016, is an efficiency ratio of 60% still reasonable sort of target to reach by the end of 2016?

Gerald Lipkin

Reasonable. We have to adjust for the tax – the amortization of the taxes. If you look at just the current quarter, and you take out without any of all the big – the little pieces, if you just take out the $51 million of tax expense – I am sorry, of the expense on the extinguishment of the debt, and you take out the amortization of the tax credits, those two items alone bring us down to about 64% in this current quarter. And we have yet to realize any real cost saves yet. In addition, there are lots of other items during this quarter, which I am not removing, just the two items. I mean, remember that the amortization of the tax credits is directly related to the tax line. It has nothing to do with the operating efficiency of the company. So, I am removing that as I always believe we should be doing.

Frank Schiraldi

Got it. Okay. And then on the margin, just want to make sure I understand. So, if you extract or exclude I should say, 13 basis points, the $5.2 million in higher interest rate swap income and PCI related income, is that a reasonable place to assume the margin moves too and you get the full benefit of CNL, full benefit of the restructuring, and you’ve probably got some -- as you mentioned just core NIM pressure outside of that in terms of spreads. So, is that a reasonable place to expect the margin to migrate to in the short term?

Gerald Lipkin

You know what I think what we are thinking is that obviously it’s a little higher as a result this quarter of those two items. But we still have the impact of two more months of CNL. We have the impact of the debt, which has not yet fully benefited us for a full quarter. It was only two months out of three months. And we think the normalized compression probably could run about 2 basis points a quarter. So, I am going to start by saying probably between 3.18 and 3.25 is probably a number that you should be thinking of.

Frank Schiraldi

Great. Appreciate it. Thank you.

Gerald Lipkin

You are welcome.

Operator

And our next question comes from the line of David Darst of Guggenheim Securities. Your line is open, sir.

David Darst

Hey, good morning.

Gerald Lipkin

Good morning, David.

David Darst

Alan, maybe you have got a lot of things kind of moving here with the expenses. Could you give us a range for what the first quarter might look like just on a core basis?

Alan Eskow

I think the best way to look at it is taking out all the items we had, but it’s a year, about $455 million for a year, that for a year number. The problem is for the quarter, there is a lot of things that won’t be fully implemented in the first quarter. I mean, CNL is not going to -- for some extent not going to happen until the second, third, and fourth. I mean, there is a lot of different things that are not happening in that first quarter, but will happen as the year goes on the branches. We have been closing branches, but a number of those branches will not close until the middle of the year. So, some of those cost saves, you won’t see until the third and the fourth quarter. So, it’s going to be a little hard to tell you exactly what number for the first quarter, but I would say at least for the year, about $455 million.

David Darst

Okay. So that would be in line with maybe exiting the year like 110?

Alan Eskow

Yes, might be a little higher.

David Darst

Okay. And then just on the loan growth this quarter, Gerry, so definitely more construction, multifamily, and I know that’s in New York and New Jersey markets. But what’s your appetite and what do you think the market demand is for you to continue to see that type of growth?

Gerald Lipkin

I see a lot of growth coming out of our Florida offices. I think that area of our franchise is in an area that’s seeing very strong economic growth, more so outside of even the construction area. We do see some of that obviously here in the northern New Jersey, New York City market. The markets are very strong. As I commented, when they talk about the economy growing at a somewhat tepid pace not even hitting in some areas of that 2% goal, but you’ve got to remember that’s affected to a large degree in parts of the country that are adversely affected by oil. Fortunately, for Valley, other than a couple of gas station loans, we don’t have any exposure to the oil industry. So, I think that our growth prospects in Florida, for example, and in New York, New Jersey are reasonably good at this point.

David Darst

Just I guess with the construction in Florida, do you have an appetite to do additional construction loans in South Florida or do you have much exposure there?

Gerald Lipkin

We don’t have that much exposure. We have an appetite to do good construction loans everywhere. The class of loans is not something that we are looking to avoid. We just want to make sure that they are well structured. And the construction loans that we are seeing coming out of Florida from our staff have been very well structured. So, we still have an appetite for that.

David Darst

Okay, got it. Thank you.

Operator

[Operator Instructions] The next question comes from the line of Collyn Gilbert of KBW. Your line is open.

Collyn Gilbert

Thanks. Good morning, gentlemen.

Gerald Lipkin

Good morning, Collyn.

Collyn Gilbert

Gerry, just talk to your comments on loan growth, maybe if we could just tie you down a little bit more to kind of overall growth expectations for the year, and maybe how you see purchases playing into that? And then if you could sort of stratify the growth expectations out of the New York, New Jersey market versus Florida?

Gerald Lipkin

We are expecting about a net 6% kind of growth, net 6%. We do plan on selling some residential mortgages during the course of the year. I wouldn’t say you are going to see a lot of purchase activity, but that’s kind of really depends on how the market develops throughout the year. I mean, we are not necessarily budgeting for purchases, but sometimes things become available and it makes sense to do them.

Alan Eskow

Purchases are a funny object. Banks look at doing participations with other banks. Well, you consider that a purchase or you don’t consider that a purchase, if you are participating in a larger loan with another bank, historically, banks always do that. They don’t usually break that out as they purchase. I think as we have been reporting to we have been having gain on sale of loans and we continue to expect to have that throughout 2016. Sometimes those numbers are impacted by market value adjustments at the end of the quarter, not necessarily by the volume of loans that are being transacted, but we did sell $50 million during the fourth quarter.

Gerald Lipkin

We are quite excited. You ask about Florida, I am quite excited about some of the initial loan applications that I see coming in out of CNL. I think the quality that I see coming in has been excellent. They are the type of loans that we like to make. And they were not all real estate related. Some of them were just typical C&I loans. So…

Collyn Gilbert

Do you have a thought of that 6% in rough terms what the split would be between Florida and New York?

Alan Eskow

Florida and New York, well I don’t think we breakout Florida and New York versus New Jersey as well.

Collyn Gilbert

Right. I mean, I am sorry, legacy franchise versus Florida?

Alan Eskow

Florida, we project a higher number than we are projecting in the New York, New Jersey market. I think, last year we had projected somewhere in the 10% to 12% range for Florida growth and slightly lower, which averages everything out. And then when you take into account, the sale of resi loans that brings it down a little lower.

Collyn Gilbert

Okay. Okay, that’s helpful. And then Alan, can you just talk a little bit about the change in your reserve methodology, sort of what facilitated that and just a little bit more color around that and then also maybe in conjuncture with that kind of talk about your outlook for sort of reserve build credit and provision from here?

Alan Eskow

Yes. I mean, our methodology only changed – I wouldn’t say it was dramatic. So I don’t want anybody to think that we made a huge change it did add obviously to the reserve during the quarter. I don’t know that there would have been a major difference if we didn’t make this change. But that being said I think the big issue is we looked at qualitative factors as they impact historical losses. And I think everybody is probably spending more and more time looking at things that way. So everything starts with historical losses over some period of time. You need to be able to capture a long enough period of time to make sure that you are not eliminating things that might require you to build your reserve or otherwise. And then the qualitative factors, which are all the various things that impact what goes on top of that to get to a reserve number, have been adjusted going forward to be a little tighter on how we are looking at things and what we are looking at. We took a lot of subjectivity out of whatever we had. There has been this thing historically that most banks have used, which allow you to have management adjustments. We have eliminated management adjustments right now going forward. And rather, we are looking again at what we call these two factors or qualitative factors. The last thing that we did, which you may have seen in the release is that we have been running an unallocated portion of our reserve for as long as I think I have been around here. And as a result of the change, going to taking out some of that subjectivity out, going to these more stringent if you will Q factors, we felt that the imprecision that we always felt might have existed in the loan portfolio is now being captured. That being the case, we took the unallocated and we allocated that to all the other portions of the loans that we hold, so the unallocated now shows up at zero instead of $5.5 million or $6 million that we have been showing and now that’s in commercial – C&I loans, CRE loans, etcetera. So that’s really this whole methodology change, if you will. And I don’t know that there is going to be any major impact going forward.

Collyn Gilbert

Well, just in general, maybe your outlook on credit and just economic volatility, what it might mean for how you are thinking about credit in general, going forward?

Alan Eskow

I am not the credit guy around here. So I don’t want to be the guy that say – with the outlook on credit. I think we are still comfortable from everything I am hearing from our credit people, with their review of the portfolio and what they are seeing, otherwise you would be seeing dramatic increases in the provision and in the reserve, which you are not saying that and that’s because of the overall calculations that we do, which really have not changed taking into account criticized assets, etcetera, taking into account impaired loans, a lot of those have gotten better over the last few years. And so as a result of that, those have come down. But on the other hand, we have seen a lot of growth and that growth is being taken into account as well, portfolio by portfolio. So unless we see some other major change, I don’t expect you will see major changes in the reserve going forward.

Collyn Gilbert

Okay, that’s helpful. And then just a quick question on the forward swaps that are coming – or that came on in November, what is the duration on those?

Alan Eskow

I am sorry probably more like 2 years to 4 years. They are layered in at different timeframes.

Collyn Gilbert

Okay. And then do have any more forward swaps scheduled to come on in the near-term at that sort of comparable rate?

Gerald Lipkin

We do have some first quarter once coming on. I don’t know what the rates are, I am waiting to hear that. Excuse me one second.

Collyn Gilbert

Okay. And then, why you are looking…

Alan Eskow

Yes. So there are – it looks like, I don’t know a couple of hundred million – couple of hundred thousand of incremental expense coming on. It’s not really a huge number.

Collyn Gilbert

Okay. Couple of hundred thousand of incremental interest expenses coming on tied to it. Okay. And then Alan, did I hear you correctly, did you actually give NIM guidance, I swear I have been following you guys I don’t for how long?

Alan Eskow

I gave a range, a range based on everything you see as to about where we think you should be looking.

Collyn Gilbert

Okay. And that range for the – and that was the full year 2016 and that did you say 3.18 to 3.25?

Alan Eskow

Yes. In that range, I mean again as we keep telling you, there is million moving parts. And so for me to get any – even think about anything more precise than that or even you guys I mean I don’t understand how you guys are coming up with the number that you could be comfortable with. There is a lot of things that will be changing during the course of the year. Just the debt instruments that are going to be coming off and new coming on and loan production coming on, loans being sold, so there is a lot, I gave you a number that or some range that I thought might make sense.

Collyn Gilbert

Okay, that’s helpful. And one last question to that point, what type of interest rate environment are you kind of assuming in that or how many hikes if any this year?

Gerald Lipkin

We think – I won’t answer that question. I am on the Board of the Fed. People will misread it. I am not that I know.

Alan Eskow

Yes. We built in some incremental increase in the prime rate during the course of the year, but not a lot. We are not looking at the same thing that we think we are hearing from the Fed at this point. I will speak and that Gerry never told me anything.

Gerald Lipkin

I don’t know.

Collyn Gilbert

Alright. I will leave it there. Thanks guys.

Alan Eskow

Okay.

Operator

Your next question comes from the line of Brian Horey of Aurelian Management. Your line is open sir.

Brian Horey

Thanks for taking my question. Can you give us an update on the performance of your taxi medallion portfolio from a credit standpoint?

Alan Eskow

Yes. It’s actually been performing pretty well. One of the things that we did is that we capped the valuation of those loans way back when. So even as loans went up to $1 million – not loans, the valuations went up from $1.25 million, we did not do that and so we capped it at about $800,000. And just they are performing at this point. We only have one loan in the entire portfolio that exceeds 80%. And half of them are amortizing loans, but there are a lot of loans that are way less than that, there is about 30% of the loans that are less than 50% LTV, that one loan – I am sorry, 800…

Gerald Lipkin

The $800,000 is what we put the value cap at and then we only lent a percentage against that. We didn’t – it’s not that we lent $800,000, we were lending in most cases two-thirds of that or less.

Alan Eskow

There maybe a couple of exceptions to that two-thirds, but most of them were under the two-third. So we had a pretty good valuation cushion on it. And right now, as I know they are all performing. They are all performing.

Gerald Lipkin

I am just hearing from my credit people, zero non-performing. And almost all of them are amortizing loans also. They are not all a static loan.

Brian Horey

So you haven’t had to restructure or extend maturities on any of them so far?

Gerald Lipkin

So far no.

Alan Eskow

No.

Brian Horey

Okay. Thank you.

Operator

Next question comes from the line of Matthew Breese of Piper Jaffray. Your line is open.

Matthew Breese

Good morning everybody. Thanks for taking my question.

Alan Eskow

Good morning Matt.

Matthew Breese

Just a real quick one, what’s the current stance from the management team on future acquisitions and whether or not those take place in the legacy footprint or more in Florida?

Gerald Lipkin

Good point. We are always on the outlook to grow our franchise through acquisitions. Our primary focus has been in the Florida marketplace, because you really have to focus your attention one place at a time here. And right now, we are trying to build our Florida franchise. So we are looking for additional opportunities in Florida. That being said, while our primary focus is not in the legacy New York, New Jersey area, if the right opportunity came along, we will be happy to consider that.

Matthew Breese

Okay, that’s great. And then one other one, the regulators have been a little bit more outspoken about commercial real estate, cap rates, where we are in terms of the real estate cycle. Do you have a view or thoughts on where they stand and now the economic cycle might play out over the next 12 to 24 months?

Gerald Lipkin

Well, I don’t know how the regulators think, but I know how we think. I personally have my views about cap rates. When I see banks lending, I don’t care what kind of property it is, using a sub-3 cap rate I think it’s ridiculous. So, pretty much, we have like we did with the taxi medallion loans, we appraised not using necessarily the cap rate that the appraiser might come up with, we have our own floors that we like to impose on our loans, which very often changes the valuation considerably, but we are comfortable and that’s how we have always lend money at the bank. We did not get involved in the sub-prime residential mortgage market for the same reason. Just because everybody thinks it’s a great place to be, it doesn’t necessarily mean we agree with that. So, we adjust our cap rates. I think that when you hear some of the cap rates that are bandied around, I think it’s just ridiculous. It’s interesting that the Florida marketplace seems to use even a higher cap rate than we see up here. So, it gives me a little bit more comfort on the valuations I see coming out of Florida.

Matthew Breese

Understood. Thank you very much. Appreciate it.

Gerald Lipkin

That’s alright.

Operator

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

Gerald Lipkin

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

Operator

Ladies and gentlemen, that does conclude the conference for today. A digitized replay of today’s recording will be available at 1:00 p.m. today through February 27, 2016. You can access that digitized replay at anytime by dialing 1-800-475-6701 and using the access code of 382750. Alternatively, if you are an international dialer, you may access the same replay by dialing 320-365-3844 and utilizing that same access code of 382750. That does conclude the conference here for today. We thank you very much for your participation and using our executive teleconference service. You may now disconnect.

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