Ladies and gentlemen, thank you for standing by. And welcome to the Valley National Bancorp's Third Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Travis Lan, Head of Investor Relations. Please go ahead sir..

Good morning and welcome to Valley's Third Quarter 2020 Earnings Conference Call. Presenting on behalf of Valley today are President and CEO, Ira Robbins; Chief Financial Officer, Mike Hagedorn; and Chief Banking Officer, Tom Iadanza.

Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.

Please refer to today’s earnings release for reconciliations of these non-GAAP measures.

Additionally, I would like to highlight slide two of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp, the banking industry and the impact of the COVID-19 pandemic.

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. With that, I'll turn the call over to Ira Robbins..

Thank you, Travis, and welcome to all the participants on the call. This morning, I will update you on Valley's strong performance and offer my perspective on recent success and opportunities. Mike will provide additional details on the financial results before we open the call to your questions.

In the third quarter of 2020, we reported net income of $102 million and earnings per share of $0.25. Exclusive of a modest charge associated with debt prepayment, adjusted earnings were $104 million, representing the highest level of quarterly earnings in Valley's entire history.

These are extraordinary results against the backdrop of a global health pandemic a near zero interest rate environment and general economic uncertainty. We've achieved these results by building a diverse and strong balance sheet and developing a corporate culture, focused on customer service and responsiveness.

On an adjusted basis, our pre-provision net revenue increased 2% from the second quarter. This growth reflected strong fee income and continued interest expense reductions, which offset asset yield pressures.

This quarter's adjusted pre-provision net revenue as a percentage of average assets was 1.71% up from 1.68% in the prior quarter and 1.46% in the third quarter of 2019.

As net interest margin pressure across the banking industry has weighed on profitability, our ability to preserve our net interest margin and drive higher profitability is exceptionally unique. We have also benefited from a focus on positive operating leverage. Our adjusted efficiency ratio declined to 46.6% from 53.5% in the third quarter of 2019.

This improvement was achieved through 27% year-over-year revenue growth, which exceeded our adjusted expense growth by over 2.5 times. While our financial performance has improved significantly the backdrop remains challenging.

And future operating leverage will be dependent on our ability to identify and execute on incremental cost savings and revenue opportunities. In addition to strong financial results, we are pleased to report a significant reduction in our active loan deferrals.

As of September 30th, we had less than $1.1 billion of loans on active deferral representing 3.3% of our total loan portfolio. This compares to an active deferral level of 8% in July and 12% in May. There has been significant focus on the Metro New York City economy in recent quarters.

We remain confident in our conservative lending philosophy and the strength of our borrower base. In a few minutes Mike will walk you through our exposure to this market and the strong underwriting metrics that support our conviction. Our credit metrics beyond deferrals improved during the quarter as well.

While our $31 million provision was approximately 25% lower than the second quarter, our reserve coverage ratio continues to grow. Our recent earnings momentum has positively demonstrated our ability to generate organic capital. Despite a significant reserve build and cash dividend, we have grown tangible book value by 8% in the last 12 months.

Our tangible common equity ratio has increased to 7.3% from 6.7% a year ago. We acknowledge that the operating environment remains challenging and the economic outlook is uncertain. In 2020, we have harvested low-hanging fruit on the funding side of the balance sheet.

We will explore additional opportunities to reduce funding costs and offset continued asset yield pressure. Our fee income results in the swap and mortgage banking businesses have been extremely strong this year but may normalize going forward.

Expense controls remain a key focus and we will need to work harder to identify cost reduction opportunities in some cases by leveraging new technologies and solutions. On the credit side, we continue to believe that our conservative underwriting philosophy positions us to outperform in periods of economic stress.

In summary, we are extremely proud of our recent financial results. That said, we know that we will need to work harder than ever to maintain this high performance. I am confident that our team is up to the task. Now I'd like to turn the call over to Mike Hagedorn for some of the quarter's additional financial highlights. .

Thank you, Ira. Turning to slide 5. You can see that Valley's reported net interest margin increased to 3.01% from 3% in the second quarter of 2020. On a sequential basis, our cost of interest-bearing liabilities improved by 16 basis points to 0.8% and our interest expense declined by approximately 18%.

At the same time, our earning asset yields declined 12 basis points to 3.58%. On the asset side we have reduced the impact of broader yield pressures with mix shifts towards loans and away from lower-yielding cash and securities.

Our ability to generate funding cost reductions in both our deposit and wholesale portfolios has enabled us to absorb asset yield pressures to this point.

While the significant amount of our repricing opportunity has been captured slide 6 identifies the amount of retail CDs expected to mature in the next 12 months at rates well above current offering rates. Specifically over the next three quarters, we have nearly $4.5 billion of retail maturing CDs at an average cost of 1%.

Towards the end of the quarter we paid off $50 million of wholesale funding that carried a 3.7% cost and was set to mature in 2022. Going forward we may utilize a portion of our remaining liquidity to redeem other high cost liabilities.

As a result of our repricing and liquidity deployment levers, we continue to believe that we will outperform peers from a net interest margin perspective going forward. The bottom left chart of slide 7 illustrates the significant downward trend in our interest bearing deposit costs since the third quarter of 2019.

In this time our CD and interest-bearing non-maturity deposits have declined by 137 basis points and 94 basis points, respectively. We believe there's additional room to reduce interest-bearing non-maturity deposit costs in addition to the CD re-pricing benefit that we identified on the prior slide.

From a balance perspective, total deposits declined slightly from the prior quarter due to the ongoing utilization of PPP funds. Excluding the run-off of over $400 million of PPP-related deposits during the quarter, sequential deposit growth was approximately 1%.

Non-interest-bearing deposit generation remained strong with balances increasing approximately 2.5%, exclusive of PPP. In recent quarters, we have discussed the ongoing customer rotation from CDs into lower-cost transaction accounts.

This trend continued in the quarter with interest-bearing transaction balances increasing 6% to more than offset a 9% decline in CD balances. Earlier this year, we bolstered our liquidity position to prepare for the uncertainty of the current environment. On June 30, 2020, we held nearly $2 billion of cash and equivalents on our balance sheet.

As our understanding of the pandemic has evolved and the economic impacts come into focus, we began to utilize some of this liquidity. By September 30 our cash position had declined to approximately $1 billion. As mentioned, we may utilize some of our remaining liquidity to pay off wholesale liabilities.

Slide 8 details our loan portfolio and the asset yield pressure that we are experiencing along with other banks in the industry. During the quarter, loan yields declined 13 basis points. However, on a positive note, as you can see in the chart, new origination yields were effectively unchanged at 3.26%.

Loan origination volume also increased 9% from the second quarter and spreads on new originations expanded 28 basis points. Our new loan spreads are currently at their widest level since the second quarter of 2019. Total loans of $32.4 billion include roughly $2.3 billion of outstanding PPP loans at the end of the quarter.

Exclusive of PPP, our loan portfolio has increased approximately 2% on an annualized basis since the end of 2019. We continue to see consistent activity in our core commercial real estate segments. This quarter saw a rebound in consumer lending activity, which helped to stabilize balances in those portfolios as well.

Slide 9 provides additional insight into our commercial real estate portfolio, which is well diversified in terms of both collateral and geography. Over the last few quarters, there has been an increased external focus on Metro New York and Manhattan specifically.

As you can see only 5% of our CRE portfolio is tied to non-multi-family properties in Manhattan. The bottom table illustrates key underwriting metrics for the portfolio by geography. I would highlight our low weighted average LTV of 56% for the portfolio and 50% for non-co-op in Manhattan.

We remain confident in our underwriting and believe we are well positioned to navigate the current environment from a credit perspective. Moving to slide 10, our non-interest income increased 10% from the linked-quarter driven primarily by strength in loan sale gains and swap revenue.

Fee income ticked up to 14.8% of total revenue from 13.7% in the prior quarter. We remain focused on growing diverse revenue streams over time and enhancing customer adoption of the various financial products that we offer. Swap fees were over $19 million during the quarter as we originated back-to-back swaps on over $550 million of notional loans.

Our borrowers continue to demand the interest rate protection provided by our swap offerings. Net residential mortgage gain on sale income increased approximately 60% sequentially, reflecting both higher loan sale volumes and gain-on-sale margin expansion.

Residential loans sold exceeded $300 million for the period, up from $240 million in the linked-quarter, while the gain on sale margin increased over 50 basis points to 3.79%. Slide 11 provides an overview of our quarterly operating expenses and the continued improvement in our adjusted efficiency ratio.

Our expenses on both the reported and adjusted basis increased modestly from the prior quarter. Adjusted expenses exclusive of de minimis merger charges, a $2.4 million charge for debt extinguishment and a $3 million for tax amortization totaled $155 million. This was up $1.6 million or approximately 1% from the prior quarter.

Expenses associated with COVID-19 declined to $1.2 million from above $2 million in each of the prior two quarters. The ongoing expense is related to enhanced cleaning and sanitation efforts, which are likely to persist for the duration of the pandemic.

Our adjusted efficiency ratio continued to improve coming in at 46.6% versus 46.8% in the second quarter. As Ira mentioned, on a year-over-year basis, we have generated 27% revenue growth with only an 11% increase in adjusted operating expenses.

We remain focused on expense control and more specifically positive operating leverage as revenue pressures continue to build across the industry. On slide 12, we provide an overview of the evolution of our branch count. We recognize that many banks have announced reactive branch closures to combat revenue headwinds.

At Valley, we consistently evaluate our branch network to ensure that we are best positioned to efficiently meet our clients' needs. This proactive approach has resulted in a significant improvement in our average branch size and efficiency since 2015.

We anticipate closing an additional 10 branches over the next few months, and we'll continue to evaluate additional opportunities to streamline our delivery channels. Turning to slide 13 on asset quality, our allowance for credit losses increased approximately $15 million to 1.03% of loans from 0.99% in the second quarter.

Our allowance represents 1.11% of non-PPP loans and has more than doubled from the end of 2019. The quarter's reserve build reflects a $31 million provision and nearly $15 million of net charge-offs in line with the prior quarter.

Charge-offs in the quarter included approximately $6 million for the taxi medallion portfolio as valuations continue to decline. There was an additional $6 million charge-off for a C&I loan that had experienced trouble prior to the onset of COVID-19. This loan was fully reserved as of June 30.

On the bottom left, you can see the buildup of our allowance as compared to the prior quarter. The net increase in the allowance is primarily the result of management's qualitative assessment of ongoing risk associated with COVID.

While the Moody's economic forecast that support our CECL model have improved, since the summer it became clear at the end of the third quarter that the Moody's baseline scenario did not fully account for the increased likelihood that a federal stimulus bill would not be passed in the near-term.

In response, we conservatively shifted our model weightings away from the baseline and more towards Moody's adverse and prolonged recession scenarios. This shift resulted in a more adverse economic outlook and higher provision. Our model now reflects modest GDP declines through the first half of 2021.

Despite the reweighting, our unemployment projections are slightly more optimistic than in the second quarter as a result of an improved outlook in each of the Moody's scenarios that we utilize. We continue to believe that future provisioning activity will be largely dependent on the degree that economic outcomes track our expectations.

Non-accrual loans declined nearly $20 million or 9% in the quarter, driven primarily by a reduction in the C&I segment. As a percentage of total loans, non-accruals declined to 0.59% from 0.65% in the second quarter.

We also saw a significant improvement in our accruing past due loans, which represented 0.26% of loans in the third quarter as compared to 0.29% in the second quarter. Slide 14 illustrates the consistent growth in our tangible book value and the ongoing improvement in our capital ratios.

Tangible book value has increased 8% in the last 12 months, driven by our increased earnings power. Our tangible common equity ratio increased to 7.3% from 6.98% in the second quarter. This reflects our strong earnings and the utilization of some excess liquidity during the quarter.

We estimate that our $2.3 billion of PPP loans reduced our TCE to total asset ratio by approximately 45 basis points in the quarter. On a year-over-year basis, we have also seen a significant improvement in our regulatory capital ratios.

We remain confident in our capital levels and believe that the consistent growth in our risk-based ratios illustrate our improving ability to increase our capital levels on an organic basis. With that, I'll turn the call back over to Ira for some closing comments..

Thanks, Mike. I am extremely proud of Valley's results for the quarter and on a year-to-date basis. Our flexible and diverse balance sheet has enabled us to preserve our net interest margin in the face of a challenging interest rate environment.

Our positive operating leverage and the dramatic improvement in our efficiency ratio is a testament to the innovative and responsive culture embodied by our team. We remain confident in our credit underwriting and the strength of our loan portfolio. We look forward to continued success for the remainder of the year and into 2021.

With that, I would now like to turn the call back over to the operator to begin Q&A. Thank you. .

[Operator Instructions] Our first question comes from Frank Schiraldi of Piper Sandler. Your line is now open..

Good morning..

Good morning..

Sounds like – well, it seems like you're certainly ahead of peers in terms of cost initiatives. I mean you guys talked a little bit about branch consolidation. And Mike you mentioned and Ira you mentioned as well positive operating leverage.

Just wondering your thoughts going forward, how confident you are in being able to deliver positive operating leverage given the tough revenue environment. And if you think you can keep for example the efficiency ratio below 50% in the future here..

Thanks. Thanks for the question, Frank. I think Valley has definitely become the culture of how we think about expenses throughout the entire organization and it's a way forward for us as to how we think about innovating and the use of technology. We've been very proactive as to how we think about that overall expense base.

Here we didn't need COVID to tell us that the expense model needed to change, that it was really changes based on customer behavior as well as the opportunities presented from technology. So we think we're definitely ahead of where our peers are and have a good path forward as to how we're looking at the expense base.

Mike something you want to add?.

Yes. The only thing I would say is don't lose sight of the fact on the opportunities that we still have to reprice our term funding costs as well. That's shown on Page 6 of our Investor Presentation under our 12-month forward maturity schedule.

And relative to the industry, we believe that this advantage for us and the results in managing our operating leverage to 2.5x has demonstrated that we've taken full advantage of that as we've tried to defend the NIM in this challenging environment..

And then just one follow-up if I could on capital. Just wondering, if you guys mentioned given liquidity on the balance sheet, you do have the potential for additional payoffs on the wholesale side. I'd imagine, it's not necessarily significant to capital levels and I think you might do further there.

But just wondering, how your thoughts on capital levels have maybe evolved.

And where you think at this point, what is the right sort of TCE ratio for Valley to operate at in the future?.

Yes. I think we had previously given guidance I think around 7.25% was an appropriate TCE to TA number for us. I think as we think about capital, it's really about the optionality and the flexibility that we have moving forward.

I think there's a lot of strategic initiatives within the organization that we have and having the appropriate capital levels to support those initiatives is really where the focus is at this point.

So as opposed to being pinned down and telling you at 7.50% 7.60% or whatever that specific number may be, I think as we think about capital it's really that optionality. There are so many opportunities in this organization today and having the appropriate capital levels for that is really where we're focused..

I would just add that the focus on growing organic capital is very strong. It's just as cultural in our company as our desire for operating leverage as well and improvements in expenses.

As evidence of that when you look at our TCE levels and you take into account what PPP has done to that, which we estimate at 45 basis points combined with where we're at on CET1 today, both of those are the highest in the last 40 quarters. So we've clearly turned a corner and made some significant progress..

Sure. Okay. But it doesn't sound like there's a real change for the guide Ira in terms of – you mentioned in the past 7.25%. I mean there's no change to thinking that that number is – has changed significantly..

I don't think giving you guide right now is appropriate for us. I think maybe we'll consider it as we move forward. But I think just highlighting Mike's point, on an absolute basis, look where we are today versus where we were four, five, six years ago. It's an unbelievable basis to where we are.

And you layer on top of that the fact that we have a PPNR of 1.71% today. On an adjusted basis, the amount of organic capital that we're originating today is tremendous.

So once again I think it just goes back to the tremendous amount of opportunities we have within the organization supported by the organic growth that we're doing which is something Valley hasn't historically had..

Okay. That was great. Thank you..

Thanks, Frank..

Thank you. [Operator Instructions] Our next question comes from Steven Alexopoulos of JPMorgan. Your line is now open..

Hi, good morning. This is Alex Lau on for Steve. My first question is on loan growth. You had loan growth in commercial real estate this quarter and you mentioned in the release controlled growth.

Can you explain what you mean by this and what you look at to qualify for this? And also, how is the pipeline looking into the fourth quarter for commercial real estate? Thanks..

Thanks, Alex. This is Tom Iadanza. By controlled growth, what we mean is that we do a lot of business with existing customers. People have been through various economic cycles. Historically, it's been 60%, existing customers 40% new and it's probably increased to 70-30 since the pandemic increased.

Our focus is on relationship-driven business very diversified we're very granular. Our average real estate loan is still under $4 million. Our average C&I loan is still under $1 million. We're diverse by markets. We're not heavy in Manhattan, we're heavier in the suburbs. And we'll continue to focus on that relationship-driven business.

Our conservative underwriting standards will be maintained through all of this. We will not stretch to grow. Our pipelines pre-pandemic probably we're in the $2 billion range. It likely did down 15% from that level now. We believe they'll grow modestly, but stay at that $1.6 billion $1.7 billion level going forward..

Thank you. And then a question on NIM. Outside of your time deposits, do you have a savings deposits at 36 basis points? And then in the last zero interest rate environment you were in the low 30s.

Do you think you can go below this 30 basis point range this time around?.

I won't give guidance on a specific number, but I would say this the processes that we have set up to benchmark ourselves against the market and then react quickly are probably the strongest they've ever been in the company's history. So I feel fairly confident that if the market will allow for that we're poised and can quickly react.

And we're constantly doing this to make sure that we're still competitive and that we're not overpaying on that source of funding. .

Thank you..

Thank you. And our next question comes from Collyn Gilbert of KBW. Your line is now open..

Thanks. Good morning guys..

Good morning, Collyn..

Mike, just along the lines of margin, you've given some great disclosures there. And obviously you've made a significant headway on the funding side. But I think and you pointed this out one of the interesting points is that the loan origination yields seem to be flat from 2Q.

Can you just talk a little bit about that, or maybe Tom, if you weigh in on that as well sort of do you think that loan yields have kind of bottomed and spreads are widening a bit? I know you referenced that your new spreads are up over a year ago.

But just kind of some color around kind of loan pricing and if you've perhaps seen a bottom in where loan yields are?.

Yes. It's hard to predict, if we've seen a bottom, but we have implemented floors in all of our loans and that has helped on those spreads. We'll continue to do that. It's also responsiveness. Those customers at 70% they use us all the time.

They've come to us because we can get it done and they recognize the value in today's market of pain for that performance. So we'll continue to have floors. We'll continue to aggressively bring in deposits to fund this. And the good news is the spreads are going up. And the quality of the loans and the level of leverage is going down.

So we're kind of seeing it on both the quality and return front. We think it'll continue, but it's hard to predict. It's still competitive for high-quality loans still have a lot of competition today..

Okay. That's great. I will stick to my question and get back in the queue for the rest. Thanks guys..

Thank you. And our next question comes from Steven Duong of RBC Capital Markets. Your line is now open..

Hey, good morning guys..

Good morning..

Just on your hotel and hospitality deferrals it kind of ticked up a little bit.

Is that primarily around the New York area? And just do you have any latest occupancy statistics on that versus the year ago?.

Yes. To put it in context, the hotel portfolio in total is about $500 million and 15%, $75 million is on deferral. The uptick is coming mostly out of Florida, which we have our primary portfolio of hotels in. We don't really have much New York New Jersey. So we're not seeing the same experience there.

I do want to point out that going into the pandemic, the loan to values on these portfolios were less than 60%. It's all real estate secured, we have PGs on all.

The increase in this particular quarter was to a specific borrower who is highly liquid, has the wherewithal to sustain this and also has revenue and resources that are not tied to the hotel business. And the same experience on restaurant though. That's a little bit more spread out in New York, New Jersey and Florida.

But we've seen a significant decline in those deferrals. We're down to about $60 million in total. And loan-to-value going into the pandemic with 60% on that portfolio, it's all real estate secured and we have PGs. We don't expect it to get any worse..

Got it. I appreciate the color on that. And then just going back on the margin, maybe Mike you can handle this one. Your short-term and long-term borrowings ticked a little higher this quarter.

What was -- what's the driver behind that? Was it just lower cost borrowings rolling off? And then should we expect this to go a little higher in the fourth quarter with the $1.2 billion rolling off?.

Sure. So the short-term borrowings are exactly as you said that's some maturities there. The long-term side is the impact of having the sub-debt issuance for an entire quarter. So I think that's probably fairly self-explanatory. What I would say on the remaining funding side, the non-debt-related funding side.

If you go to page 6 and the IP and you look at those rates, especially in the first, second and third quarter of 2021, as of this morning, FHLB advance rates as a proxy range between 39 and 45 basis points. So you can see there's still a lot of leverage for us to reprice.

And on the maturing CD book, which is FHLB is not a good proxy, we know with offering rates today there's two things going on there. One, people are seeking greater liquidity. So as their CDs mature, they will transition into a transaction account. So we have seen that. It's increased our deposits overall.

And second, the availability for longer-term CD rates even if you put them out there customers are not going to take that, given the absolute levels of rates. And so when they do re-sign-up for a new CD, it's at a much lower rate. And our retention there has been very strong as well..

Got it. Appreciate. Thank you, Mike..

Thank you. And our next question comes from Matthew Breese of Stephens Incorporated. Your line is now open..

Good morning. .

Good morning..

Hey. I was hoping could you quantify total PPP income for the quarter? And then Mike I know you characterized the margin outlook in terms of you think you'll outperform peers. But I guess I -- perhaps that's open to interpretation.

Could you maybe characterize the margin outlook in terms of whether you think it can remain stable or expand from here?.

Hey, Matt, this is Tom. I'll handle the income for the quarter and then Mike will talk about the margin again. The third quarter income from PPP was about $14.8 million. $5.7 million of that is from interest $9.1 million is from fees..

And I think if I understand your question on NIM, it was related to my prepared remarks around the relative advantage that we have to peers. So I think it's like motherhood and apple pie to say that there's NIM compression in the market. I mean that's absolutely going on.

The things that are encouraging to us that we've already visited about are the fact that our new loan originations have seemingly flattened out with second quarter yet to be determined whether that continues. But as Tom mentioned having floors on our loans and having greater discipline in this environment seems to be an advantage.

And then I would just couple that again with the funding side. As I mentioned earlier, we still have opportunities here and you can see both the dollars and the rates on the IP on Page 6. And then I would lastly say especially on new originations the spread on new originations on the lending side are at 28 basis points higher.

So we've seen a better loan and a better spread in this market. .

Understood. And then in terms of expenses you have 10 branches being cut in the fourth quarter. I was hoping for -- maybe if you could quantify what the expense saves tied to that are.

And then just thinking about the longer-term expense outlook, do you feel like this kind of $155 million range is appropriate for this environment?.

Yes. So on the 10 branches that we announced that we would close and we've achieved regulatory approval correct? Regulatory approval..

Yes, correct..

We estimate the full year 2021 cost savings to be between $3 million and $4 million. .

Thank you. [Operator Instructions] And we do have a follow-up question from Collyn Gilbert of KBW. Your line is now open,.

Thanks. Okay. Just a follow-up on the expense question and getting a little bit more granular on it.

Just curious how specifically the professional fee line is going to trend and will that kind of stay elevated as you guys are looking at some of these technology investments and technology initiatives, or does that come down? And then I just also to -- on that line just curious about your outlook for mortgage banking?.

Yes. I'll take maybe a little different tack on it. I will address the specific question on professional fees, but let me kind of give you a little more color. It is somewhat in the earnings release as well related to expenses. So the adjusted expenses in the third quarter were $155 million.

And as we said earlier that's a 1% increase against 2Q 2020, but there's a couple of things in there that you need to consider. First there's $5.1 million increase in compensation and benefit-related expenses. But we think that that's mostly due to medical and employer 401(k) expenses, because we're a self-funded plan.

And I think at this juncture in the pandemic we're starting to see some of our employee base and our covered individuals under our plan get medical treatment for things that were delayed early in the pandemic. And they're going back to their doctors. So I think that's first and foremost.

There was also a decline in our compensation-related deferred loan costs due to just absolute lower loan volumes. That's just how it works. And then there was a modest incentive accrual as well increase.

As it relates to professional fees, as we've talked about our core system improvements around here and all the things we're doing in technology, it stands to reason over time those costs will increase.

And we do have a lot of consulting-related expense right now that's not capitalized just because of where we're at in the life cycle of those projects. So they get -- more of that expense gets expensed upfront. And then once you get past that you'll see more of that going into being capitalized..

Okay. That's helpful..

Just a follow-up on Mike's point. I think the real focus here is on the operating leverage. And I think maintaining an expense base that supports the growth of the organization and where we are is really important today, but the focus is on making sure that we're generating positive operating leverage.

And I think the 2.5 times that we did this period reflects where we think we're going to be able to continue that path as we -- really as we guide forward. On the mortgage banking, I think, obviously, it's a function of where interest rates are today.

I think Tom alluded to earlier that pipelines remain really strong and we think there's going to be significant growth there. But it really reflects the diverse business model that we've created here. And it's something that we think as long as interest rates remain favorable that we'll be able to benefit from..

Okay. Okay. Great. I’ll leave it there. Thanks guys..

Hey, thanks..

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Ira Robbins for any closing remarks..

Once again, we thank you for joining us today and look forward to continuing the path forward for us. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..