Valley National Bancorp
NASDAQ:VLY

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Valley National Bancorp
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Price: 9.47 USD -2.27% Market Closed
Market Cap: 4.8B USD
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Earnings Call Transcript

Earnings Call Transcript
2018-Q2

from 0
Operator

Ladies and gentlemen, thank you for standing-by and welcome to Valley National Bank’s Second Quarter Earnings Release. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and I will give instructions at that time. [Operator Instructions]. And as a reminder, today’s conference is being recorded.

I will now turn the conference over to Rick Kraemer. Please go ahead.

R
Rick Kraemer
IR

Thank you, Ryan. Good morning and welcome to the Valley National Bancorp second quarter 2018 earnings conference call. Leading our call today will be Valley President and CEO, Ira Robbins; and our Chief Financial Officer, Alan Eskow.

Before we get started, I want to make everyone aware that you can find our second quarter earnings release and supporting documents on our company website valleynationalbank.com.

Additionally, I would like to point everyone to Slide number 2 of our 2Q 2018 earnings presentation and remind everyone that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.

And now, it’s my pleasure to turn the call over to Ira Robbins.

I
Ira Robbins
President and CEO

Thank you. Good morning and thank you everyone for joining us this morning. We made significant progress at the bank during the second quarter of 2018. During the month of May, we successfully completed our systems conversion of USAmeriBank, fully integrating our two companies. Additionally, we have begun implementation of an extensive multi-year branch transformation, which we’ll cover in more detail shortly.

I'm extremely proud of what all of our associates have been able to accomplish in such a short period of time and I thank them for their tireless dedication. There are many changes taking place within the walls of Valley today. These changes might appear less obvious from the outside when only getting a chance to look at the numbers. We have done a tremendous job attracting new talent to the bank to improved compensation and incentive plans, simplified organizational procedures and a new comprehensive vision for Valley, all of which should help grow revenues at a level far greater than we had in the past and create a foundation for continued growth and operating leverage.

The ongoing investment in infrastructure is necessary to our future success. We’re embracing technology and developing new relationships with fintech companies. Improving the experience, ease and speed of online account openings is a priority. Our use of the sales force and marketing cloud combined with the investment in our internal data hub should positively impact both the cost of customer acquisitions, increase our success rate and improve operating efficiencies.

While the timing of investments such as these may temporarily slow the progress of driving absolute operating earning expenses lower, we are investing for the future and remain confident that our long-term expenses will result in greater operating leverage in a much more robust and efficient bank. It is important to note that despite all of these investments taken place, we expect absolute operating expenses will continue to decline.

With that, we will move to earnings presentation to cover some additional highlights in the second quarter. Please turn to Slide 3. For the second quarter of 2018, Valley posted diluted earnings per share of $0.21. Included in this number were several merger-related items totaling approximately $3.2 million pre-tax or $0.01 per share on an after-tax basis.

On an adjusted basis, earnings per share were $0.22 which represents growth of approximately 22% over the same period just one year ago. We successfully completed our systems conversion of USAmeriBank during the month of May and continue to see impressive operating results as our newly acquired markets, our customer and employee retention remain on target.

Loan growth remained strong. Our quarterly annualized loan balances grew over 12% during the quarter. We continue to see great success in our middle market C&I businesses driven in part by changes in employee compensation structures which have levered our ability to attract greater talent.

Our revenue growth on annualized linked quarter basis was over 16%, fueled by previously mentioned loan growth coupled with non-interest income growth in most categories.

Valleys adjusted return on average assets exceeded 1% which was both an internal short-term target and externally communicated to everyone as a near term benchmark in assessing the improved performance of the bank.

Despite this growth, we believe the current period results are well below the core earnings power of our franchise. While we are showing obvious progress in terms of revenue growth, we are cognizant of the continued need to improve our absolute level of expenses and more efficient use of our current cost structure.

As you can see on Slide 4, Valley continues to diversify both geographically and by product set. We posted impressive organic loan growth across most portfolios. The linked quarter growth did not consist of any wholesale loan purchases or unusual participations.

Our commercial lending compensation plans which are now more closely aligned with the industry are helping us to acquire strong talent with meaningful experience and significant relationships.

In recent months, we've added a new Head of C&I, New York, a lending team in Jacksonville, several relationship managers in our national equipment leasing business and a new syndications department.

We remain encouraged by the level of new loan originations which exceeded $1.7 billion for the quarter. The yields associated with the new and existing loans continue to significantly improve, partially reflecting a portfolio that is placing more emphasis on C&I growth, coupled with rising short-term rates.

In fact, our yield on new loan originations increased to 4.53% from 4.36% in the prior quarter, reflecting an active beta on new originations of nearly 60% compared to the change in average effective funds for the quarter.

The shift in asset class origination from longer dated treasury index products should continue to have a positive impact on the bank's overall asset sensitivity, as short-term rates continue to escalate.

As a result of our recent success, we feel comfortable raising our annual loan growth targets for 2018 to a range between 8% and 10% net of loan sales from the previously disclosed 7% to 9%.

As always, we are committed to maintaining our historically conservative underwriting standards. We are confident that despite our improved growth we remain one of the more conservative underwriters in our markets. We will not sacrifice quality for short-term gains and revenue.

Turning to Slide 5. You will note that our deposit balances experienced a linked quarter decline of approximately 300 million. While this is clearly a disappointing result, I’d point out that part of the decline was driven by outflows in municipal deposits and other escrow balances. Balances related to those account types often show considerable fluctuation driven by seasonal forces.

On a more positive note, we saw non-interest-bearing balances growth at 6% on an annualized linked quarter basis. It is also worth noting that we are still in the early days we have seen a sharp rebound in quarter to-date deposits of over $200 million, with approximately one-third of that coming in the form of non-interest bearing deposits. We anticipate seeing a return to positive deposit growth trends in the third quarter of 2018.

As we suggested in the prior quarter, competition for deposits within our market remains fierce. Deposit betas remain on the rise. And as a result, we did place greater reliance on short-term borrowings, while allowing some longer duration borrowings and CDs to roll off.

Tactically, we think this was a reasonable balance sheet decision recognizing some of the rate specials we were competing with in many markets. From a longer-term perspective, we are making the necessary investments in technology to enhance both our consumer and commercial customers’ digital experience, while piloting leading technology within our marketing department to acquire new customers.

We fully acknowledge the need to build greater core deposit balances and ultimately our goal is to fund the majority of our loan growth with deposits.

I’d now like to turn the call over to Alan to cover some additional financial topic.

A
Alan Eskow
SEVP and CFO

Thank you, Ira. Turning to Slide 6, you will notice we grew net interest income by 6% on an annualized linked quarter basis. Our significant quarter-over-quarter loan growth combined with a relatively stable net interest margin continues to provide some cushion from increasing borrowing pressure.

That said, we are anticipating modest margin headwinds to remain in the current environment. While early third quarter deposit trends as mentioned by Ira have been favorable, we are anticipating that in the near term our loan growth will remain partially funded by wholesale borrowers. This will likely act as a governor on any net interest margin expansion in the near term.

In addition, approximately 35% of our loans adjust with movements in short-term interest rates and with the fed increase in June they will show a full adjustment in the third quarter.

Turning to non-interest income, we experienced growth across most major business lines during the quarter. Some of that growth was concentrated in swap fees due to strong commercial loan production.

Our insurance business also saw an increase during the quarter while service charges on deposits were disappointing, driven primarily by lower balances over the quarter. Gain on sale revenue related to our residential mortgage business increased over 13% from the prior quarter. We sold approximately $195 million in residential loans during the quarter for a pre-tax gain of $7.6 million.

We remain comfortable in our ability to originate in excess of 1.5 billion in residential mortgage loans in 2018 despite the macro headwinds facing the industry.

Turning to Slide 7, you will notice that our LIFT initiative remains slightly ahead of schedule as we have captured approximately 60% of the savings. To-date, virtually all of the benefit we received has been on the expense side with the originally estimated $3 million in annualized revenue enhancements to come later in the program. We remain on track to complete the program by the end of second quarter 2019.

Our reported operating expenses of 149.9 million included approximately 3.2 million of merger related expenses. We think third quarter 2018 will paint a much clearer picture of expenses as we achieve one full quarter of USAB integration -- integrated within Valley.

We made significant hires during the quarter in several lending departments. While those editions added approximately $1 million to quarterly expenses on annualized, we are confident that they were producing significant revenues for the bank in short order.

Our focus on improving operating efficiency and greater operating leverage is paramount. We continue -- we believe will be able to achieve an adjusted efficiency ratio -- less ratio less than or equal to 54% by the end of the fourth quarter of this year.

On Slide 8, we cover some of the key credit quality highlights. During the quarter, we recorded an additional 3.3 million loan loss provision related to the valuation of taxi medallion loans. Additionally, we moved approximately 31 million into non-accrual status, driven by internal downgrades and not actual loan performance.

Our level of related reserves as a percentage of exposures continues to build and now stands at over 17% of the entire the taxi medallion loan portfolio. Our current model values the average New York City medallion on our books to a level of 246,000.

Based on the larger recent medallion transfer activity, we anticipate valuations could continue to experience some downward pressure. We continue to monitor the positions closely to reflect any dramatic changes in the market.

Despite a somewhat higher level of provision our credit losses remain generally benign with net charge-offs at 692,000 in the second quarter. Our level of non-accruals excluding medallion loans also remained at a low level.

I would now like to turn the call back to Ira to cover the topic of Valleys branch transformation.

I
Ira Robbins
President and CEO

Thanks, Al. We are currently in the process of proactively redefining what the retail presence looks like at Valley National Bank. Recognizing that branch traffic continues to decline and customer behavior continues to move to more digital, we are creating a branch infrastructure that’s more reflective of current times and those to come. This is also an opportunity to allocate resources more effectively and enhance our digital channels and features.

While the bulk of this process will occur over the next three years, our strategy must remain fluid. This transformation will leave Valley in a position to be more proactive and faster to react to the evolving banking landscape in the years and beyond.

As you can see on Slide 9, there are multiple work streams in progress, all working to achieve the same goal, greater relevancy in the markets we serve, ultimately leading to improved core deposit generation and diversify revenue.

While the physical appearance, location and number of branches is part of this process, it is our people, training and services that we provide that will ultimately determine our long-term success.

Slide 10 outlines the summary of our internal analysis. While this portion of the study focused solely on our New Jersey, New York footprints, we will be expanding it to Florida and Alabama in time to ensure all of our branches are equipped to perform at the highest potential.

With the New Jersey, New York, we have identified 74 branches out of 177 that do not meet our internal measures of success as defined by either balances, cost and/or profitability. As such, we anticipate consolidating approximately 20 of these branches over the course of the next three quarters, leading to approximately $9 million in annual saves when it’s fully consolidated. We do not expect to recognize a material expense charge related to these potential consolidations.

The remaining branches identified during our analysis will undergo tailored action plans that will focus on improving deposit balances, cost controls and revenue enhancements. While we are hopeful that these action plans will result in positive results for all of our branches, we are setting deadlines for performance as outlined on Slide 11. If the branches do not show progress towards meeting our internal targets, they will definitely be considered for consolidation as well.

In the meantime, we will be renovating and repositioning our best performing branches to reflect our desire for an improved customer experience, greater employee efficiency and smaller square footage in some cases.

Turning to Slide 12. As previously stated, we are raising our full year loan growth goals. Our new range of expected growth, net of portfolio sales is now 8% to 10% from the previously stated 7% to 9%.

In terms of net interest margin, we expect moderate headwinds in the future quarters, driven primarily by the market competition for deposits and our anticipated need to fund strong loan generation.

As stated previously, we believe new loan yield originations combined with the floating and adjustable rate portion of our loan portfolio should mitigate much of the deposit pressure.

Finally, due to our stronger revenue growth, we believe setting efficiency expectations is a better expense management over the long-term. While absolute expense base remains a critical focus of management and a larger driver of future efficiencies, we are continuing to reinvest in the businesses and generating greater positive operating leverage is a priority.

As witnessed this quarter, we are making significant strives towards greater revenue growth in shorter period of time. Our goal is to achieve an adjusted efficiency ratio by 4Q of ‘18 of less than or equal to 54%. That number excludes merger related charges, infrequent items and amortization of tax credits.

The new target of less than 54% by 4Q of 2018 reflects the significant contributions of our project LIFT efforts, coupled with the accelerated adoption of new technologies and greater revenue growth.

Keep in mind, just last year when we announced our project LIFT initiative and 2020 Vision, we provided a long-term operating efficiency goal of sub 55%. Today, we are lowering our long-term goal to sub 51% reported efficiency ratio during the year 2020. That number would be inclusive of tax credit amortization, and does incorporate estimated annual saves from our branch disclosures announced today. On an adjusted basis, that number would be equivalent to approximately 48.5%.

With that, I would like to open up the call for questions.

Operator

[Operator Instructions]. Our first question comes on the Frank Schiraldi with Sandler O'Neill. Please go ahead.

F
Frank Schiraldi
Sandler O'Neill

Just a couple of questions to start off here. In terms of, Ira, could you give us just a little more color on the deposit gathering strategies? And you talked about a reversal of the 2Q trend already here in 3Q. If you could just talk about what is bringing deposits back in the door, is it just seasonality or is it different strategy, or is it just matching pricing?

I
Ira Robbins
President and CEO

I think it’s a combination of all of it. They are definitely impacted in the second quarter by seasonality. We expect that to improve in the third quarter. Additionally, we did raise some of our rates on CDs in some money markets to be a little more competitive with what we’re seeing the market today, we think that’s having a positive impact.

But overall, it's really what we're doing on the retail sales approach by changing some of historical dynamics. So what happen within our branches will be much more proactive in addressing customer needs.

In addition, we’ve set some established requirements within the commercial loan portfolio as to what increased compensating balances look like and I think our lenders are doing a much better job of being proactive and asking for additional deposits.

F
Frank Schiraldi
Sandler O'Neill

And then I wondered if maybe you could just -- a follow-up to that would be, if you could quantify at all, when you talk about modest pressure on the NIM, is that -- came to what we saw in 2Q or given maybe pricing has picked up more, could that -- the pressure be maybe even greater at this point?

I
Ira Robbins
President and CEO

I think unfortunately deposit betas in my mind really aren't linear. We had a lower -- a much lower deposit beta in the first quarter versus what we saw in the second quarter. So it's hard to give you a linked quarter trend as to what we're seeing. I think overall, though, it doesn't seem as competitive today as it did going from first quarter into that second quarter.

That said though, many of our peers do need deposits and there is increased pressure. I don’t anticipate significant decrease or anything like that in the margin. I think there is moderate pressure on the deposit side.

But that said, I think we are doing a really good job on the asset side changing some of the composition of the assets that we are bringing in and getting a better yield on the assets that we are booking.

F
Frank Schiraldi
Sandler O'Neill

Okay. And then just finally, if I could just one more on capital. You raised your loan growth expectations. How does that change your thoughts or color around capital accretion from here? Are you still comfortable that you can accrete capital internally? And then how do we think about -- if you do need external capital, how do we think about a raise versus potential room on the dividend?

I
Ira Robbins
President and CEO

I think right now we are focused on generating capital internally. I think with the improved operating efficiency within the organization, we should be able to support the additional loan growth for the time being.

Operator

Next question will come from the line of Steven Alexopoulos with J.P. Morgan. Please go ahead.

S
Steven Alexopoulos
J.P. Morgan

I want to start on the branch transformation. Ira, how much is it going to cost in 2019 and 2020 to overhaul the retail network given some of these items you are outlining?

I
Ira Robbins
President and CEO

I think it’s baked into the efficiency guidance that we are providing, Steven.

S
Steven Alexopoulos
J.P. Morgan

Okay. So the 9 million cost saves will be net of any investment that you need to make actually?

I
Ira Robbins
President and CEO

Correct.

S
Steven Alexopoulos
J.P. Morgan

Got you. And then -- that’s helpful. On the strong C&I loan growth, Ira, you mentioned this new employee incentive plan helping to drive the growth. Can you give us a little more color on that plan and why it’s driving such strong growth?

T
Tom Iadanza
Chief Lending Officer and Senior SVP

Hey. Sure, Steve. This is Tom Iadanza. I think what the incentive plans did was put us to market to allow us to attract personnel from organizations that we've always competed with. That process began well over a year ago and bringing those people and we’re starting to see the benefit of that. Additionally, the comp plan is not driven solely by loan growth, it’s driven by deposit gathering, ancillary revenue opportunities as well as just not production but growth in deposits at the branch, not volume growth in loans overall. So the plan is a very balanced plan to make sure that we’re -- we continue the lifeline of generating deposits to fund our loan growth on a long-term basis.

S
Steven Alexopoulos
J.P. Morgan

Okay. But that plan was cited as one of the components of why C&I was so strong and I'm just trying to figure out why that helped this quarter in particularly?

T
Tom Iadanza
Chief Lending Officer and Senior SVP

Yes. It goes back to the hiring of people. The plan allowed us to attract and retain our people. So that process, again, we put this plan in place over a year ago, it allowed us to attract people, allowed us to keep our better people and we are seeing the fruits of that in this year, in this quarter.

S
Steven Alexopoulos
J.P. Morgan

Okay. And then just a final question on the deposit cost and the rise we are seeing there. What's the incremental cost of new money that you're bringing today? And are you needing to just raise rates across the board for your existing customers?

I
Ira Robbins
President and CEO

We are trying to be thoughtful about how we definitely attack that, within our new customers, it is a higher interest-bearing cost than what we are seeing across the entire portfolio. But we are being mindful of how we go ahead and connect with our current customers, so we are not putting them so far off market that there is a big deposit beta for them later as well. So we are being in our mind strategic as to how we attempt to communicate with our current customer base to rise up some of those costs in a linear manner. But we are adjusting rates throughout the portfolio.

S
Steven Alexopoulos
J.P. Morgan

Okay. Ira, is it safe to say that cost of new money is over 2%?

I
Ira Robbins
President and CEO

I think for the high cost money market and CDs the answer is yes. But we’re generating a third of our deposits still coming in non-interest bearing. So on a blended basis for us, I don’t believe it’s 2%.

Operator

Our next question will come from the line of [Aaron Guganavich] with Citi. Please go ahead.

U
Unidentified Analyst

Thanks. Just looking at the originations for the quarter, could you break down the areas that you had, the mix of that -- those originations? And also where are you seeing the largest amount of credit spread pressures within those your -- within those lending verticals?

I
Ira Robbins
President and CEO

Yes. It’s not so much related to region, though that’s part of it, it’s really related to loan type, the industry and such. Certainly there continues to be pressure on the multi-family, on the line co-Operator, lines of business. We have chosen a strategy of maintaining a strong credit culture which also puts us in competition for quality loans in everyone of our market. So I wouldn’t really relate it so much to the areas but to the business lines and the types of loans we like.

U
Unidentified Analyst

And what was the mix of originations for the quarter?

I
Ira Robbins
President and CEO

I don’t -- regionally, it was probably in line with what -- probably 30% in Florida, probably 35% or so in New Jersey and the balance in New York. By type, I don’t really have the exact -- what was the real estate, what was C&I but we’re still -- but we still like the real estate business, we’re still having in quality real estate lending.

A
Alan Eskow
SEVP and CFO

We’re seeing a majority of the growth today in the C&I book of business and I think Tom alluded to that a little bit earlier. We’ve been hiring for the last year now and focusing on bringing on some additional C&I lenders within the organization and that’s having some positive impact to us.

U
Unidentified Analyst

Thanks. And then on the branch transformation, I just want to -- I think you said that there’s not going to be any charges for the branch closures or consolidation and how many branches are you expecting to actually renovate over the next few years?

I
Ira Robbins
President and CEO

So what I was referring to was the 20 branches that we’re looking at closing over the next couple of quarters that if there’s a charge it’d be minimal if any. That said, though, over the next few years as we go ahead and work on this improvement where it’s enhancing the look and feel of some of the current branches as well as potentially consolidating some of the other branches outlined, there maybe charges here and there but they’re all within the efficiency guidance that we’ve targeted.

U
Unidentified Analyst

Okay. And how many branches do you expect to actually renovate?

I
Ira Robbins
President and CEO

There’s significant piece of the current portfolio that we do believe are high performing branches that we need to -- that we look at to improving. Once again, though, there is not going to be material impact to the P&L as a result of that -- a material impact to the non-interest expense, excuse me, as a result of that.

R
Rick Kraemer
IR

Aaron, it’s Rick. It’s tough to drill down to actual number of renovations at this point because we’re starting with our -- the underperforming group if you will, as we put an action plan there’s a timeline associated with that. So, assuming we -- hopefully we do see better performance out of those and then those could be add -- we could be adding that number to the number to renovate but at a very minimum we’re looking at renovating some portion of that 103 branches or so, that’s defined as well performing for us.

I
Ira Robbins
President and CEO

I think to me the important message we want to get across is we’re being self identifying here and understanding that we have some underperforming branches, whether it’d because of profitability those branches or the deposit balances that sit there in relation to what the market opportunity is for where these branches sit. And we are being clear with the street that if these branches don’t improve the performance there is going to be implications as a result of that. And we need to get better performance out of our branches, and we believe we have an ability to put together a plan, a strategy that does that.

Operator

Our next question comes from line of Ken Zerbe with Morgan Stanley. Please go ahead.

K
Ken Zerbe
Morgan Stanley

Hey, thanks. I guess, Alan, perhaps, could you keys to compare the rates that you’re paying on the wholesale borrowings versus which -- because I did hear you say that you're -- that part of your loan growth is going to be supported by wholesale, at what rate you’re paying the wholesale borrowings versus the rates that you would need to pay to attract more core deposits?

A
Alan Eskow
SEVP and CFO

Ken, that’s across the board question so to speak. I mean in terms of the borrowings, new borrowings, if you are borrowing from the home loan bank on a gross basis before dividends, it’s probably in about the 215 range right now, 220, in that range. Net of dividends, it comes out substantially less than that. In order to raise deposits, I think I would point it to -- pointed that out before that we realized and we've already raised a fair amount of our deposit rates but I think the way we’re seeing things is that there’s some irrationality going on out there and there’s a lot of rates rising literally every other day of the week. So we are picking and choosing the areas we want to raise rates in, in terms of large commercial customers because of the demand deposits we get. We’re paying up on some of the money market business accounts to them. But on a blended basis that is substantially below the 210 or 215 or 220 that we’re paying to the home loan bank. It’s more on the consumer side that the higher payments have to be made. And we are constantly reviewing the rates we’re paying when adjusting for them. So it’s a little hard to say because there is still a fair amount of deposits we get from large commercial borrowers that are substantially below the home loan bank rates.

K
Ken Zerbe
Morgan Stanley

Got you. Because I guess I know this is kind of simplistic way of looking at it but I guess the question is just what is wrong with the philosophy of paying up for those commercial customers, paying an extra 10, 20, 30 basis points, whatever it might be if that net cost is actually still cheaper than wholesale, like why choose the wholesale, I mean it might be for ALM I don't know, but that's what I’m trying to compare the two.

A
Alan Eskow
SEVP and CFO

I think incrementally it’s not going to give you the same balances that you need at that period of time. I think overall it's a strategy that we’re looking at to make sure that we have the ability to connect with these customers to make sure that we are self funding ourselves or funding ourselves through our core deposit network on a period in time. But short-term, the -- we consolidate or we shrunk about $100 million in CDs during the quarter. So if you combine the $100 million in CDs that we shrunk with the decline in the municipal and the escrow balances, from a funding cost, there’s really no difference than going to the home loan bank. And we probably were a little bit cheaper in doing that. The way that it looks to the street is that we contracted in deposit but from an interest expense it’s largely flat.

K
Ken Zerbe
Morgan Stanley

Got it. Okay. And then just as a follow-up question. When you think about your loan growth targets, which -- I mean it’s great that they're increasing, the question is what -- how much of that is coming from C&I versus say construction or resi just given sort of that broader concern over term CRE and the size of the CRE portfolio that you guys have?

T
Tom Iadanza
Chief Lending Officer and Senior SVP

Yes, again it’s Tom Iadanza here. The construction focus is relatively flat quarter-to-quarter. We didn’t see a lot of growth. We -- it could pick-up a little bit from utilization of lines under our existing projects. I think the C&I growth -- you’re probably running 35%, 40% on the C&I, the balance on a real estate, in the commercial side. The resi side, I don't have the figures in front of me but the resi side is probably a third of the overall growth additionally, to the total 680 or so million for the quarter. I expect those trends to continue at those levels.

R
Rick Kraemer
IR

Ken, this is Rick. On originations for the quarter so that 1.7 that we cited plot, you are looking about on auto, consumer around 17%, resi was 25%, C&I was 36% and CRE is about 22%.

Operator

Our next question comes from the line of Collyn Gilbert with KBW. Please go ahead.

C
Collyn Gilbert
KBW

Thanks. Good morning, everyone. Alan, just to go back to the borrowing question. So if we think about on an end of period basis, you guys grew bonds about $1 billion this quarter and you've kind of indicated that roughly 300 million of the deposit outflow that occurs is going to be coming back, so obviously a net increase of 700 million or so borrowing. Do you anticipate that to reverse going forward or just trying to understand kind of how you see the mix of funding tied between borrowings and deposits or then also ask like where do you see the loan-to-deposit ratio doing?

A
Alan Eskow
SEVP and CFO

Yes, Collyn, as I said, one of the things I said before is that we're constantly reviewing our rates and adjusting them so that we can see additional deposit inflows. We've done some of that going back into the end of the second quarter. We are reviewing some of them now. And so, a lot of that is why we are seeing some of the balance increases today. Ira pointed out, we were up couple of 100 million dollars in the first month here. So it looks pretty good.

We will continue to do that and we're continuing to address one of our commercial customers, I know Tom indicated before that one of the incentives for the lenders out there is to increase deposits, not just to increase loans. So we’re going to -- we expect as we did this past quarter, we saw a fair amount of growth in demand deposits and we would like to think we will continue to see that going forward. The more of the C&I business we do, theoretically the more deposits and the more self funding we should be seeing as compared to other loan products.

So I think you'll see some reversal in this quarter of what's going on, we've already seeing that in the first month and I expect that to continue.

I
Ira Robbins
President and CEO

I mean Collyn, if you look at it from a macro basis, I previously said, our comfort level on loan-to-deposits should be between 95 and 105, and we’re sitting at 107 today. So obviously there is significant desire and focus internally here to get that numbers up of 105.

C
Collyn Gilbert
KBW

Okay, that’s helpful. And then I think you may have said this Alan but just the borrowings that you're adding, are you extending duration at all or are you still keeping those pretty short-term?

A
Alan Eskow
SEVP and CFO

We’re relatively short-term.

C
Collyn Gilbert
KBW

Okay. And then just on …

A
Alan Eskow
SEVP and CFO

That provides us flexibility as new deposits come in, I have the ability quickly to pay those borrowings down without worrying about penalties or sitting with borrowings out there that I don't really want.

C
Collyn Gilbert
KBW

Okay, that’s helpful. And then just some housekeeping questions. Other other income was up with on a linked quarter basis. Was there something in particular that was driving that?

A
Alan Eskow
SEVP and CFO

Other other income really had a couple of things, probably the two largest items, one is swap fees which we talked about a little bit earlier, it’s up about a little over $1 million quarter-over-quarter. And we also have FDIC loss share in there. And as we settle out different things with the FDIC, sometimes it's a positive, sometimes a negative, but this was a positive this particular quarter, we still have more to go. So we are comfortable with the fact that we will see more of that income coming forward.

C
Collyn Gilbert
KBW

Okay. So both on the swap side and then on the FDIC loss share side, so this level could stay elevated?

A
Alan Eskow
SEVP and CFO

Yes.

C
Collyn Gilbert
KBW

Okay, okay. That’s helpful. And then on the -- so the big jump in FDIC cost, what is that? What was going on there?

A
Alan Eskow
SEVP and CFO

The best way I can describe -- and by the way and I saw somebody write up something this morning. Remember one thing about FDIC, it’s not necessarily based on deposits anymore. It’s all based on your asset side of the balance sheet and what's going on there. But yes, we saw some incremental change as a result of the merger activity. We actually expect that to be down further, down from this quarter into the third quarter.

C
Collyn Gilbert
KBW

Okay. And then if we -- just your -- kind of your outlook on provision. You made the point that a majority of that this quarter would tie to taxi. I know your -- the uncertainty as to where that may go going forward. But just generally, how should we be thinking about the provision?

A
Alan Eskow
SEVP and CFO

The best way to think about it is, number one, it was not 50% coming from the taxis. It was more coming from loan growth. So we're not really seeing any loan losses at this point, but we do have to provide for loan growth. So the loan growth was pretty substantial this quarter as we continue to do that, we will continue to provide there. And then in terms of the medallions, there is a continued pressure I think as both Ira and I mentioned earlier, and it could go down further, the valuations. And if it goes down, we will see some continued pressure on the provisioning there.

C
Collyn Gilbert
KBW

Okay, okay. And then just clarifying I think I got it but I just want to make sure. The 9 million of savings that you expect to extract with the 28 branch consolidations, is that -- that’s an absolute reduction versus like …?

A
Alan Eskow
SEVP and CFO

Correct.

C
Collyn Gilbert
KBW

Okay, okay. And then just finally the merger charge this quarter the 3.2 million, how does that breakout from a line item perspective, like how much was?

A
Alan Eskow
SEVP and CFO

Some of it is in salary, in the salary area and some of that is in the professional -- yes, data processing.

C
Collyn Gilbert
KBW

Do you have a specific number, sorry, it’s just tricky to model without that?

A
Alan Eskow
SEVP and CFO

I don’t have it.

I
Ira Robbins
President and CEO

I think one of the things to keep in mind Collyn is we didn’t do this conversion till late in May. So the separation of some of the employees didn’t really take place until June. So we anticipate continued improvement in the overall and absolute non-interest expense as a result of not having any USAB expenses during the quarter.

Operator

Our next question comes from the line of Matthew Breese with Piper Jaffray. Please go ahead.

M
Matthew Breese
Piper Jaffray

Maybe just staying on the topic of expenses. Last quarter, it seemed pretty clear that the operating expenses of 143 million, that number to 3Q, we’re generally heading into the 130 -- high 130, mid high 130 kind of range, but to the opposite it went higher, it sounds like USAB costs were still in there. So I just wanted to make sure that the 3Q expense trajectory into that 130 type level, is that still the number, and can you be a little bit more specific for us?

A
Alan Eskow
SEVP and CFO

I think part of the expenses, we’re seeing enhanced revenue growth and part of that has to do with the gain on sale that we saw and I think the guidance we tried to give was ex additional revenue growth where that was going to end up being. Overall, the overall expenses are going to continue to come down. What we announced today with the branches was not in any of that specific guidance that we’ve previously provided. But on an absolute basis, the quarterly non-interest expense number is going to continue to trend down.

M
Matthew Breese
Piper Jaffray

One of the other items you said was that for 2019 at least the 4Q run rate would be sub that 550 and that did not include the 9 million either. Is that still a case and potentially can we be sub that 540 perhaps?

I
Ira Robbins
President and CEO

I think long-term we’re going to get to those numbers. I think the one variable that we maybe didn’t forecast was some of the growth that we’re seeing in non-interest income today on the gain on sale, on the revenue piece. And as that continues to go up, there’s obviously expenses associated with what we’re doing on the residential mortgage piece. So the incremental pieces we’re seeing on the revenue side associated with gain on sale isn’t that positive to the EPS number but there is an expense number associated with that as well. So we maybe a little bit higher on some of the non-interest expense. You’ll see some additional non-interest income as a result of that, net-net will be positive though.

M
Matthew Breese
Piper Jaffray

Okay. I appreciate the updated efficiency targets. What does that imply for your ROA targets or are there any updated ROA targets?

I
Ira Robbins
President and CEO

No.

A
Alan Eskow
SEVP and CFO

No.

Operator

[Operator Instructions]. Our next question comes from the line of David Chiaverini with Wedbush. Please go ahead.

D
David Chiaverini
Wedbush

Hi, thanks. I had a follow-up on the branch transformation initiative. How much in deposits are in the 20 branches being consolidated?

I
Ira Robbins
President and CEO

You know what, those branches have low -- fairly low deposit levels, and that's part of the issue that we're dealing with here. And so, I don't have the exact totals.

A
Alan Eskow
SEVP and CFO

It’s about $650 million.

I
Ira Robbins
President and CEO

But one of the things that we're targeting is that we expect to run about an 85% to 90% retention. We are mainly closing branches that are underperforming that are in markets that are fairly close to other branches and we’ll already -- we will be working very closely with the branch people to make sure that the largest depositors are discussed with early on, so that we don't anticipate losing a majority of those deposits.

D
David Chiaverini
Wedbush

Got it. And then shifting gears to how you’re acquiring strong talent. I was curious how does the pipeline look for new hires and where are you attracting them from, are they big banks, are they community banks, I am just curious about where they’re coming from?

I
Ira Robbins
President and CEO

We’re always active in talking to people and bringing people in and I would say it's mostly coming from banks our size or bigger in many cases, but we’re not -- it depends on the market. In certain markets, a smaller bank hire maybe more appropriate, but in our New York City market it’s primarily coming from bigger banks.

A
Alan Eskow
SEVP and CFO

And I would say that's probably across the board not just the lenders. We are doing a lot of hiring these days as things change with technology and so forth. And we are seeing a lot of talent coming from some of the larger institutions.

D
David Chiaverini
Wedbush

Great, thanks. And then lastly on the loan pipelines. I think last quarter you had said that the loan pipelines were trending 10% to 15% higher than a year ago levels. You have an updated pipeline figure for the second quarter?

I
Ira Robbins
President and CEO

It’s about the same. It's trending -- I’m sorry it’s trending in line slightly higher than what we achieved in the second quarter, but it comes down to timing when we could pull it through. So, we may see similar results, hard to say at this point. But our pipeline has been very steady.

Operator

And at this time, we have no further questions in queue.

I
Ira Robbins
President and CEO

Thanks. I just want to conclude, just by talking -- just real quick about the quarter overall and I think overall we were pleased with the improved performance when it comes ROA, when it comes to the improved earnings per share. Understanding that there’s obviously more work for us to do on the deposit side, we think we have some plans in place from a tactical perspective, as well as investments we’re putting in on a strategic perspective. The strong revenue growth is something that historically the value was always a challenge for us. And I think the pieces we’ve put in place to deliver sustainable revenue growth is something that’s unique here and we’re excited about the opportunity that that’s going to continue for us as we move forward.

With that, I just want to thank everyone for joining today.

Operator

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