Valley National Bancorp
NASDAQ:VLY
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Valley National Bancorp
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Good day ladies and gentlemen, and welcome to Valley National Bancorp's Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time. [Operator Instructions].
I will now turn the conference over to your host, Rick Kraemer, Investor Relations Officer. You may begin, sir.
Thank you, Nicole. Good morning and welcome to the Valley National Bancorp third quarter 2018 earnings conference call. Leading our call today will be Valley President and CEO, Ira Robbins; and our Chief Financial Officer, Alan Eskow, as well as our Chief Banking Officer Tom Iadanza.
Before we get started, I want to make everyone aware that you can find our third quarter earnings release and supporting documents on our website valley.com.
And additionally, I would like to point everyone to slide two of our 3Q 2018 earnings presentation with a reminder that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements.
And now, it's my pleasure to turn the call over to Ira Robbins.
Thank you. Good morning and thank you for joining us this morning. Over the past year we have identified several goals we believe would improve the profitability profile of Valley. Greater efficiency not only in the manner we presently deliver the products and services, but how we scale our infrastructure for the future. Growth, not just for the sake of increasing the size of the bank,, but more importantly creating positive operating leverage throughout each business lines.
Since the beginning of the year we have shown tremendous progress towards demonstrating that Valley is on a direct path to a more diversified balance sheet, I might add through organic originations, repeatable revenue stream that is not relying on asset purchases and more a function of the internal initiatives we control and infrastructure.
In infrastructure that through enhanced utilization of technology can support cost effective growth for years to come. We continue to work tirelessly to welcome our clients from the USAmeriBank acquisition. While we have incurred some higher than anticipated integration cost we are thrilled with the customer retention and actual absolute growth we have experienced to-date. We've also begun to execute several other major initiatives. For example, our branch transformation strategy will create greater efficiencies from a combination of reduced branch count and greater revenue generation from an upgraded staffing model.
On that front alone we have closed 6 of the first 20 branches we previously announced, incurring only a modest impairment charge this quarter, while addressing all 20 announced closures. We have begun examining, rehiring and implementing a universal banker model dedicated to our branch network. We believe this initiative should result in addition headcount reduction in time, while simultaneously delivering expanded core deposit growth.
Additionally, we are also in the midst of rolling out a brand new quantitative staffing model targeted at improving the efficiency of all branch platform level employees. I might add the analysis was in large part driven by the investment and subsequent implementation of Valley's new business intelligence platform.
Moving to the balance sheet, we grew loans over 15% annualized in the quarter. we're achieving this growth under the same stringent underwriting practices that Valley was built upon. Having spent my entire career at Valley in my opinion there is only one way to underwrite a loan. The drivers behind our growth are a combination of successful new hires over the past year, an industry aligned compensation plan and a more targeted and structured C&I sales practice, all of which were supported and enhanced through greater technologies at the bank.
These efforts are enabling our lenders to enter into new markets and product lines, which will continue to further diversify our loan portfolio. The software provides our lenders access to real-time data, giving each the ability to make more informed decisions and move projects through the pipeline in a more streamline fashion. While from a back office perspective, the technology investment adds capacity to existing administrative functions that have allowed us to dramatically improve overall approval times.
There is an excitement in the markets we operate about Valley and we're tracking interest from employees of other institutions like I have never witnessed during my tenure. Each of those from whom I speak seem enthusiastic about our direction and strategic initiatives. Year-to-date we have spent over $8 million in future facing technology cost. Services such as Encino, sales force, digital banking and internal products like our very own enterprise data hub and enterprise information management systems are all changing the landscape.
Valley is better able to interact, inform and empower our associates like never before, in turn creating an experience and product for our customers. We are currently spending approximately 9% of our annualized revenue on a combination of direct and indirect technology initiatives. This compares to roughly 4% the company had historically allocated. This will undoubtedly lead to improved efficiencies that are far more scalable in the manual processes we have employed the path.
Finally going to this month we unveil the new logo and rebrand, which give shape to our vision forward. As the banking landscape continues to evolve, we thought it's necessary to develop a brand that reflects our commitment to delivering innovative services, while simultaneously celebrating our 91 year legacy. There is an excitement within the walls of Valley that I have not witnessed in my time at the bank, and I'm so proud of all of our associates for embracing these changes and moving our company forward.
With that we will move to the earnings presentation on slide three to cover some additional highlights during the quarter. For the third quarter of 2018, Valley posted reported diluted earnings per share of $0.20. Included in this number with several items telling approximately $4.8 million pre-tax or a penny per share on after tax basis. On an adjusted basis, our earnings per share was $0.21, which represents growth of approximately 23% over the same period just one year ago.
There are several other notable items in the quarter, which were not reflected in the $4.8 million. Specifically, we continue to run overlapping treasury management software packages for our commercial customers. Within AML, we are utilizing dual risk monitoring software. Further, we have redundant telephone and broadband platforms that are cumuli in saving our expenses by over $600,000 per quarter. Additionally, we incur over $400,000 of severance during the third quarter related to normal business practices.
Further, we consciously spent $2.1 million in forward facing technology and finally our commissions related to residential mortgages were approximately $1.5 million greater versus recent run rates due to higher level of origination.
We expect many of these costs to begin to the client of the next couple quarters. It is worth noting that our quarterly loan loss provision was once again driven in large part by our taxi medallion portfolio, which was in isolated equaled an additional penny of earnings per share.
With that, Alan Eskow our CFO will cover a few slides regarding some additional income and expense trends during the quarter.
Thank you, Ira. Please turn to slide four. We grew net interest income by 11% on an annualized linked quarter basis. Our significant linked quarter loan growth combined with net interest margin expansion of 1 basis point help offset the impact of rising funding costs. In the near-term, we expect our net interest margin to remain relatively stable.
Additionally, we expect to fund our future loan growth with deposits as opposed to Federal Home Loan Bank advances and move our loan to deposit ratio closer to our goal of sub-105%.
Turning to non-interest income, we did experience a rather meaningful linked quarter decline approximately $1.8 million of the quarterly decline was due to impairments taken on assets related to branch closures. This amount covers the 20 branches we expected to consolidate, described on last quarter's call. Another contributing factor was the approximate $2 million of quarterly earning swing in FDIC loss share income. As a reminder, this number was a positive $745,000 in the second quarter of 2018 versus a negative $1.2 million this quarter.
Finally, the largest delta was the gain on sale income related to residential mortgage, which experienced a decline from $7.6 million to $3.7 million quarter-over-quarter. In previous quarters, we have been consistently closing jumbo bulk mortgage sales, in addition to our conforming flow based business.
We are hopeful, we will be able to close additional bulk sale transactions in future quarters. However, that market remains less predictable than traditional conforming outlets for secondary mortgage sales. During the quarter, we sold approximately $151 million of loans for a pre-tax gain of $3.7 million or 2.4%.
Moving on to slide five and operating expense. You will notice that we have achieved over 76% of the annualized benefit related to our LIFT initiative. We believe we remain on pace to achieve the full annualized amount through the end of the second quarter 2019.
Our reported operating expenses of $151.7 million included in frequent items of approximately $3 million of merger related charges and reserve related to outstanding legal matters. Additionally, tax credit amortization expense was $5.4 million. Excluding all of these items, our adjusted operating expense level was $143.3 million for the quarter, up marginally from the second quarter.
That said, there are several items that were not considered onetime in nature to cloud the expense progress we made during the quarter. The largest was mortgage commissions, approximately $1.5 million higher than the previous quarter's run-rate. Another $1 million of costs related to servants and duplicated infrastructure expense, specifically treasury management solutions, AML software and telecommunications.
In the fourth quarter of 2018, we expect our adjusted expense levels to remain stable, driven primarily by higher than normal advertising costs related to our company rebrand. We remain very focused on improving efficiency over the long-term. That said, we are modestly increasing our fourth quarter 2018 level adjusted efficiency ratio to a range of 54% to 56%. This takes into consideration a potentially lower level of mortgage gain on sale income than we had originally projected and previously mentioned costs associated with our rebranding efforts.
With that, I would like to turn the call to Tom Iadanza, our Chief Banking Officer to cover some balance sheet and credit highlights.
Thank you, Alan. Please turn to slide six. As you can see, we posted impressive organic loan growth of 15.1% annualized for the quarter. The growth was diversified among all asset classes. Though we are especially pleased by the increases in C&I which is validating the initiatives we have implemented. Keep in mind, we also sold approximately $150 million of residential mortgages during the quarter.
It is important to emphasize that this growth is not a function of a dramatically different risk profile at the bank. One of the greatest differentiators Valley possesses is our loyal and diversified commercial borrower base. This consists of over 55,000 customers an average C&I loan size of $1.2 million across multiple geographies, it average CRE loan size of approximately $2.9 million. In fact the average size of our top-20 loans is approximately $28 million per loan. We continue to grow and build in a very diversified manner.
In the recent quarters, we continue to acquire strong talent with meaningful experience and significant relationships, which are beginning to contribute to new loan originations. This combined with our industry aligned incentive plans should continue to promote greater opportunities to fuel growth for the foreseeable future.
Our geographic mix of loans remain constant and we continue to see strong originations albeit done marginally from the prior quarter. We continue to place great emphasis on moving a portfolio mix to a higher percentage of variable rate loans, which should help us maintain a consistent net interest margin in the future.
At quarter-end, the percent of total loans tie to three months benchmarks or less was 38%, up several percentage points over the course of the year. Additionally, new origination spreads are coming in at levels equal to greater than our current net interest margin, which bodes well for future stability. Finally as a result of this quarter's growth, we believe we will exceed our previously announced annual loan growth guidance of 8% to 10% net of sales.
If you will please turn it to slide seven. You will notice our deposit balances experienced the linked quarter increase of approximately $948 million. During the quarter, we increased deposits through a mix of core and brokered CDs, allowing us to rely less on the use of Federal Home Loan Bank advances. This mix shift came with a substantial improvement in wholesale funding costs. We will continue to act opportunistically in an effort to improve our wholesale cost and duration.
While our most recent trailing quarter betas on deposit and other cost of funds continues to climb along with the industry, we are pleased that our loan beta has been keeping up with the pace of increase. Additionally, our loan to deposit ratio remained flat from the prior quarter at approximately 107%. It remains a near-term goal to bring that level back down under 105%.
As we suggested in the prior quarters competition for deposits in our markets remain strong. That said, we are focused on growing deposits that are not solely dependent on rate. In particular, we are placing emphasis on growing our middle market business customers supported by an upgraded treasury management solution and an increased sales force expanding and upgrading business mobile banking. And finally, we are creating industry specific platforms and products focused on attracting lower cost operating accounts.
Additionally, our residential mortgage business continues to be an increasing source of retail deposits accumulating over $75 million of deposits a year to date. From a strategic perspective, we continue making the necessary investments in technology to enhance both our consumer and commercial customers' digital experience. While in early stages, we are encouraged that our net account growth in non-maturity deposits has trended positively over the past few quarters with personal and business non-interest-bearing seeing some of the highest net account growth rates.
Furthermore, our average non-interest bearing deposit balances increased 3.5% annualized during the quarter. This is further evidence that our efforts differentiate and enhanced service and products are gaining traction.
Please turn to slide eight. During the quarter, we recorded a loan loss provision of $6.6 million, down about $500,000 linked quarter negatively impacting the third quarter provision was the continued valuation decline of taxi medallion lounge, which would have equaled approximately $0.01 per share. Following this quarter's provision, our level of related reserves as a percentage of exposure continues to build and now stands at close to 20% of the taxi medallion loan portfolio.
Our current model values the average New York City medallion on our books to a level of approximately $229,000 per medallion, this is more closely aligned to reach and transfer price activity. We continue to monitor the positions closely to reflect any meaningful changes to the market.
You may have noticed that our total accruing past due loans increased by approximately $ 25 million linked quarter. Approximately $15 million of this is related to a single loan that was considered past due for administrative purposes by current and all payments, that loan has since moved back to current status. The approximate remaining $10 million represent a number of smaller loans, most of which are now current for payment.
Despite a somewhat higher level of provision, our credit losses remained generally benign with net charge-offs at $238,000 in the third quarter. Our levels of non-accruals declined approximately $6 million from the prior quarter and our ratio of non-accrual loans as a percentage of total loans is 0.33%.
I would now like to turn the call back to Ira for a discussion regarding our near-term outlook and closing comments.
Thanks, Tom. Turning to slide nine, given the growth we have seen year to date, we believe we will exceed our previously announced full year loan growth outlook of 8% to 10% net of portfolio sales. We are pleased with the tangible achievements we are witnessing in the loan portfolio from a growth, mix, duration and yield perspective. Furthermore, we believe we are achieving this improved growth rate without sacrificing the credit quality and underwriting standards that have always been the hallmark of Valley.
In terms of net interest margin, we expect the NIM to remain neutral for the fourth quarter within the range of plus or minus 2 basis points. Additionally, we expect to continue to move our loan-to-deposit ratio closer to our near-term goal of sub-105%.
Finally, as Alan previously mentioned, should the environment not improve for secondary mortgage market transactions, we believe we could face similar levels of gain on sale income achieved in the third quarter. That combined with what we expect to be short-term inflated advertising expense in the fourth quarter related to Valley's rebrand could place short-term pressure on our adjusted efficiency ratio goals.
In line with those expectations, we are raising our fourth quarter efficiency guidance to a range of 54% to 56% from the previously announced goal of 54% or better. While the level of operating expenses remained more elevated in recent quarters than we had originally assumed it is important to recognize. The areas of improvement and expense distribution are not always reflective within one quarter's reported numbers. We are making important strides in building a balance sheet that is not hazard to any one asset class, diversifying by geography, by product, by asset mix and importantly duration, all of which allows for us to more effectively manage net interest income over the long-term irrespective of the interest rate environment.
Our customer base is robust and diverse. We have over 55,000 commercial customers and well over 400,000 retail customers. This diversity supports future loan demand and access to core funding over the long-term in varying economic conditions. We are building an efficient infrastructure to compete well into the future, implementing a scalable technology that can grow with the bank and our customers, is a core driver through the entire organization.
We are laser-focused on delivering sustainable risk-adjusted growth through redeployment of capital and expenses into higher revenue generating sources and upgrading talent and supporting them with world-class technologies. We believe all of these efforts should lead to greater positive operating leverage in 2019 and beyond.
With that operator, please open the line for questions.
Thank you. [Operator Instructions] And our first question comes from Frank Schiraldi from Sandler O'Neill. Your line is now open.
Good morning.
Good morning, Frank.
Just first on - Ira, you guys have couple of times this year now increased your growth expectations. And just wondering how you're feeling about capital levels here, about the TCE ratio. I know you're feeling comfortable you'll be able to beat that level internally here.
It's a good question, Frank. I think we're definitely comfortable with where our capital position is today. We don't believe that we're going to continue to generate loan growth that's north of 15%. Our expectation is that the current internal capital generation that we have supports the balance sheet growth of high-single digits, which is where our long-term expectations are. During the quarter a little bit of growth came from our inability to execute a jumbo bulk sale. And we believe we'll get back to the loan growth numbers that we had originally forecasting.
Okay. And as you think about down on the loan growth, it seems like you feel you can put this sort of 8% to 10% or I guess you'll exceed them the near-term here, but while defending the margins. So I wondered if you could just talk a little bit more about funding. I think in the past, you've kind of talked about noninterest bearing being a pretty good piece of the pie you're bringing into the bank. And I think you may even said maybe a third of deposit balances, I guess excluding the brokered. But is that still sort of a reasonable expectation here as you look out over the coming quarters?
Yes, so Frank, it's Alan. Yes, absolutely. So first of all on the noninterest bearing, on noninterest bearing again are much more working capital funds that are on deposit with us as a result of our C&I type lending that we do. So even though point-to-point we saw a slight decline during the quarter, if the average balance is up. And so that's because these companies take their money and use it for various working capital needs during the quarter. So, we're comfortable that that number which is running very close to about 28% is going to continue in the near-term.
Secondly, we have seen unit growth, especially in the last quarter or two both in the noninterest bearing and in many of our savings and other type money market accounts. So we're thinking very positively relative to core deposit growth going forward. Even though we may not see all the dollars come in day one, we are seeing units open up and that's across our markets. And so we've penetrated very nicely, our digital program is making a move forward and we are seeing some growth there. So we're very comfortable with that.
That being said, so on the brokered side, which I think you ask the question. We are using that, like any bank that's using the digital platform today on a nationwide type of a basis. We're funding the bank on levels that are lower than we can fund using the home loan bank advances. While they're great for certain purposes, at the moment, our brokerage deposits as well as our core deposits are coming in all across less than we can do in the wholesale market with the Federal Home Loan Bank.
So we can help name maturities and duration this way and not just fund the bank overnight and we'll obviously continue to monitor that. We realize we put a fair amount on, but we are also watching and continuing to see growth in money market accounts and other types of accounts, it's not just in brokered. But at the moment that's an additional method in which we can fund the bank. And we've defended the margin very well as a result of that.
So we made a fairly significant switch to brokered deposits and other funding costs during the quarter. And again, the margin went up 1 basis point. So we're very comfortable that the way our balance sheet is structured and I think Ira may have been the one I'm not sure, which one of these guys mentioned it. That regardless of the movement of interest rates we are trying to protect that balance sheet by the types of loans we're putting on, the diversification and the same thing on the funding side. So it's not all in one bucket, it's in various buckets. And we're trying to make sure the durations make sense relative to the assets coming on.
Okay. I mean, just a quick one, what is the pickup or what was the pickup in the quarter, in terms of replacing borrowings with the brokered product?
Hey, Frank, it's Rick. So on a comparable duration basis of where we put these brokered on, it was about a 25 basis point net funding advantage versus FHLB.
And that exists now the 20 basis points.
It was existing then, and I believe it is still existing now.
Okay. Okay, thank you.
Frank, just let me just clarify one more point and I mentioned the word duration before. So a lot of the funding from the Home Loan Bank had been overnight funding. So we're 20 basis points cheaper than the overnight funding rate and we're getting rates that we're putting on duration that's running at around seven months. So we think that's helping to protect against future moves both on the longer term and the shorter term.
Okay. So you're getting duration and you're getting the 20 basis points?
Absolutely. Yes.
Okay, great. Thank you.
Thanks, Frank.
Thank you. Our next question comes from Steven Alexopoulos from JP Morgan. Your line is now open.
Hey, good morning, everybody.
Good morning, Steve.
I want to first start with a follow up…
[indiscernible] said Steve.
So I want to first start follow-up - that's okay, on the strong time deposit growth in the quarter. It would seem particularly period end was very strong that there's a bigger increase in deposit beta coming for 4Q. Alan, can you walk through how you offset that in 4Q? Do you expect the loan yield pickup to be higher than the 16 bps increased we saw this quarter?
Not necessarily, but I don't certainly think you're going to see that higher beta that you're talking about, I think that's all kind of being built in already in terms of what we put on during the quarter. We've put on a substantial amount of time deposits and we think that that number is coming in that yield that costs is coming in even though it's increased at a level that still allow us to handle the margin.
Remember we do expect again that we'll see a Fed rate hike as we move to the end of the year. The hike will come in although we'll only get a small amount of it during this quarter. The deposit rates while they moved up they're not moving in advance theoretically of when the Fed is moving the rates.
And I think in addition to that, Steve, I think Tom highlighted real quickly regarding the asset yields that we're generating and on a marginal basis, if you look at the loan yields that we originated in the quarter and the funding yields, including those CDs that we put on we were still positive to where the margin is today. So we don't anticipate significantly compression. I think Tom and Alan have both alluded to and I think we're finally beginning to get some benefit of having a diversified balance sheet and not focused on really long-term duration, but a duration that's shorter than many of our peers in the New York marketplace. And an asset beta as you can see that we put into the presentation that's greater than what the deposit beta is.
Right, okay. Then just a couple of questions on the loan growth side, which is obviously very strong in the quarter. When you look at C&I which is I would say weak across the board, is fair to categorize it and the competition is talking about a really tough environment. Can you give color, I don't understand how you guys were so successful this quarter with the C&I loan growth you posted.
Sure, hey Frank, it's Tom. When you look back going back 12 to 18 months we started bringing in teams in different geographies that were experienced C&I lenders with a book of business. So we're benefiting from what they have contributed and what they continue to bring in. While always upgrading our staff we continue to add the right people focusing mainly on the C&I side. Our C&I target is really small and low end middle market. We go after that company local to us $100 million and below and we cross-sell the hell out of it with all of our products.
Furthermore we created a few niches. We started off our Property Casualty Premium Finance Company about a year ago. That's hit at $100 million of C&I loans in about a year and average loan size of $15,000 average coupon just north of 6%. We've added people on our small ticket equipment leasing business. We're starting to see growth out of that we'll continue to see growth out of that. So we've kind of identified niches that give us growth in different pockets, while focusing and having a targeted calling effort on that small and middle market company in our regions. So a combination of those factors got us to I'd say approximately about a 14% annualized growth in C&I.
And maybe just to keep going with that, if we look at the commercial real estate growth you had, which is very strong also. Can you talk about what market that came from and the pricing is being described by pretty bad given what non-banks are doing. Can you talk about the pricing there too? Thanks.
Sure, the USAB merger, and we probably alluded to this previously they've had some pretty strong growth on the real estate side again in a fashion we're very comfortable with where it's with their long-term loyal customers who are now able to use a bigger balance sheet. Fortunately we get a better premium coming out of Florida around real estate that we have in New York market.
Our New York group continues to be active of real estate. They are probably growing on an annualized pace of about 8%, New York, New Jersey area. We haven't done a lot of multi-family because of the rates that we're getting out of that it's just too thin for us. We are doing the right things in industrial, right things on some construction that we still do. We get a premium on those where we are active on multi-family we will be doing a little bit of that in the couple recent quarters we're getting a better rate than what may be seen by others, but it's because of that loyal customer base and our ability to respond and get the business done.
But the real estate market up here is truly competitive and where we're picking and choosing where we want to be and we get most of our business from our existing customer base. Florida is still giving us a better premium, USAB is properly using a larger balance sheet today again growing with existing customers.
Okay, that's good color. Thanks a lot.
Thank you.
Thank you. And our next question comes from Austin Nicholas from Stephens. Your line is now open.
Hey, guys. Good morning.
Good morning, Austin.
Maybe on the margin, can you help us quantify maybe what the impact was from better than expected cash flows on the PCI loan pool to the margin?
Yes, so it really is not really dramatic in all honestly, it's not as material as I think maybe the document seem to indicate. I mean, the majority of our growth in net interest income this quarter really came from the fact that we had such a huge volume and we've had good volume two quarters in a row. And we've got increased rates coming on with that new volume.
So really the PCI loan portfolio, while it's grown and it adds something to the numbers, I mean, most of it and I think over the past history Ira has always talked about it most of it is really basic interest that we're recognizing. It's not really anything that gives us huge amounts of change if you will from period to period. So we did see some increase it's not really what made them move in the net interest income or the interest income level for the quarter.
Austin this is Ira just to really reinforce I think what we've tried to communicate earlier, we originated on a marginal basis the margin at least up or flat on the new loans and new deposits that we put on and which is helping stabilize the margins. And in addition to that we have short-term cash flow that's reinvested at a higher rate based on the asset sensitivity of our balance sheet.
And you can see that in the asset betas that we're showing versus some of the deposit betas. So the stability in the margin is by no means a function of original cash flows from the PCI portfolio.
And I think the other point is that our over the last couple of years we've been using swaps, we have put much more floating rate loans on that's reflective again in the loan betas. And in addition to that USAmeriBank brought us on as well a lot of prime type base loans. So we've now got a balance sheet that I think has about $9 billion of assets that reprice in a relatively short period of time some of them obviously as short as one day and that's really helping our margin move in the right direction, even though we're seeing such higher funding cost.
Understood, thanks that's helpful. And maybe just on the efficiency kind of targeted as you looked out to 2020 of that call it 50%, 51% or so, can you maybe help us - or sub-51% can you maybe help us understand the walk down to that over the next coming call it two years? Is it - and maybe what specifically is driving that? Is it more of the revenue side, or is it more the expense side or is it little bit of both that really gets you down to that 51%?
Yes, I think the way to look at it is a little bit of both. So one of the things we talked about on the call was we have a lot of technology going on here right now. We've added a lot of people, we've added a lot of costs, we have a lot of things going on. Well, a lot of that is not yet yielding the cost saves we would like to see and it was pointed out that just this quarter about $2 million was forward facing technology that is going to help us in the future.
So we're not going to see the benefit of that for some period of time. In addition as we've also pointed out we've got duplicated cost going on because when you add new systems if you're not fully implemented you're paying for the new one, you're still paying for the old one. So there are save is going to happen there as well that have not yet happened.
So - and in addition to that I would say that the other forms of technology and I'm going to basically say that a lot of this is technology driven as those come on board we're going to save staffing them down the road, that's not going to happen overnight. I will also say that branch transformation is going to help us in many of the things we're doing. And as Tom alluded to on the revenue side, we've added new people, new products and those things are driving revenue to get higher.
So I would say it's this combination of events and I know everybody likes to look quarter-to-quarter, but some of this is much longer term in nature and just can't happen overnight, but we do expect by 2020 a lot of that will be in place and will derive benefits from that.
Got it. Okay, that's helpful. Appreciate it. And then maybe just one last one, on the effective tax rate for maybe next year, do you have any comments on how that will look given some of the changes in the New Jersey state tax code?
Yes, so the New Jersey tax rate went up by - went from 9% to 11.5% they increased it by 2.5% in 2018 and 2019 and then it starts to drop off a little bit. So during 2018 we really don't expect much of an increase in rates. So one of the reasons for that is our deferred tax assets get revalued based upon the higher rate that are going to turnaround in that next two year period or so. So that is really offsetting any increase that we might see in 2018 of these higher rates.
In 2019 and 2020 again the rates are going to both stay higher and then go down. We do expect that we're going to see a little bit of a higher rate, I'd say about 1% going into 2019 and probably about a 0.5% into 2020 and 2021 based on these changes and the fact that these kind of reverse themselves. There are three year rate and they're going to go start high and then go down lower. We've given some guidance that talks about 21% to 23% and that takes that all into account.
Got it. Okay, great. Thanks for my questions.
Thanks, Austin.
Thank you. And our next question comes from Ken Zerbe from Morgan Stanley. Your line is now open.
Great, thanks. I guess, first just clarification question really quick, in terms of the time deposits how much in terms of maybe end of period was solely from brokered CDs versus more of your traditional retail customer CDs?
I think it was kind of spread out over the quarter. We probably did a little more brokered as the quarter moved on. We were probably a little later start during the beginning of the quarter and got further into it as we went on. We raised about $500 million of brokered deposits during the quarter I don't have the average off the top of my head, but it did come on. So maybe a little - it probably started at the end of the first month and built itself to the end of the quarter. So maybe one month did not really include those brokered CDs.
Got you, understood. And then when you guys think about your 105% loan to deposit ratio is it fair to assume that that growing brokered CDs is also a good way of getting that down below 105% or are you thinking more on a - in different basis?
No, we absolutely are thinking all of it and I don't know if were on the earlier part of the call, but I think we said number one, we have seen money market balances increase and other types of balances as well as our own CDs increase, so we've seen that. On the brokered side, we are able to pick and choose much better the duration and the rate that we're willing to pay and not necessarily have to wait for people to walk in the door or see advertising or whatever. We've got a very nice outlet in order to do that and I look at it very much like a digital bank that's doing the same thing.
However they've got a back office costs and maybe it's slightly cheaper in rate, but I don't think it's a lot cheaper. But the weighted average duration on these is running at about seven months. So we're picking and choosing durations that we think make sense relative to our future thoughts about interest rates and loans coming on the books, et cetera. So I think it's worked very well and again I think that will help us control our margin.
Got it, understood. And I definitely understand and appreciate the fact that these are coming on cheaper than the FHLB borrowings. I guess, just last question like, how do you think about this as a longer term strategy? Because I mean presumably or let's assume that there are some disruption in the brokered market or short-term rate spiked. I guess obviously I think we all appreciate the value of core funding like not in brokered, like is this something that you'd like to ultimately replace at some point or is brokered CDs going to be remained more of a longer term funding vehicle for you?
So Ken, this is Ira. I think it's very tactical in nature where we are today. We're making significant investments internally in our branch transformation. And I think we've seen real positive growth in unit accounts, as Alan mentioned something we haven't witnessed here in many quarters, in noninterest bearing accounts, in core interest bearing accounts as well.
So I don't think it's sustainable by any means to run any organization off of wholesale, whether it be wholesale assets or wholesale funds. We need to make sure that we have core deposits that are generating an equal to the loan growth. We recently went through significant technology investment in upgrading our corporate treasury solution that Tom mentioned, as to the lending platform.
We believe that will help us compete and attract more of the commercial deposits that we already have individual relationships with. So tactical from a short-term perspective, there are significant amount of initiatives that are taking place here today to make sure that we are able to grow core deposits to support the loan growth that we have.
Sounds good. All right, thank you very much.
Thank you. And our next question comes from Matthew Breese from Piper Jaffray. Your line is now open.
Good morning everybody.
Good morning Matt.
Good morning, Matt.
So on expenses, your 3Q run rate is now on an annualized basis $595 million. If I analyze what you've done year-to-date you're at closer to $585 million and this compares to expense guidance earlier in the year of roughly $550 million, and commentary previously in the year that you'd be at a run rate below $550 million. So there's some pretty wide deltas here. And I guess my question is where are the cost savings and why haven't we seen work progress to meaningfully lower the expense base after so much time we spend laying out the opportunities in how you would execute?
Yes, and I think I alluded to it real briefly Matt, with regards to some of the integration expenses that we are incurring additionally in the USAB deal. And now is additional expenses that we've incurred but it's also some additional time allocation that we've spent in focusing on that merger as opposed to executing some of the technology that we had anticipated driving some of those costs. So it's been a little bit delayed and we probably should have done a better job with outlaying that guidance initially.
That being said, though, the initiatives that we've outlined are still present, we still believe that we're going to be able to execute significant cost saves associated with it. Part of it's been offset by the mortgage commissions as well, I don't think that was in our initial guidance. But we understand that, we need to improve the expenses throughout the entire organization to get the efficiency ratio to a level that makes sense.
Yes. And Matt, this is Rick. Don't forget also the reason we kind of moved away last quarter from actual operating dollars into more of efficiency, because we are seeing a faster pull through on a revenue side as well, right. So while greater efficiencies are important and driving costs down are also important. Growing revenues are equally important to the efficiency side. So the focus on the absolute dollar was something we kind of tried to move everybody away from last quarter.
Understood. So if we…
It's not suggesting - sorry, go ahead.
If you focus on the pieces here. So one, you've talked a lot about the investments on the tech side. But my understanding of LIFT was that that was a tech driven cost save initiative where you would implement tech and reduce headcount. And it just seems like the tech spend is much greater than you would thought, is that accurate?
I think there's additional tech spend that we alluded to in the call today that wasn't incorporated within LIFT. I think we're up to 73% of what we identify within LIFT, and there's still an expectation that we're going to get to the number that we've provided, it just is going to be a little bit longer. I think that what maybe we had originally thought for the specific year based on resources being more allocated towards the overall conversion. I think we're also seeing tremendous opportunity to LIFT some talent that we think can drive significant revenue growth that wasn't maybe here, when we first provided those initial forecasts.
And I think Rick is right, I think guidance that we gave on around on absolute basis was also expecting a certain revenue stream. I think now we've been able to demonstrate that the revenue streams is going to be higher, but that also costs. So we probably should have done a better job as Rick said, giving guidance around an efficiency ratio as opposed to giving guidance around an absolute number. I mean - but you look at our overall revenue growth, what we were able to do in loan growth and net interest income, that's pretty sustainable, and there's real positive that are going to come from there.
The other part, I'm a little confused on is if the mortgage gain on sale is going to be lower, I would expected a little bit greater elasticity in the in the expense side of the equation too. Should we expect that in forward quarters if we're not going to achieve the gain on sale?
Absolutely.
Okay. And then, if expenses are going to be higher and I haven't heard anything about the ROA target of 1.25. When do you expect to be able to hit that.
That remains unchanged. So we're still pointing towards some point in 2020.
Right.
Okay, understood. That's all I had.
Thanks, Matt.
Thank you. And our next question comes from Collyn Gilbert from KBW. Your line is now open.
Thanks, good morning everyone. Just to the loan growth discussion, what did the line utilization rates do this quarter on the C&I side?
It went up slightly it should probably be around 43% not a dramatic increase always hover around 40%.
Okay. And then have you guys do you know or are you tracking of the loan growth that's been put on here now in the last couple of quarters. How much of that is from new customers versus current Valley customers?
Absolutely. On the C&I side, it's a better mix of new customer to existing Valley. On the real estate side, I would say it's predominant Valley customer. But we absolutely track that recognizing on the C&I that gives us the best opportunities to cross sale treasury solutions and that is the focus of that C&I growth.
Okay, that's helpful. And then on the - Ira you had said a couple of times making the point that the margin of the incremental business you're adding is better than what's on the balance sheet. So just on a blended basis, if we look at what the loan origination yields are versus what the funding cost were this quarter and last quarter? What would you say in rough terms each of those are?
So they were a little north of 3.12% net. The loan yields were close to 4.70% on a blend basis.
Collyn, real quick that include a higher level of residential also. Because due to the lack of sale. So the commercial side is coming I think around north of 4.85%, around 4.85%.
Okay. And then what the lowest yielding loan bucket within your book right now? And what yield is that carrying?
That would be the resi it's carrying about a 4.2% yields.
Okay. Do you have the duration on that Tom by chance?
I'll get back to you.
Okay. And then just conversely what is the highest yielding bucket?
It's on a commercial real estate about this quarter about 4.85% on our new originations.
How about - I mean sorry if wasn't clear. I'm curious more about the current portfolio, not what your - not your origination yields what's the lowest on the book and then what's the highest on the book?
Lowest on the book is still be the resi. The highest on the book is commercial real estate.
Okay. And is that 4.2% still what the overall book is carrying or is that what new originations were?
That's around 4.2%, the new originations are actually higher than that, new originations close to 4.5%.
Okay, that's helpful. And then just curious can you guys give us any guidance on what you think the tax credit amortization line will be in coming quarters or how we should think about that?
I would think about it similarly to the trends you've seen in the past years, Collyn, it's pretty steady 1Q, 2Q, 3Q. And then roughly double or so into the fourth quarter.
Within offsetting taxes.
Correct.
Okay. So - but your tax guidance for the fourth quarter then assumes that that's a higher number in the fourth quarter.
Correct. It takes (inaudible) found everything.
Okay. All right very good. That's all I had thanks guys.
Thank you.
Thank you. And our last question comes from David Chiaverini from Wedbush Securities. Your line is now open.
Hi, thanks. Follow-up on the efficiency ratio. So you mentioned earlier in the call about how 9% of revenue is being spent on tech up from 4% of revenue previously. And you mentioned how you're spending it on Encino, salesforce.com. I was just curious is 100% being spent on software or are there some people in that 9% tech spend also?
There is a lot of people in there I think we are looking at migrating data centers, which we think will have a long-term save for us, the business intelligence software that we've created not only is our software cost, but there is a people cost, I think we are roughly about $1 million, just to get to that number. So it's across the board in software as well as people.
Got it. And that 9%, is that what you kind of envision for coming quarter and years as well?
I think it's a target for us, definitely today. I think the negative that we are not seeing is we are not seeing the benefit today of any of the efficiencies that we intend to get out of it. I think as you look to the future, if you continue that spend and always have a fuller progress associated with it, it's going to be offset by the efficiencies that you get from you spent previously.
For us we didn't have that benefit. To me it's sort of like FIFO, when you book a loan you are going to take the expense today from a provision and you are going to get the interest income a few quarters later. That said, I think that's what it's like for us on the technology spend, but it's an important investment that we think is going to drive significant profitability improvement within the entire organization.
Okay, thanks for that. and there was no change to the sub-51% efficiency target for 2020?
Correct.
Okay. And then the last one, is just a housekeeping question, in noninterest income there was a roughly $5 million decrease in other income driven by net expenses related to changes in the FDIC loss share receivable. I was wondering is that a one-time item?
Well, last quarter we had a gain in that category, and that gain was about $700,000 odd. The normal would be a negative number. The reason we had a gain is we closed out a bunch of loss shares, and as a result of that we had a gain. Going forward, I would say the numbers we show this quarter, I think we had about $1.2 million of costs, that's probably closer to the number you will see going forward.
Got it, thanks very much.
You are welcome.
Thank you.
Thank you and I'm showing no further questions at this time. I would now turn the call back to Rick Kramer, Investor Relations Officer for any further remarks.
All right. I'd like to thank you all for taking part in our third quarter earnings conference call. If you have any additional questions you can reach out to myself or Alan Eskow. Have a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.