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Valley National Bancorp  (NYSE:VLY)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to Third Quarter Valley National Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. (Operator Instructions) I'm now going to turn the conference over to your host, Rick Kraemer, Investor Relations Officer, you may begin, sir.

Rick Kraemer -- Investor Relations Officer

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 could find our third quarter earnings release and supporting documents on our website valley.com and additionally, I'd like to direct you to slide two of our 3Q '18 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 is my pleasure to turn the call over to Ira Robbins.

Ira Robbins -- President & Chief Executive Officer

Thank you. Good morning and thank you for joining us today. 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 products and services, but in 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 line. Since the beginning of the year, we have shown tremendous progress toward demonstrating the values on a direct path to a more diversified balance sheet, I might add through organic originations, repeatable revenue stream that is not reliant on asset purchases and more a function of the internal initiatives we control in 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 costs, we are thrilled with the customer retention and actual absolute growth we have experienced to date. We have 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 six 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 additional 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 are 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 streamlined 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 are attracting 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 costs. Services such as nCino, Salesforce, 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 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 the roughly 4% the Company had historically allocated. This will undoubtedly lead to improved efficiencies that are far more scalable than the manual processes we have employed in the past.

Finally, earlier this month, we unveiled a new logo and rebrand, which gives shape to our vision forward. As the banking landscape continues to evolve, we found it 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'll 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 $0.21 -- excuse me of $0.20. Included in this number were several items totaling approximately $4.8 million pre-tax or $0.01 per share on an after-tax basis. On an adjusted basis, our earnings per share were $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 (ph) monitoring software. Further, we have redundant telephone and broadband platforms that are (inaudible) our expenses by over $600,000 per quarter.

Additionally, we incurred 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 originations. We expect many of these costs to begin to decline over the next couple of quarters. It is worth noting that our quarterly loan loss provision was once again driven in large part by our taxi medallion portfolio, which when isolated equaled an additional $0.01 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.

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

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 helped 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 earnings 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 had 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 infrequent 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 while not considered one-time in nature do 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 rates. Another $1 million of costs related to severance 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.

Tom Iadanza -- Chief Banking Officer

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 the 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 and average C&I loan size of $1.2 million across multiple geographies and 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 continued 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 down marginally from the prior quarter. We continue to place great emphasis on moving the 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, a percent of total loans tied to three month 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 or 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 to slide seven. You will notice our deposit balances experienced a 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 costs and durations (ph). 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 on to 105%. As we suggested in the prior quarters, competition for deposits in our markets remained strong. That said, we are focused on growing deposits that are not solely dependent on rates. 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 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 (ph) 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 enhance service in products are gaining traction.

Please turn to slide eight. During the quarter, we reported 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 loans 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 recent 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, but current on 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 (ph) 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 was 0.33%. I would now like to turn the call back to Ira for a discussion regarding our near-term outlook and closing comments.

Ira Robbins -- President & Chief Executive Officer

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 a 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 remains 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 reflected within one quarter's reported numbers. We are making important strides in building a balance sheet that is not tethered 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 managed 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 throughout 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 these efforts should lead to greater positive operating leverage in 2019 and beyond. With that, operator, please open the lines for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Frank Schiraldi from Sandler O'Neill. Your line is now open.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Good morning.

Ira Robbins -- President & Chief Executive Officer

Good morning, Frank.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Just first on, Ira, you guys have you know a couple of times this year now increased your growth expectations. I'm just wondering how you're feeling about capital levels here about the TCE ratio. When (ph) are you feeling comfortable you'll be able to accrete that level internally here?

Ira Robbins -- President & Chief Executive Officer

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 (technical difficulty) in 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 forecasted.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay, and as you think about -- again on the loan growth. It seems like you feel you can put this sort of 8% to 10% or I guess you'll exceed that in the near-term here, but while defending the margin, so I wonder if you could just talk a little bit more about funding. I think in the past you've kind of talked about non-interest-bearing being a pretty good piece of the pie, you're bringing into the bank and I think you may have even said you know 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?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Yes, so Frank it's Alan. Yes, absolutely. So first of all on the non-interest bearing. Our non-interest-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, 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 at 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 non-interest bearing and in many of our savings and other tight 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 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 brokerage side which I think you asked 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 are great for certain purposes, at the moment, our brokered deposits as well as our core deposits are coming in all at costs 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 from 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 makes sense relative to the assets coming on.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. I mean just a quick one. What is the pick up or what was the pick up in the quarter in terms of replacing borrowings with the brokered product?

Rick Kraemer -- Investor Relations Officer

Hey, Frank it's Rick. So on a comparable duration basis of where we put these brokers on, I think it was about a 20 basis point net funding advantage versus FHLB.

Frank Schiraldi -- Sandler O'Neill -- Analyst

And that exists now the 20 basis points?

Rick Kraemer -- Investor Relations Officer

It was existing then and I believe it is still existing now.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. Thank you.

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Frank, 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 -- we are putting on duration that is 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.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay, so you're getting duration and you're getting the 20 basis points?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Absolutely.

Frank Schiraldi -- Sandler O'Neill -- Analyst

All right, OK, great. Thank you.

Rick Kraemer -- Investor Relations Officer

Thanks, Frank.

Operator

Thank you. And our next question comes from Steven Alexopoulos from J.P. Morgan, your line is now open.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning everybody.

Ira Robbins -- President & Chief Executive Officer

Morning, Steve.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I wanted to first start (multiple speakers). So I wanted to first start a follow-up -- that's OK -- 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 increase we saw this quarter?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Not necessarily, but I don't necessarily 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 put on a substantial amount of time deposits and we think that number is coming in that yield, that course is coming in even though it's increased at a level that will 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. You know the deposit rates while they moved up, they're not moving in advance theoretically of when the Fed is moving the rates.

Ira Robbins -- President & Chief Executive Officer

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 significant compression I think. You know, as Tom and Alan have both alluded to, 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 is 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Right, right. Okay. Then just a couple of questions on the loan growth side, which is obviously very strong in the quarter. You know we look at C&I, which is I would say weak across the board, it's fair to categorize it and the competition is talking about a really tough environment. Can you just color, I don't understand how you guys were so successful this quarter with the C&I loan growth you posted?

Tom Iadanza -- Chief Banking Officer

Sure, Hey it's Tom. When you look back -- going back you know 12 months, 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 up a property and casualty premium finance company about a year ago. That's in (ph) at a $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 in 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 14% annualized growth in C&I.

Steven Alexopoulos -- J.P. Morgan -- Analyst

And maybe just to keep going with that, if we look at the commercial real estate growth you had which was 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.

Ira Robbins -- President & Chief Executive Officer

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 run real estate that we have it in New York market. Our New York group continues to be active at real estate. They're probably growing on an annualized pace of about 8%, the New York, New Jersey area. We haven't done a lot of multifamily 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 multifamily where we do a little bit of that in a couple of 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 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. That's good color. Thanks a lot.

Operator

Thank you. And our next question comes from Austin Nicholas from Stephens. Your line is now open.

Austin Nicholas -- Stephens -- Analyst

Hey, guys, good morning.

Ira Robbins -- President & Chief Executive Officer

Good morning.

Austin Nicholas -- Stephens -- Analyst

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?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

So, it really is not really dramatic in all honesty, it's not as material as I think maybe the documents 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 its 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 the move in the net interest income or the interest income level for the quarter.

Ira Robbins -- President & Chief Executive Officer

Austin, this is Ira, just to really reinforce I think what we've tried to communicate earlier, we originate it on a marginal basis, the margin at least up or flat on the new loans and the new deposits that we put on, which is helping stabilize the margin. 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 additional cash flows from the PCI portfolio.

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

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 based 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 costs.

Austin Nicholas -- Stephens -- Analyst

Understood. Thanks, that's helpful. You know maybe just on the efficiency kind of target as you look out to 2020 of that, you know, call it 50%, you know 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 -- over the next coming call it two years is it and maybe what specifically is driving that? Is it more the revenue side or is it more the expense side or is it a little bit of both that really gets you down to that 51%?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Yes, I think the way to look at it is a little bit of both. So you know 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 costs going on because when you add new systems if you are not fully implemented, you're paying for the new one, you're still paying for the old one, so there are saves going to happen there as well that have not yet happened 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 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 we'll derive benefits from that.

Austin Nicholas -- Stephens -- Analyst

Got it. Okay, that's helpful. I 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?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

So, the New Jersey tax rate went up by -- went from 9% to 11.5%, they increased it by 2.5% in '18 and '19 and then it starts to drop off a little bit. So during '18, we really don't expect much of an increase in rate. So one of the reasons for that is our deferred tax assets get revalued based upon the higher rates that are going to turn around in that next two year period or so. So that is really offsetting any increase that we might see in '18 of these higher rates. In '19 and '20, 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 '18 -- into '19 and probably about a 0.5% into '20 and '21 based on these changes and the fact that these kind of reverse themselves. They are a 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.

Austin Nicholas -- Stephens -- Analyst

Got it. Okay, great. Thanks for taking my questions.

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Ken Zerbe from Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

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 brokerage CDs versus more your traditional retail customer CDs?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

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?

Ken Zerbe -- Morgan Stanley -- Analyst

Got you, understood. And then when you guys think about your 105% loan-to-deposit ratio, is it fair to assume that growing brokered CDs is also a good way of getting that down below 105% or are you thinking more on it in a different basis?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

No, we absolutely are thinking all of it and I don't know if you 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 cost 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 makes 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 helped us control our margin.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Understood and I definitely understand and appreciate the fact that these are coming on cheaper than 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 is some disruption in the brokerage market or short-term rates spiked. I guess, obviously, I think we all appreciate the value of core funding like not brokered. Like is this something that you would like to ultimately replace at some point or is brokered CDs going to remain more of a longer term funding vehicle for you?

Ira Robbins -- President & Chief Executive Officer

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 (ph) accounts as Alan mentioned, something we haven't witnessed here in many quarters in non-interest 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 and 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, but 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.

Ken Zerbe -- Morgan Stanley -- Analyst

Sounds good. All right. Thank you very much.

Operator

Thank you and our next question comes from Matthew Breese from Piper Jaffray. Your line is now open.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning, everybody.

Ira Robbins -- President & Chief Executive Officer

Good morning, Matt.

Matthew Breese -- Piper Jaffray -- Analyst

So on expenses, your 3Q run rate is now on an annualized basis $595 million. If I annualize what you've done year-to-date, you're at closer to $585 million and this compares to expense guidance early 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 saves and why haven't we seen more progress to meaningfully lower the expense base after so much time was spent laying out the opportunities and how you would execute.

Ira Robbins -- President & Chief Executive Officer

And I think I alluded to it real briefly, Matt, with regard to some of the integration expenses that we are incurring additionally in the USAB deal and not only is it 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 has been offset by the mortgage commissions as well. I don't think that was in our initial guidance. We understand that we need to improve the expenses throughout the entire organization to get the efficiency ratio to a level that makes sense.

Rick Kraemer -- Investor Relations Officer

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 the revenue side as well, right. While greater efficiencies are important and driving cost down are also important, growing revenues are equally important to that efficiency side. So the focus on the absolute dollar was something we kind of tried to move everybody away from last quarter.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. So if we --

Rick Kraemer -- Investor Relations Officer

Not suggesting -- sorry, go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

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 have thought. Is that accurate?

Ira Robbins -- President & Chief Executive Officer

I think there's additional tech spending that we alluded to in the call today that wasn't incorporated within LIFT. I think we're up to 73% of what we identified within LIFT and there's still an expectation that we're going to get to the number that we provided, it just is going to be a little bit longer. I think that what maybe we had originally thought for this specific year based on resources being more allocated toward 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's right, I think guidance that we gave on a rounded absolute basis was also expecting a certain revenue stream. I think now we've been able to demonstrate that the revenue stream 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 when you look at our overall revenue growth, what we're able to do in loan growth, in net interest income, that's pretty sustainable. And there's real positives that are going to come from there.

Matthew Breese -- Piper Jaffray -- Analyst

The other part I'm a little confused on is if the mortgage gain on sale is going to be lower, I would've expected a little bit greater elasticity in the expense side of the equation. Should we expect that in forward quarters if we're not going to see the gain on sale?

Ira Robbins -- President & Chief Executive Officer

Absolutely (ph).

Matthew Breese -- Piper Jaffray -- Analyst

Okay and then if expenses are going to be higher and I haven't heard anything about the ROA target of 125. When do you expect to be able to hit that?

Ira Robbins -- President & Chief Executive Officer

It remains unchanged. So we are still pointing toward some point in 2020.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, understood. That's all I had.

Ira Robbins -- President & Chief Executive Officer

Thanks, Matt.

Operator

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

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, everyone. Just to the loan growth discussion, what did the line utilization rates do this quarter on the C&I side?

Ira Robbins -- President & Chief Executive Officer

It went up slightly to probably around 43%. Not a dramatic increase. Always hover around 40%.

Collyn Gilbert -- KBW -- Analyst

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?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Absolutely, on the C&I side, it is a better mix of new customers 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 opportunity to cross-sell treasury solutions and that is the focus of that C&I growth.

Collyn Gilbert -- KBW -- Analyst

Okay, that's helpful. And then on the -- you know Ira, you had said a couple of times you know 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 costs were this quarter and last quarter, what would you say in rough terms each of those are?

Ira Robbins -- President & Chief Executive Officer

So they were a little north of 312 net. The loan yields were close to 470 on a blend basis.

Tom Iadanza -- Chief Banking Officer

(multiple speakers) Collyn, real quick. That did (ph) include a higher level of residential also because due to the lack of sale, so the commercial side is coming I think around 4 -- north of 485 or 445 (ph).

Collyn Gilbert -- KBW -- Analyst

Okay, and then what is the lowest yielding loan bucket within your book right now? And what yield is that carrying?

Tom Iadanza -- Chief Banking Officer

That would be the Resi, it's carrying about a 4.2 yield.

Collyn Gilbert -- KBW -- Analyst

Okay. Do you have the duration on that, Tom, by chance?

Tom Iadanza -- Chief Banking Officer

(multiple speakers). I'll get back to you.

Collyn Gilbert -- KBW -- Analyst

Okay and then just conversely what is the highest yielding bucket?

Tom Iadanza -- Chief Banking Officer

It's on commercial real estate about you know this quarter about 485 on our original -- new originations.

Collyn Gilbert -- KBW -- Analyst

How about -- I mean honest -- sorry if I wasn't clear. I'm curious more about the current portfolio not what you're -- not your origination yields, what's the lowest on the book and then what's the highest on the book, blended?

Tom Iadanza -- Chief Banking Officer

The lowest on the book would still be the Resi, the highest on the book is commercial real estate.

Collyn Gilbert -- KBW -- Analyst

Okay and is that 4.2 still what the overall book is carrying or is that what new originations were?

Tom Iadanza -- Chief Banking Officer

It's around (multiple speakers) the new originations are actually higher than that. New originations are close to 4.5 (ph).

Collyn Gilbert -- KBW -- Analyst

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?

Tom Iadanza -- Chief Banking Officer

I would think about it similarly to the trend you've seen in past years, Collyn. It is pretty steady, 1Q, 2Q, 3Q and then roughly doubled or so into the fourth quarter.

Ira Robbins -- President & Chief Executive Officer

With an offset in taxes.

Tom Iadanza -- Chief Banking Officer

Correct.

Collyn Gilbert -- KBW -- Analyst

Okay. So, but your tax guidance for the fourth quarter then assumes that's a higher number in the fourth (ph) -- that's (multiple speakers).

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Correct.

Collyn Gilbert -- KBW -- Analyst

Okay, got it.

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

I take into account everything.

Collyn Gilbert -- KBW -- Analyst

Okay. All right, very good. That's all I had. Thanks guys.

Operator

Thank you. And our last question comes from David Chiaverini from Wedbush Securities. Your line is open.

David Chiaverini -- Wedbush Securities -- Analyst

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 nCino, Salesforce.com. I was just curious, is 100 % being spent on software or are there some people in that 9% tech spend also?

Ira Robbins -- President & Chief Executive Officer

There's a lot of people in there. You know I think we're looking at migrating data centers which we think will have a long-term say for us, the business intelligence software that we've created not only is our software costs, but there is a people cost. I think we're roughly about $1 million just to get to that number. So it's across the board in software as well as people.

David Chiaverini -- Wedbush Securities -- Analyst

Got it, and that 9% is that what you kind of envisioned for coming quarters and years as well?

Ira Robbins -- President & Chief Executive Officer

I think it's a target for us definitely today. I think the negative that we're not seeing is we're 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 forward progress associated with it, it's going to be offset by the efficiencies that you get from what you spent previously. You know, for us, we didn't have that benefit. To me it felt like CECL (ph) where you book a loan, you're going to take the expense today from a provision and you're 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.

David Chiaverini -- Wedbush Securities -- Analyst

Okay, thanks for that. And there's no change to the sub 51% efficiency target for 2020?

Ira Robbins -- President & Chief Executive Officer

Correct.

David Chiaverini -- Wedbush Securities -- Analyst

Okay, and then the last one is just a housekeeping question. In non-interest income, there is 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?

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

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 showed this quarter, I think we had about $1.2 million (ph) of costs, that's probably closer to the number you'll see going forward.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Ira Robbins -- President & Chief Executive Officer

You're welcome.

Operator

Thank you. And I'm showing no further questions at this time. I would now turn the call back to Rick Kraemer, Investor Relations Officer for any further remarks.

Rick Kraemer -- Investor Relations Officer

All right, well, 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.

Operator

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.

Duration: 59 minutes

Call participants:

Rick Kraemer -- Investor Relations Officer

Ira Robbins -- President & Chief Executive Officer

Alan D. Eskow -- Senior Executive Vice President and Chief Financial Officer

Tom Iadanza -- Chief Banking Officer

Frank Schiraldi -- Sandler O'Neill -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Austin Nicholas -- Stephens -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Collyn Gilbert -- KBW -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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