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Valley National Bancorp (VLY -0.76%)
Q4Â 2019 Earnings Call
Jan 30, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2019 Valley National Bancorp Earnings Conference Call. At this time all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Mr. Rick Kraemer. Thank you. Please go ahead, sir.
Rick Kraemer -- Senior Vice President of Investor Relations
Thank you, Skylar. Good morning and welcome to the Valley fourth quarter 2019 earnings conference call. On the call today is Valley President and CEO, Ira Robbins; Chief Financial Officer, Mike Hagedorn; and Chief Banking Officer, Tom Iadanza.
Before we begin, I would like to make everyone aware that you can find our fourth quarter earnings release and supporting documents on our company website valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures to GAAP results. Additionally, I would like to direct you to slide 2 of our 4Q '19 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.
With that, I'll turn the call over to Ira Robbins.
Ira Robbins -- President and Chief Executive Officer
Thank you, Rick. Good morning and welcome. Our fourth quarter results are a reflection of the tremendous progress we've achieved over the past couple of years. We continue to make significant strides toward delivering on and repeating our previously stated goals of, consistent growth, improved operating efficiency and greater diversification of revenue.
In the fourth quarter of 2019, Valley reported adjusted earnings per share of $0.24. Our adjusted EPS was up 14% from the fourth quarter of last year. Furthermore, our full year 2019 adjusted EPS of $0.92 was also up 14% versus the full year of 2018. Keep in mind, we delivered these results in a challenging macroeconomic environment, which has put pressure on net interest margins for the entire industry.
Equally impressive, we delivered 12.7% tangible book value growth for the full year, while announcing and closing a significant acquisition. Additionally, this growth occurred while paying a meaningful cash dividend and reinvesting in our products, people and infrastructure.
Two years ago, we identified several key targets and guidelines for you to hold us accountable. As you have observed, substantial progress has been made on each and every one of those guidelines and targets. Our loan growth has consistently been above industry average, while maintaining the same prudent underwriting standards which have long been a hallmark of Valley. We have driven down our core costs, beating our estimated adjusted see adjusted efficiency ratio goals for the full year of 2019. Our multi-year branch transformation initiative has resulted in consolidations and cost saves, while delivering a better product to our customers, which can be seen in many underlying deposit trends. And just as important, that customer experience scores throughout our branch network have exponentially expanded as well.
Our fee income continues to grow, boosted by improvement of existing businesses and expansion of new products. Lastly, shareholder value creation is a top priority, and we delivered an exceptional deal with Oritani, which was immediately accretive to tangible book value and all of our capital ratios.
Additionally, we remain very encouraged with the many trends we witnessed during the fourth quarter, such as strong organic loan growth with significant geographic and product diversification, excellent business and retail core deposit growth, continued improvement in efficiency and very sound credit metrics. I'm extremely proud of the progress we have made over the past two years, and believe this is only the beginning of a long run of success for Valley.
Now I'd like to turn the call over to Mike Hagedorn for some additional financial highlights for the quarter.
Michael Hagedorn -- Chief Financial Officer
Thank you, Ira. Turning to slide 5 in quarterly net interest income and margin trends. Our net interest margin increased 5 basis points to 2.96% from the prior quarter, while the interest rate spread increased 10 basis points from the previous period. We are encouraged by this linked quarter expansion, given the remaining repricing tailwind we believe exists in our current liability structure. We had previously outlined this opportunity in our forward repricing gap during the third quarter call. Accordingly, we have been focused on managing liability costs lower, while maintaining competitively in the market.
Furthering our efforts to lower the cost of funds was the extinguishment of approximately $635 million of longer-term FHLB debt during the fourth quarter. We had originally cited the intention to extinguish this debt, in conjunction with the closing of the Oritani transaction. This action resulted in an approximate $23 million after tax charge, and is expected to result in approximately 200 basis points of annual interest expense savings, on a comparable level of borrowings, a significant portion of which we have captured in recent weeks.
While we continue to place emphasis on the short end of the curve on liabilities, we did take the opportunity to extend duration modestly during the fourth quarter, by moving approximately $300 million out between two and three year durations, utilizing alternative wholesale funds. We believe this action is prudent, given the absolute rate available and current shape of the curve.
As you can see from the 12 month forward maturity schedule on slide 6 of our EPS presentation, there is still substantial ability to reprice both retail CDs and other wholesale borrowings meaningfully lower, should the current rate outlook remain.
As illustrated on slide 9, we continue to see the effects of lower repricing on our monthly deposit rate averages. As such, we believe we are defensively positioned for the current rate environment and outlook.
Moving to assets; as expected, the current environment continues to negatively impact portfolio yields. That said, we sold approximately $800 million of mostly New York City-based multifamily loans, that had a weighted average yield of approximately 3.53%, which helped offset some of the core yield compression. At year-end, approximately 57% of our loans were adjustable rate, while 37% of total loans are scheduled to reset within the next 12 months. Approximately 15% of total loans are indexed to one month LIBOR, and another 9% are tied to prime, which reprice either daily or monthly. Additionally, almost 19% of loans price off of varying CMT indices, the bulk of which contractually reprice every five years.
As seen on the left chart on slide 8, lower index rates over the past six plus months, continue to place downward pressure on new loan origination yields. While much of this is driven by market pressures, we did witness a 17 basis point rebound in new origination spreads during the quarter. This is important, in a product of our ability to access lower cost deposits to fund significant growth. Another noteworthy observation is the pace of lower new origination yields has begun to slow in recent months. And while it's too early to call a bottom, stabilization is an encouraging signal.
Moving on, our non-interest income declined 7% linked quarter, driven primarily by lower swap fees of $3.9 million. As we discussed, during the third quarter earnings call, we expected this business to soften in the fourth quarter. Moving forward, we expect this could continue to be negatively impacted in the first quarter, by what is historically a seasonally slower period for loan growth.
As a percentage of adjusted operating revenue, adjusted fee income was 13.8%, which is a decline from the prior quarter 16% level. While this quarter's outcome was modestly below our long-term goals of 15% to 20% of total operating revenue, the quarterly annualized increase in net interest income, compounded the declining fee ratio, which is a good issue to have.
Diving into the results in more detail; we generated swap volume of approximately $10 million during the 4th quarter of 2019, originating back to back swaps on approximately $400 million of notional loans. Our net residential mortgage gain on sale income increased 13.5% from the third quarter of 2019. These gains were the result of approximately $300 million in loan sales during the quarter, which consisted of both conforming flow and one jumbo bulk transaction. Our conforming gain on sale margins improved approximately 21 basis points from the previous quarter. In the future, we believe more active marketing efforts and education among our sales team and clients will continue to make non-interest income a larger contributor to the bottom line.
Our reported expenses increased approximately $50 million from the prior quarter. The reported numbers include several infrequent items, totaling approximately $51 million on a pre-tax basis. Specifically, the loss on extinguishment of FHLB debt was approximately $32 million and merger related expenses were $15.1 million. The amortization of tax credit investments was $4 million for the fourth quarter.
Our adjusted expenses, exclusive of tax credit, amortization and previously mentioned infrequent items, we're $145 million, up approximately $5 million from the previous quarter. Importantly, this does include one full month of direct Oritani expenses, which were approximately $2 million. Approximately $1.3 million of this can be seen in the quarterly salary lines, with the balance being dispersed across several line items.
We also incurred approximately $350,000 in quarterly expense aimed at resolution of Oritani's pre-existing regulatory issues. It's worth pointing out, that the direct Oritani expenses we realized in December, would equate to achieving over 38% cost saves on an annual basis, well ahead of our expected timeline. Keep in mind, these saves have occurred before system and back office integration, and without consolidating or closing a single branch.
Further support of our commitment to efficiencies can be seen within the salary and employee benefits expense. After adjusting for merger related severance costs and backing out direct Oritani related expenses from December, we saw a decline of approximately $1.6 million from third quarter '19. This fourth quarter adjusted level equates to a quarterly year-over-year decline of 6.4% as compared to 4Q '18.
As we have spoken about many times in the past, we are hyper-focused on creating greater operating leverage. Nowhere is that more obvious than looking at our adjusted efficiency ratio. For the fourth quarter, we reported $54 million over a 100 -- 52.4% sorry, over a 100 basis point decline versus the previous quarter, while full-year 2019 declined an impressive 412 basis points from from 2018, ending at 53.78%. This was well below our full year target of 55%. Making this even more impressive is that this occurred while entering new markets, expanding products and announcing and closing a significant acquisition. It has become ingrained in our management culture to focus on reallocating resources toward business lines, products and people, that give us the greatest returns on our expense base, and the results speak for themselves.
Our loan growth, adjusted for the acquisition of Oritani for the fourth quarter was an annualized, negative 0.9%. Importantly, this metric includes the sale of approximately $800 million in multifamily commercial real estate loans, mostly within New York City, which occurred late in the fourth quarter. Absent this sale and the Oritani acquisition, loan growth would have been 10% annualized. Our full year 2019 organic loan growth, excluding Oritani and the sale of multifamily loans, would have been approximately 9% or just over the high end of our guidance.
As illustrated on slide 8, much of this quarter's organic growth came in commercial real estate, C&I and construction. The average size CRE loan originated during the quarter remains relatively small at $2.1 million, while average C&I was just $376,000, further diversifying our risk.
From a geographic perspective, our growth was well distributed. Approximately 40% of our total quarterly commercial growth came from Florida and Alabama, while New York and New Jersey made up approximately 55%, with the balance coming in our National Commercial businesses.
We sold approximately $300 million in residential loans during the quarter, approximately 44% of which came in the form of a Jumbo portfolio bulk sale, in which we retained servicing. Conforming loans sold increased 19.6% from the previous quarter, which generated the balance of gains via sales through our standard GSE outlet.
Deposit trends were very favorable for the quarter. At quarter end, loan-to-deposit ratio was 101.8%, well within our desired range. Our total deposits, ex-Oritani, increased approximately 4% linked quarter and 8.6% for the full year. Excluding Oritani, non-interest-bearing deposits grew 10.5% annualized on a linked quarter basis, while our core branch deposits grew 6.4% for the full year.
We witnessed annualized linked quarter growth in savings, NOW and money market accounts of 6.1% also exclusive of the merger. Momentum in our branch and online deposit channels continues, showing net new account growth of 3.3% annualized on a linked quarter basis. Perhaps more important, balances associated with these channels grew at a linked quarter annualized pace of over 13.5%.
Diving deeper, we have seen tremendous balanced growth in our checking accounts at 11.3% on an annualized linked quarter basis. Our efforts in online banking, while still relatively immature, saw net account growth of 9.3% from the previous quarter, while all of our geographies experienced net account expansion as well. We are proud of these achievements, especially considering, we closed 15 branches during the calendar year, that carried combined balances of approximately $485 million. This is further evidence that our branch transformation efforts, led to more proactive customer outreach, combined with enhanced product offerings, are having a positive impact on both retention and growth.
As illustrated in the average deposit balance and rate trends chart on slide 9, we have been managing deposit rates lower across both business and retail segments. As shown, the monthly average rates for Savings, NOW and money market accounts have declined for five of the past six months. While CDs have experienced a similar trend.
As we stated last quarter, we expected greater repricing benefits to come in 4Q '19, given the anticipated lag effects. Notably, the months of November and December experienced accelerated declines in average rate. We continue to expect more declines during the first quarter of 2020, given the forward repricing dynamic and liability sensitive pricing gap we face over the short term.
During the quarter, we saw reliance on short-term borrowings diminish by approximately $732 million. This was facilitated by a combination of paydowns, offsetting the aforementioned loan sales, accessing brokered CDs and our successful core deposit raising efforts during the quarter. As we mentioned earlier, we extinguished approximately $635 million of long-term FHLB debt during the quarter that we had previously identified. If you recall, this debt carried a weighted average cost of around 3.93%, compared to current market rates that are greater than 20 basis points less -- that are greater than 200 basis points less.
In the fourth quarter, we added $300 million of modest duration broker deposits at favorable long-term funding rates, taking advantage of the shape and absolute level of the curve. While we continue to place emphasis on pulling liability costs lower, this is a prudent approach toward laddering our funding sources, and managing our relatively neutral interest rate position.
I want to give a brief update on asset quality, capital and the expected impacts of CECL. Our total non-performing assets declined approximately $6.3 million from the previous quarter. Our accruing past due loans saw a more meaningful drop from the previous quarter, declining over $20 million. As we signaled in the previous quarter, this decline was expected, given the administrative circumstances that resulted in the previous quarter's increase.
During the fourth quarter of 2019, we recorded a $5.4 million provision for loan losses. Our net charge-offs increased by 3.6% from the previous quarter, driven primarily by medallion loans, for which reserves had previously been established, and one smaller C&I credit.
Turning to CECL; we are lowering our estimated range of impact that we spoke about last quarter. After running additional parallel tests and updating the expectations of the forecasted economic conditions and portfolio balances as of December 31 2019, we estimate that CECL could result in an increase to our non-PCI allowance of approximately $30 million to $40 million as compared to our current reserve levels. This is down from the previously expected range of $50 million to $70 million. This addition would be exclusive of the balance sheet transfer that occurs within the PCI related credit portion that existed at year-end. The PCI related reclassification will not have any impact on the pro forma capital or regulatory phase-in period.
In terms of capital, you'll notice the significant improvement in both tangible, common equity and regulatory capital ratios during the quarter. These increases were accomplished by a combination of the acquisition of acquired Oritani capital and significant progress made toward lowering the risk weights associated with much of the acquired portfolio. Furthering the decline in risk weights, was the sale of approximately $800 million in multifamily loans. The robust levels of capital generated by the acquisition and other internal efforts, are another example of management's commitment to building a balance sheet, that can support values expansion for years to come.
I'd like to give a brief update on the increase in reserves associated with uncertain tax liability, related to renewable energy tax credits, and other tax benefits previously recognized from the investments in the DC Solar funds, plus interest. As you may recall, we had previously established a partial reserve in the first quarter of 2019. After recent developments, we recorded an additional $18.7 million increase in our tax rate tax reserve and as a result, are fully reserved for the tax position related to DC Solar at December 31, 2019.
Finally, moving to slide 11 of our presentation to cover some targets and outlook. We are establishing new full-year 2020 loan growth guidance in the range of 6% to 8%, after residential loan sales. This growth assumes a base of approximately $29.7 billion of our period end 2019 loan balance. Our outlook for net interest income is being established in a range of 13% to 16% growth for the year. This is the expected percentage growth off of our full year 2019 base of approximately $898 million. Keep in mind, this percentage growth is elevated due to the timing of the Oritani acquisition, and the expected full year realized net interest income from the acquired portfolio, in addition to organic growth.
On a stand-alone Valley, the expected growth would be approximately 3% to 6%. Our net interest income outlook assumes a 25 basis point rate cut in 2020. In terms of net interest margin cadence, it would be reasonable to assume some modest pressures in the first quarter of 2020, driven in part by seasonal decline due to day count, combined with continued pressures on new origination asset yields, and one full quarter impact of Oritani. We are maintaining our previous adjusted efficiency ratio target of 51% or lower being achieved at a period during the year. Finally, we are establishing a full year tax rate range of 24% to 26%.
Now I'll turn the call back over to Ira for some additional commentary.
Ira Robbins -- President and Chief Executive Officer
Thanks Mike, I'd like to provide a brief update on the Oritani merger. After receiving regulatory approval in record time for Valley, we were very pleased to close the transaction in early December. We look forward to the many benefits this transaction will provide, including new customers, deeper penetration into valuable affluent markets and additional capital to fuel future growth. We are planning integration later in the first quarter and should begin to deliver on additional cost saves shortly thereafter. I'm extremely happy with the progress made to date, and want to thank all Valley and former Oritani employees, that made this deal is a special and successful.
In closing, 2019 was an important year for Valley. Many of the scenes that we've laid out to you for the past two years are progressing, and the financial results and momentum are illustrative of these efforts. We have been able to deliver on significant goals we laid out, which include, sustainable balance sheet growth that is underwritten with our consistent and conservative approach, greater efficiency, positive operating leverage, driven by a cultural shift within the entire organization. Thirdly, strategic balance sheet management, with a focus on building capital and allocating it more effectively. And lastly, a disciplined acquisition strategy aimed at creating shareholder value in the short and long-term. All of this has occurred, while making significant reinvestment in our infrastructure, to support a reinvigorated Valley for years to come.
The Bank's transformation continues, and I remain absolutely confident and energized by the progress made so far. I believe these changes should have a positive impact on shareholder returns over the long term, while reinforcing our commitment to community, employees and innovation.
With that, I'd like to now turn the call back over to the operator to begin Q&A. Thank you.
Questions and Answers:
Operator
[Operator Instructions]. We have a question from Ken Zerbe with Morgan Stanley, your line is now open.
Ken Zerbe -- Morgan Stanley -- Analyst
Great, thanks, good morning guys.
Ira Robbins -- President and Chief Executive Officer
Good morning Ken.
Ken Zerbe -- Morgan Stanley -- Analyst
I guess maybe just starting off, in terms of the loan sale that you did this quarter. It want to make sure I got all the pieces here, specifically to the question is, what was the gain that you made on that sale? And the reason I ask is because if you look at sort of -- we note that the loans are yielding around 3.4%, you're saving three-ninths, so that's maybe 50 basis points per year, about $3 million of savings. But it cost you $32 million to get out of this debt. So, there must be some very large gain to make this economically make sense for you guys?
Thomas Iadanza -- Chief Banking Officer
Hey Ken, it's Tom Iadanaza. I can't comment on the terms of the loan sale. All I will tell you is that, we believe it was prudent to exit or lower our exposure in New York City multifamily portfolio. There were no credit issues within this portfolio of loans. We saw that actually it was performing fairly well with 63% loan-to-value and a 1.7 times debt service coverage. Similar to the loans we have. They didn't fit into our relationship banking, return of deposit strategy that we have within the bank. They are capital intensive with lower relative yield, with minimal cross-sell and deposit opportunity, and we'll always assess our capital needs in our asset businesses, to make sure that they all fit or will seek better opportunities.
So again, I just want to stress, there was no cap, there were no credit issues with it. It was a sound portfolio. It was an opportunity to get out of lower yielding assets in a class that we thought it was prudent to reduce.
Ira Robbins -- President and Chief Executive Officer
And Ken, this is Ira. I think in our mind there are really two separate transactions. The FHLB transaction that we described, when it came to prepaying the the debt, was consistent with what we disclosed when we were announcing the Oritani transaction. So basically what we did is, we took a little bit of the excess capital that was generated through Oritani deal, use that to pay down debt, that took a prepayment charge. So we still had a positive capital position that resulted from Oritani. And this created positive EPS, as we began to move forward.
So the loan sale really was a distinct decision, differentiated from the gain or a differentiated from what we did on the borrowing. So I really wouldn't look at them as connected at all.
Ken Zerbe -- Morgan Stanley -- Analyst
Got it. Even though you used fair chunk of the proceeds from the sale to fund the FHLB repayment?
Ira Robbins -- President and Chief Executive Officer
We were looking at it from an independent perspective, right. So we announced the Oritani transaction, we announced the $635 million. So the save that was going to come from that, was largely a function of just reinvesting or reborrowing back in different term debt at a lower rate. It so happened that we were able to -- as Tom identified, enter into this unique transaction, that they coincided in the same quarter. That said, they really were an independent transaction and in our mind, once again, the FHLB transaction that we did on the borrowings, was largely connected with what we're doing from the Oritani deal, and really utilizing some of that excess capital.
Ken Zerbe -- Morgan Stanley -- Analyst
Got you, OK. So assuming there was no gain, which is my assumption or we can't make that assumption. This could have been a net negative from you guys in day one. But you're just saying, you wanted to do, because strategically, it makes you a better bank going forward, even if you've lost money on this transaction?
Ira Robbins -- President and Chief Executive Officer
So I don't think over the long term, we lost money on the transaction. I think when you look at make-whole payments, when it comes to any FHLB transaction, you pretty much come up neutral. I mean it's all really a time, value of money which our forecasted saves are, versus what your one-time prepayment penalty is. I think for us, as we looked at it, what was the additional capital that we acquired through the Oritani transaction, how much of that additional capital we needed versus where we want it to be on an EPS perspective, on a prospective basis, it was really just the balance of those two. Once again, separately, we entered into a unique transaction that provided us an opportunity, as Tom mentioned, to reduce some of our exposure to the New York City marketplace, and we were able to really move forward with that, in addition to reducing some of that exposure, I think as Tom alluded to, those were really transactions that didn't provide us opportunity to cross-sell from a relationship perspective. So we think it's a much more efficient use of capital on a go-forward basis.
Ken Zerbe -- Morgan Stanley -- Analyst
I see, OK, that helps. And then maybe my second question if I may though; what was the PAA adjustment during the quarter? And how much did that add to NIM and NII? Thanks.
Michael Hagedorn -- Chief Financial Officer
So the -- this is Mike. So the total credit related mark was $28 million, of which roughly half of that is the the credit interest portion of it. And that has a average life of about four years.
Ken Zerbe -- Morgan Stanley -- Analyst
Sorry, I meant the piece that actually flowed through NII in the quarter?
Ira Robbins -- President and Chief Executive Officer
I think what we're giving you is, that's one thing we tried not to really do with regard to many transaction. So Mike gave you a number of $14 million, broken out over a four year period. So you can back into a number for what the one month would have looked like, and it's really an immaterial number for us, I think as we try to look at earnings, we try to make them as sustainable as possible, and not have a lot of purchase accounting adjustments within them.
Ken Zerbe -- Morgan Stanley -- Analyst
Okay, thank you very much.
Operator
Our next question comes from Frank Schiraldi with Piper Sandler. Your line is now open.
Frank Schiraldi -- Piper Sandler -- Analyst
Hey, good morning guys. Just on loan growth assumptions for 2020, just wondering what that 6% to 8% might include in terms of run-off of the multifamily portfolio?
Thomas Iadanza -- Chief Banking Officer
Hey Frank, it's Tom again. I think the multifamily portfolio, New York piece, it now stands at about $1.4 billion, pretty strong loan to values, we are in that kind of 50 to 60 range, [Indecipherable] Oritani versus legacy Valley portfolio. The Valley portfolio is all customer relationship-driven, so we're not anticipating significant run-off. We will selectively participate and do new business there. Keep in mind, this was not a major part of our business in the past. The yields were always low. We only give these loans to people we knew well, long time customers, that we're really deposit and relationship-driven. So there could be an expectation that we will see some repayment through the normal course of business, may be a little bit extra. But I think with what we've built in other aspects of our business, will make up for that.
Keep in mind, Mike mentioned, the granular nature of the portfolio at $2.4 million of average CRE loan, it's $375 million on the C&I side on the new production, and we'll -- that's our focus. Our focus is to be well diversified without any reliance on any significant asset class. So we're going to continue that approach, and we expect to meet the 6% to 8% guidance.
Frank Schiraldi -- Piper Sandler -- Analyst
I am sorry, how much time did you say is New York multifamily with the Oritani?
Thomas Iadanza -- Chief Banking Officer
$1.4 billion. $600 million is legacy Valley, about -- a little over $800 million is Oritani. And again, the loan to value on the Valley piece is around 60% and on the Oritani piece is 48, all has performed, and we expect that to continue.
Ira Robbins -- President and Chief Executive Officer
I think if you look at 2019 as a guide, we originated about $6.2 billion in total loans across the entire footprint, and in each of the individual products. I think for us, as we continue to move forward, there is absolutely not a focus on expanding the multi-family portfolio. So balances are expected to really remain pretty much flat. So I think as we commented on where we saw growth this year, within the Florida and Alabama footprint, to a larger degree, than maybe some of the other areas, as well as within that C&I products that is probably going to continue for next year for us.
Frank Schiraldi -- Piper Sandler -- Analyst
Okay. Just as a follow-up then, the sale in the quarter, if you could maybe just talk through, why that bucket was a bit different in terms of -- you know because it sounded like credit quality was still fine there, what made -- given the pickup in capital from Oritani and then you mentioned CECL, so it is a smaller relative mark, why you decided to sell this bucket, as opposed to let it run off over time, or get replaced over time? So what's different between this and the rest of the portfolio?
Thomas Iadanza -- Chief Banking Officer
Yeah, this bucket was a transaction-oriented bucket of loans. There was no deposits associated with it. Our loan-to-deposit ratio was quite high in this piece. The balance of our portfolio is relationship driven. It's to people that we have long-term relationships, that use us for many products and services. So again, it was really assessing our capital allocation, getting out of lower yielding, non-relationship businesses, and focusing our attention on return and relationship-driven businesses. It's return against volume.
Frank Schiraldi -- Piper Sandler -- Analyst
Okay. And then I'm sorry, you might have said, but this was not part of Oritani's portfolio, this multifamily sold?
Thomas Iadanza -- Chief Banking Officer
It was not part of Oritani portfolio, it was a Valley portfolio.
Frank Schiraldi -- Piper Sandler -- Analyst
Great. Okay, thank you.
Ira Robbins -- President and Chief Executive Officer
Thanks, Frank.
Operator
Our next question comes from Steven Alexopoulos with JP Morgan. Your line is now open.
Alex Lau -- JP Morgan -- Analyst
Hi, good morning. This is Alex Lau on for Steve. So post your -- the closing of Oritani, can you give an update on branch consolidations? And also, an update on underperforming branches? Thanks.
Thomas Iadanza -- Chief Banking Officer
Sure Alex. Its Tom Iadanza again. We've identified and announced that there were nine branches, all in less than a mile from each other, that will be closed as part of the acquisition. That's what we're announcing, and that's where we are today. With regards to the Valley branches and our branch transformation, we had the previous calls announced, we would be reducing the Valley footprint by 10 branches during 2020. We are still on target for that.
I think on the positive side, the retention of deposits in the closed branches has been very high, and that's really the -- based on us getting out in front of the customer, getting to them early, and making sure that we have a lot of contact and retain a high percentage of those deposits. And if I recall, they are in that 85% retention or so range. We will continue to manage it that way. We do manage our branches individually, just to make sure that we have the right mix of deposits, the right mix of people, the right service levels. Our focus on our branches today are really service and sale-oriented, and it's important to us, we did complete the renovation and the new model look of our first eight branches, and I'm speaking as a proud father on this, they came out extremely well, and you know, it has been well received by our customer base. So we're on track and on the way with our branch transformation.
Alex Lau -- JP Morgan -- Analyst
Thanks for that. And just to follow-up, on your loan-to-deposit ratio; with Oritani, what is the -- can you remind me the range that you're comfortable with, and would that be below 100%?
Michael Hagedorn -- Chief Financial Officer
Yeah. So as we've said in the past, the same range on the top still exists. So we're looking for something in the neighborhood of 95% to 105%. So it's the same as it was before.
Alex Lau -- JP Morgan -- Analyst
Okay, thank you.
Operator
Our next question comes from David Chiaverini with Wedbush Securities. Your line is now open.
David Chiaverini -- Wedbush Securities -- Analyst
Hi, thanks. Couple of questions for you. So starting off, looking on slide 8, where it shows the loan yield portfolio and the origination yields, so the origination yields were 4.1%. The overall portfolio is 4.51%. I was curious, and I heard your comment about how the NIM in the first quarter should be under some modest pressure. But I'm curious, if we think longer-term given the, roughly 40 basis point spread between what you're originating loans at, and what the overall portfolio yield is at, should we expect additional pressure kind of through 2020?
Michael Hagedorn -- Chief Financial Officer
Yeah. So absent the comments we made about the first quarter, which I think you have right. Keep in mind that our spread, as I said in my prepared remarks, was up 17 basis points. And so I think we're seeing some slowing in the rate of decline here. As I said, it's not -- we're not ready to call a bottom yet on it, but it's certainly encouraging, maybe that those two lines in the bottom left quadrant of the slide would start to narrow somewhat.
David Chiaverini -- Wedbush Securities -- Analyst
Okay, great, thanks for that, and then on the other side of the equation, now that you prepaid the expensive FHLB debt, and that some of your cost of deposits are coming down, do you happen to have what the kind of blended spot rate cost of deposits or cost of funds, I should say -- total cost of funds at December 31st was? That way you can give us an indication, as to what to expect into the first quarter?
Michael Hagedorn -- Chief Financial Officer
We're going to look. David, I don't think we have that handy, but I can certainly reach out [Indecipherable] accurate with that.
David Chiaverini -- Wedbush Securities -- Analyst
Okay. And then last one related to that is, and I like this slide where you are showing the cumulative cash flow gap, and you show that the maturing CD rates are in the 2.2% range. What are you guys renewing CDs at currently?
Michael Hagedorn -- Chief Financial Officer
So I'll answer that in two parts. First, one of the things that management tracks very well here, is the retention of the CDs as well. And so those have ranged from roughly 80% to 90%. For new rollover retained CDs, we are in the range of 1.5% to 1.7%. So very significant reduction in our funding costs on this large portfolio, which you can see, we have about $1.7 billion first quarter, another $2 billion coming up in the second quarter, and then another $1 billion in the third quarter. So it is a significant mover of our potential net interest margin, as we talked about in the third quarter as well.
David Chiaverini -- Wedbush Securities -- Analyst
Great, thanks very much.
Operator
[Operator Instructions]. Our next question comes from Collyn Gilbert with KBW. Your line is now open.
Collyn Gilbert -- KBW -- Analyst
Thanks. Good morning everyone. Just to continue on with the NIM question. So I just want make sure I understood you all correctly. You are assuming a Fed cut in this guidance, is that correct?
Michael Hagedorn -- Chief Financial Officer
Yes.
Collyn Gilbert -- KBW -- Analyst
Okay. And then, just trying to understand, it seems like -- if we look at your NII guidance for the year and then some of the moving parts obviously to get there, it just seems like the NIM should trend in a much better way than what the NII guidance would imply. So if there is opportunity to be on the upside, I mean, where do you think you have a better opportunity, on the funding side on the asset side? Because it just seems like -- I haven't run through all the numbers, but it seems like you're setting up for NII growth to be higher than what you're offering in the targeted range. So I want to -- just trying to figure out what I might be missing here?
Michael Hagedorn -- Chief Financial Officer
So I would put it into two buckets, which I think you actually said. First would be, our funding costs. The reason that we could not may be achieve the net interest margin numbers that you might otherwise think, are a function of whether or not the curve stays where it is today, whether we have a Fed rate cut or not, the absolute shape of the curve. And then how much we get. So as I said in the third quarter, we're going to reprice down on the CD and wholesale funding books. The question is, how much we're going to fund down. And we're going to latter into that. We're not going to try to reach some bottom, and then pick the right time to do that.
The second part would be on the earning asset side of the loan book, and to the extent that we would have loan growth, higher than what we're guiding to, clearly we would have an increase in net interest margin.
Collyn Gilbert -- KBW -- Analyst
Okay.
Ira Robbins -- President and Chief Executive Officer
I think Collyn, when you look at it, I think you obviously highlighted the two key points there. But I think when you look at it, we have an unbelievable amount of deposits, as well as other types of funding, that's going to reprice based on where the cost is today versus where we are seeing overall market rates. And then on the asset side, obviously there is a significant amount of assets that are tied to short-term indexes. So if there was a rate move right off the bat, there is an immediate negative reaction to our NIM. That said, over the longer period of time, it is absolutely accretive to us, as we continue to move forward. Hopefully that helps?
Collyn Gilbert -- KBW -- Analyst
Okay. And then Mike, just to clarify, your comments was that one quarter NIM would be down. Is that what you were insinuating?
Michael Hagedorn -- Chief Financial Officer
Well, you have to consider...
Collyn Gilbert -- KBW -- Analyst
On the margin.
Michael Hagedorn -- Chief Financial Officer
You have to consider a couple of factors first. You got a different day count in first quarter. You've also got a full quarter's worth of Oritani, which has a different NIM than legacy Valley. So those two right there provide some headwinds.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay. And then my last question is on, can you provide us with with the guide on the tax credit expense for the year?
Michael Hagedorn -- Chief Financial Officer
I want to make sure I understand your question.
Collyn Gilbert -- KBW -- Analyst
The amortization expense?
Michael Hagedorn -- Chief Financial Officer
Yeah, 24% to 26% flat.
Collyn Gilbert -- KBW -- Analyst
Sorry, not the tax rate. The tax credit?
Ira Robbins -- President and Chief Executive Officer
I think we're flat from where we were in the 4Q. I think your point is, a few years ago used to show a little bit of all in the fourth quarter, based on the activity and the different types of instruments we were in. So I think we are running around $4 million a quarter now, and that's probably a good run rate for us, as we continue to move forward into 2020.
Collyn Gilbert -- KBW -- Analyst
Okay. Okay. I will leave it there. Thanks guys.
Ira Robbins -- President and Chief Executive Officer
Thanks Collyn.
Operator
And we have a follow-up question from David Chiaverini with Wedbush Securities. Your line is now open.
David Chiaverini -- Wedbush Securities -- Analyst
Thanks for taking the follow-up. So I wanted to touch on expenses. So previously, you've given an absolute dollar kind of expense range for the next quarter, possibly two quarters. I was wondering if you had any thoughts, as to what a normalized kind of expense run rate, looking out to the first quarter would be?
Michael Hagedorn -- Chief Financial Officer
This is Mike. So obviously, we're not going to give guidance on expense increase year-over-year, you can kind of back into it, given our efficiency ratio. But I will say this, that we demonstrated operating leverage in 2019. We want to continue that operating leverage, and given the guidance that we laid out, I'm pretty sure when you put that into your model, you're going to see that operating leverage continue. And just to give you some idea, that was about two to one in 2019.
David Chiaverini -- Wedbush Securities -- Analyst
Okay, thanks for that. And then question on other income, it was higher than expected the past couple of quarters at $19 million in the third quarter, $17 million in the fourth quarter. Just curious what to kind of expect in this line item going forward. I think you mentioned earlier that there might be a little bit of some seasonal weakness in the first quarter. But is low teen kind of a good run rate there?
Michael Hagedorn -- Chief Financial Officer
I want to make sure I direct you to the right slide here. Here we go. So if you take a look at slide 5, you can see the components of that, and the largest portion is the bottom, which is that kind of dark blue, which is the swap income. And as we said in the third quarter, we feel that the shared level of swaps that were done was elevated, came down a little bit in the fourth quarter like we said, so I just think that, in order for this to move meaningfully, it's probably going to come out of that category and it has been averaging about $13 million to $15 million a quarter.
David Chiaverini -- Wedbush Securities -- Analyst
Got it. Thanks very much.
Michael Hagedorn -- Chief Financial Officer
Yes.
Operator
And at this time, I'm showing no further questions, I'd like to turn the call back over to Mr. Rick Kraemer for any closing remarks.
Rick Kraemer -- Senior Vice President of Investor Relations
Well, thank you all for joining us -- for our earnings conference call. We look forward to speaking with you again next quarter.
Operator
[Operator Closing Remarks].
Duration: 47 minutes
Call participants:
Rick Kraemer -- Senior Vice President of Investor Relations
Ira Robbins -- President and Chief Executive Officer
Michael Hagedorn -- Chief Financial Officer
Thomas Iadanza -- Chief Banking Officer
Ken Zerbe -- Morgan Stanley -- Analyst
Frank Schiraldi -- Piper Sandler -- Analyst
Alex Lau -- JP Morgan -- Analyst
David Chiaverini -- Wedbush Securities -- Analyst
Collyn Gilbert -- KBW -- Analyst
