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Valley National Bancorp  (NASDAQ:VLY)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. We welcome you to the Valley National Bancorp's Fourth Quarter 2018 Earnings 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).

As a reminder, this conference call may be recorded.

I would now like to turn the conference over to your, Rick Kraemer, Investor Relations Officer. Please go ahead, sir.

Rick Kraemer -- Investor Relations Officer

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

Before we get started, I would like to make everyone aware that you could find our fourth quarter earnings release and supporting documents on our company website, valley.com.

Additionally, I would like to direct you to slide number 2 of our 4Q '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's my pleasure to turn the call over to Ira Robbins.

Ira Robbins -- President and CEO

Thank you. Good morning, and thank you for joining us today. 2018 was a remarkable year in the history of Valley, not only have we begun the physical transformation of our branches and brand, but we have dramatically improved upon the long-standing foundation that Valley was built upon, I'm pleased with our progress to date yet have eyes wide open that execute and delivery of the initiatives we have established in 2018 must be implemented to migrate Valley's financial performance toward the upper end of our peers. Resource demands were expensive, were extensive in 2018, as we closed our largest acquisition in our history and integrated with great success. Most importantly, we retain the talented employees including key executives and customer facing staff USAB. Loans within the new footprint grew nearly 20%, while we simultaneously grew deposit households by over 5%. All of which occurred while undergoing a significant core platform system integration, commercial Treasury Solution migration, implementation of a brand new residential mortgage platform, and delivery of a multitude of new mobile delivery services such as biometric authorization and mobile wallet.

Our adjusted efficiency ratio improved 103 basis points on a full year-over-year basis. While we substantially reinvested into the bank during this time frame. Our aggregate IT expense as a percent of total revenues was over 7.1% for the full year of 2018. To put this into monetary context, this represents a direct increase of over $20 million in IT expense from 2017 that hit our P&L. The mix of our tech expense has continued to shift toward growth and transformation, with approximately half of the incremental expense increase allocated toward improving future efficiencies and revenues. To give an example, we spent about $1.5 million during 2018 on developing, establishing, and introducing a data hub.

A significant amount of severance cost recognized in this quarter's period is attributable to new quantitative staffing models introduced within our branch network, a direct result of our data hub and shift toward the analytics. We anticipate salary expense will be positively impacted by over $3 million alone in 2019, as a result of this expense in 2018. Further, positively impacting the future efficiency of Valley, is the extensive efforts we've made in reshaping the workforce and ultimate productivity of our employees.

On a linked quarter basis, total headcount is down approximately 70 employees. As a result, our assets per employee have increased 7% for the year, moving us much closer to peer levels, however, a more telling change is that involuntary separations have increased by over 25% from 2017 as the Bank's expectations have shifted toward growth and accountability. A tangible result of the improvement and streamlining of our workforce is that our reported net income per employee was up over 20% from the prior year. The culture change in Valley is real, and I can think of no better example than the profound lift and focus on sales and revenue growth. Our loan growth over the course of 2018 was 13.4%, far outpacing the industry and our stated goals, approximately 65% of our total loan originations are repeat business with the existing customers. Additionally, the growth we realized in 2018 via USAB, was a result of existing customer growth even higher than the legacy 65% value rate. In addition to the efforts on the asset side of the balance sheet, we continue to be very focused on new account growth and deepening core deposit relationships.

In 2018, we opened approximately 46,000 new core deposit accounts. This is an increase of 23% from the prior year. The average new core account balance open in 2018 was approximately $55,000 versus $36,000 in 2017.

Additionally, we have steadily increased our share wallet. As an example, our residential mortgage business has opened over a 1,000 new core deposit account customers with balances totaling in excess of $100 million just this year alone.

Execution and accountability are two driving things within the bank, and it starts from the top. In 2018, we effectively doubled the component of compensation tied to relative stock performance for every single executive. We also tied greater levels of incentive-to-performance for all lending and deposit gathering employees, and continue to make stock a greater portion of overall compensation, ultimately driving increased ownership across a greater base. We are making all the necessary changes to drive a culture, that puts the customer first, and encourages performance and accountability throughout the entire organization. Over the long term, we believe this is in the best interest of every Valley stakeholder.

With that, we'll move on to the earnings presentation to cover some additional highlights from the fourth quarter.

If we focus on slide 3, for the fourth quarter of 2018, Valley posted reported diluted earnings per share of $0.22. After adjusting for several infrequent items during the quarter, adjusted earnings per share was $0.21. On an adjusted basis, our quarterly earnings per share represent growth of approximately 31% over the same period just one year ago. We continue to make strides in lowering our efficiency ratio. In fact, included in the 56.7 adjusted efficiency ratio for this quarter, are several items, that we anticipate will not be as meaningful as we move into 2019. Specifically, we incurred a little over $1 million in quarterly expense directly related to the company rebrand in the fourth quarter. We expect a little bit of it will remain in the first quarter of 2019, and then come down thereafter.

Secondly, our residential mortgage commissions for the quarter of $4.2 million are meaningfully greater than our expectations for 2019 on an annual basis. Based on more recent pipeline and changes in compensation structure, we expect this cost to drop significantly in the first quarter, while residential gain on sales revenue are likely to remain relatively static. Lastly, as I previously mentioned, we continue to reinvest in our core business, having spent approximately $2.7 million during the quarter on future facing technologies. We expect a greater return on these investments in quarters and years to come.

With that, Alan Eskow will now cover a few slides regarding some additional financial trends for the quarter.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Thank you. Ira. Please turn to slide 4, we grew net interest income by 9.7% on an annualized linked-quarter basis. Our net interest margin showed moderate compression of 2 basis points from the prior quarter ending at 3.10% in line with our previous guidance. For the full year, our net interest margin was flat compared to 2017 at 3.11. Our strong loan growth during the course of 2018 coupled with rising funding costs for Valley and the industry have placed additional pressures on the NIM.

That said, we are constantly working to achieve a neutral balance sheet position and a defensive net interest margin. Turning to non-interest income, we saw a large increase on a quarterly basis that was driven primarily by a pre-tax gain of $6.5 million realized on the sale of our Visa Class B shares, partially offset by a loss of $1.5 million on the sale of private label mortgage-backed securities classified as available for sale. We experienced stronger swap income generation versus the prior quarter, which was partially offset by our lower level of mortgage gain on sale income for the year.

During the quarter, we sold approximately $94 million of loans for a pre-tax gain of $2.4 million or a 2.5% margin, a modest pickup in spread from the previous quarter. While the market still remains unpredictable for jumbo secondary sales, we are hopeful we will begin to realize greater sales revenue again over the course of 2019.

Slide 5 is next, and if you move on to that and Operating Expense, you will notice that we have achieved over 83% of the annualized benefit related to our LIFT initiative. We remain on pace to achieve the full annualized amount through the end of the second quarter of 2019. Our reported operating expense of $153.7 million included infrequent items of approximately $2.7 million of severance related to branch transformation and a credit of $600,000 due to merger-related items. Our quarterly amortization of tax credit expense was $9 million. Excluding all of these items, our adjusted operating expense level was down to $142.6 million for the fourth quarter versus $143.3 million in the previous quarter. Importantly, there were several items that were not considered infrequent in nature, inflated the current quarter expenses.

Mortgage commissions related to residential mortgage production were $4.2 million for the fourth quarter. The originations in the fourth quarter remained high as a result of a large pipeline at September 30, driving the large commission expense. Based on our current pipeline, we expect mortgage commissions to drop in the first quarter of 2019.

Also, we have previously cited our advertising costs associated with the company's rebrand, were elevated by approximately $1 million in the fourth quarter. We expect this number to be comparable in the first quarter and then abate.

One last highlight to mention, is that our reported quarterly salary and benefit expense was essentially flat from the previous quarter, despite including the previously mentioned severance charge of $2.7 million. This is further affirmation that many of the changes we have made recently are starting to take hold.

As you can see on slide 6, we posted impressive loan growth of 15.3% annualized for the quarter. The growth was diversified among all asset classes, but we are especially pleased by the increases in C&I, which is validating the initiatives we have implemented.

Also included in the fourth quarter was the purchase of $105 million in CRA qualifying residential loans. Additionally, we sold approximately $94 million of residential mortgages during the quarter, total gross originations for the quarter were approximately $1.5 billion, down slightly from the previous quarter. Our new origination yields, during the quarter, were a weighted average of 4.95%, up significantly from the prior quarter.

In 2018, net residential loans grew approximately $700 million, while USAB added about $600 million in mostly commercial business lines. Both of those business lines should be smaller contributors throughout 2019. Resi should also be curtailed somewhat by our focus to drive the mix to more conforming loans. While the first year growth out of USAB was primarily driven by giving existing customers access to a larger balance sheet.

Additionally, as we continue to build out more niche programs with higher yielding assets, we should continue to migrate the mix of loans away from lower yielding fixed rate commercial real estate.

Accordingly, we are anticipating overall net loan growth of 6% to 8% for the full year of 2019.

Turning to slide 7, you'll notice, our deposit balances experienced a linked-quarter increase of approximately $1.9 billion. The largest contributor of growth during the quarter was the increase in brokered deposits of approximately $1.4 billion followed by retail CD growth of almost $250 million. While these products do carry a higher level of cost versus some core deposits, they have enabled the bank to reduce the reliance on higher costs and shorter duration FHLB borrowings, which were $924 million lower than the previous quarter.

You will notice our total funding beta remains reasonably paired to our earning assets over the past 12 months. We will continue to act opportunistically in an effort to improve our wholesale costs and durations. However, we expect a growth of brokered CDs to diminish over the course of 2019. Our loan-to-deposit ratio was 102.4% down from 107% in the previous quarter. This level is back within our strategic operating range of 95% to 105%.

Competition for core deposits remains stiff, and our efforts to improve delivery channels and focus on core deposit generation are our first priority. Over the course of 2018, we organically grew no and low-cost core deposits, of approximately 3.7%. We recognize the need to improve this growth rate regardless of the rate and competitive environment that exists.

Turning to slide 8, during the quarter, we recorded a loan loss provision of $7.9 million, up about $1.3 million linked-quarter. Negatively impacting the third quarter provision, was the valuation decline of taxi medallion loans, which equaled about $2.5 million over 31% of the quarterly provision. Following this quarter's provision, our level of related reserves as a percentage of exposure continues to build and now equates to 24.7% of the entire taxi medallion loan portfolio. Our current model values the average, New York City medallion on our books to a level of approximately 221,000. We continue to monitor the positions closely to reflect any meaningful changes to the market and we'll adjust our valuations accordingly.

Overall, our credit quality remains strong. We did see a modest uptick in the 30 to 59 days past due bucket, primarily due to one C&I loan and a higher seasonal uptick in residential loans. This was offset in part by a decline in construction past dues that we highlighted during the last quarter's call. The approximate $10 million quarterly increase of non-accrual loans was driven mostly by the inclusion of additional taxi medallion loans.

With the exception of taxi medallion loans, we continue to experience very favorable credit trends. Our legacy, New Jersey and New York commercial portfolios are sitting at or near all time lows in terms of non-accrual loans, and our acquired Florida markets are showing no signs of deterioration.

I would also like to highlight some details given concerns in the investment community, regarding the participation and shared national credit markets. Similar to previous periods, our syndicated participations portfolio equates to approximately $317 million committed and $190 million outstanding spread over approximately 19 different relationships for an average $10 million outstanding per relationship and $16.6 million committed. Currently all of these loans are performing and the majority are secured by real estate and within footprint. Further our leveraged loan portfolio is minimal with less than $40 million outstanding and $50 million in commitments, all to well known long time customers of the bank.

On slide 9, we have laid out some goals for 2019. In terms of loan growth, we are expecting the full year to be in the range of 6% to 8% on a net basis. We also expect our net interest income to be up approximately 5% to 7% in 2018. We believe it's a reasonable expectation that loan growth will make up the majority of our earning asset growth throughout the year.

Finally, we anticipate achieving a full year adjusted efficiency ratio of 55% or better. As a reminder, the adjusted efficiency ratio excludes amortization of tax credits and any other infrequent items.

And with that, I'd like to turn the call over to the operator for some question and answer.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Kenneth Zerbe with Morgan Stanley, your line is now open.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Great. Good morning, guys.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Good morning.

Kenneth Zerbe -- Morgan Stanley -- Analyst

I was hoping, if you could actually just address your net interest margin expectations a little more clearly. And the reason I'm asking is loan growth looks like it is your guidance is outpacing your NII growth, and as Alan was right, the loan growth is the vast majority of your earning assets. It also implies that you're shifting into from (ph) higher yielding assets presumably, which kind of implies that the NIM itself would have to be down fairly noticeably to get the lower NII growth. Just wanted to flush that out. Thanks.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Well, what I'd like to say is regarding the NII growth, we do expect that even in the environment we're in relative to, you know, the Fed maybe not increasing rates that much going forward -- we obviously have a curve that is extremely tight and and/or partially inverted at times. So that being said, what we're seeing on the deposit and on the funding side, are higher costs. I mean, even just recently, I can tell you that we have seen the larger banks come out with programs across the board that are raising rates that we did not see last year. So where we thought we could reduce rates going into 2019, I'm now seeing pressure on that, which is causing us some concern. So that being said, even though we are seeing higher originations and volume coming in, not volume, I'm sorry, rate coming in, I think it is going to be pressure on the NIM on a go-forward basis, no doubt about it.

Rick Kraemer -- Investor Relations Officer

Hey Ken, this is Rick. Just to go back to your comments. So I'm not, I'm not so sure that that would this guidance implies. I mean there is overlap between the net interest income range and the target loan range.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Sure.

Rick Kraemer -- Investor Relations Officer

I think your estimate was around 9% of net interest growth for the year, right? So it was probably the high. So this, you personally maybe down, but I think this encompasses where the existing guidance was or the existing consensus was.

Kenneth Zerbe -- Morgan Stanley -- Analyst

I was very optimistic for you guys.

Rick Kraemer -- Investor Relations Officer

Thank you. It doesn't imply absolute decline in margin, it does give, it does leave some space for that though in case there is.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got you, OK, well, I think Alan's answer was that the (ph) NIM compression does, it is reasonable to assume.

Rick Kraemer -- Investor Relations Officer

Yes. Yes.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, got you. All right, and then just, sorry, one follow-up question -- on the loan growth, obviously this quarter was fantastic in terms of your ability to grow loans. The guidance does imply a much more meaningful slowdown versus what we had this quarter annualized, so (inaudible) just kind of go over, why the slowdown or what is driving the slowdown in '19 versus fourth quarter. Thanks.

Thomas A. Iadanza -- Chief Banking Officer

Hi, Ken, this is Tom Iadanza. Yes, I think what you saw in '18 was the benefit of USAB coming on board, having a higher hold level, being able to do more with your existing customer base that in the past, they weren't, we expect that to slow down. The USAB's 20% growth in 2018, we expect it to be lower than that. Also, we are just seeing a natural slowdown based on some of the economic conditions, political conditions that are out there. People in our marketplace, are still tentative on investing heavily into infrastructure. So we're seeing it from there, we're seeing certainly a slowdown in the housing and auto pieces of our business, and as we report -- our portfolio is a very granular portfolio. Our average loan on the real estate side is still under $3 million, our average loan on the C&I side is still under a $1 million, and we're building that way, and some of the, what we're really noticing in the market is heavy competition, we're not going to compete at some of the capital levels that are happening in certain segments of our real estate market and we're not going to compete on terms that would compromise our traditional credit standards in the C&I market.

Ira Robbins -- President and CEO

And Ken, this is Ira. I think, in addition to that, we saw about $700 million of growth in the residential portfolio during the course of the year and our expectations are for that to come way down as well. So I think when you combine with Tom referenced with regard to the USAB portfolio combined with the contraction we're expecting in annual growth in resi, when we get down to numbers that are much more palatable for the capital we have.

Kenneth Zerbe -- Morgan Stanley -- Analyst

All right. That's great, thank you very much.

Operator

Thank you. And our next question comes from the line of Frank Schiraldi with Sandler O'Neill. Your line is now open.

Frank Schiraldi -- Sandler O'Neil -- Analyst

Good morning.

Ira Robbins -- President and CEO

Good Morning, hi Frank.

Frank Schiraldi -- Sandler O'Neil -- Analyst

I was wondering if you guys could talk about the efficiency target for the fourth quarter or your expectations for the fourth quarter. I think it came in a little bit above there on an adjusted basis, and sort of the primary reason for that? And then, you gave guidance for under 55% in 2019, given some of the elevated cost you talked about, and given some of the branch closures early in '19, are you thinking that can get -- is it reasonable to think that gets to 55% or below in 1Q? And then maybe trails down from there. Thanks.

Ira Robbins -- President and CEO

Yeah, I think at the beginning of the year. If we go back one year ago. The guidance we gave for efficiency was at 56%. So we definitely came in a little bit higher. I think part of that was associated with the increase in residential mortgage commissions during the quarter as well as the rebrand. So without those, we would have been right in line with the guidance that we provided in the beginning of the year. So I think we're comfortable with what we've targeted for 2019, and specific to that I think the first quarter is going to be at the 55%. I think that's our estimate for where we'll end up for the, for the full year.

And I think as I mentioned in my prepared remarks that we continue to invest in some technologies that we think will have positive impacts us, the data hub being one of them. If you look at what we've done in the consumer space, we've increased auto decisions, which should drive down some of the expenses there. So we do believe that there is going to be some significant positive reductions in non-interest expense as a result of what the expenses were in 2018.

Frank Schiraldi -- Sandler O'Neil -- Analyst

And then just a follow-up, Alan you mentioned, you talked about brokered and the growth in the quarter, could you just remind us now where brokered stands as a percentage of total deposits and then how much more room you have this year to further increase those levels.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Yes, so first of all, I just think the most important thing is to think about brokered as just another wholesale place to go. We're comfortable with the level we're at, the percentage of brokered,

Ira Robbins -- President and CEO

close to 13%.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

13%, so again, I think the important thing is, is that we have been able to set some duration out there and I'm not just sitting there overnight. So we, as we told you before, the average term on those previously had been about seven months overall. So instead of having overnight funding at a higher level, I'm able to do a lower higher-duration and not have so much volatility, and also we have recently been out a little shorter, we were concerned about going out too long. So, and we have brought in some of those costs recently.

Ira Robbins -- President and CEO

It's about, if I may just clarify, it is about $1.9 billion on the $24.5 billion we have.

Frank Schiraldi -- Sandler O'Neil -- Analyst

So it seems like, I mean, Alan spoke to is slowing growth there. I mean, it seems like you kind of, you have roll over there, but it seems like we shouldn't expect to see increases in that broker deposits.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

So I think that's, that was my point. You're not going to see the kind of growth you saw before.

Frank Schiraldi -- Sandler O'Neil -- Analyst

Okay, all right, thank you.

Operator

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

Austin Nicholas -- Stephens. -- Analyst

Hey, guys, good morning.

Ira Robbins -- President and CEO

Morning. (multiple speakers)

Austin Nicholas -- Stephens. -- Analyst

Just maybe hitting back on the expenses, can you maybe just help us understand the cadence of getting, maybe down to that sub 51% by 2020 and how that should look as we trend through '19 and into '20 just on a bigger picture basis.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Well, I think what the issues are, you got branch transformation going on. We are spending a lot of money as Ira keeps pointing out on technology. But I think, we have not yet seen all the benefit you're going to see out of the technology changes. So I think that's where a lot of those efficiencies are going to come in, that we really just haven't seen yet. We're spending the money, we're getting some benefit, I think we're going to get a lot more benefit. I mean, we just started to go into on the commercial side and see no treasury solutions, we've hired a number of people that's going to help us on treasury solutions. So we've got a lot still going on. And in order to get that efficiency ratio down, they have to either produce revenues or have to be less cost.

Ira Robbins -- President and CEO

Yes, Austin, I don't think we want to get into a quarter-by-quarter efficiency target, but you know, look, if you look back over the last year, while reinvesting a pretty substantial amount of dollars, the adjusted efficiency ratio came down by over 100 basis points. Right? So that reinvestment is going to slow and what we also alluded to just now on the call, was we're taking a decent amount of severance, which will also lower future salaries again right. So it going to be gradual, but to get to a 55 by the end of the year or for the year, we're starting at a place that's, 56.7. It's going to be, it's going to be chipping away at us. I think it should be a gradual adjustment lower, but that's not to say there isn't a quarter or two here or there that, you know, is flat lines or even goes up.

Austin Nicholas -- Stephens. -- Analyst

Understood. And then I guess I think maybe you addressed this partly before but bigger picture, looking at capital. Can you maybe just remind us what the messages to investors on capital here with your TCE kind of bumping around the 6.5 level.

Ira Robbins -- President and CEO

Yeah, I think exactly the (ph) the message should be that we have flexibility. There is definitely internal leverage that we have within the organization to look at raising capital, without being diluted to shareholders. We are extremely sensitive to that component of it. I think if you just look at where we were from and an EPS estimate, no, I think just based on the street estimate, TCE or tangible equity is about to grow about $175 million. If you layer that in with the midpoint of our loan growth targets, right there, there's about 20 basis points of increase in the TCE ratio. That being said, I think a large piece of it is going to be of how we moderate the overall loan growth, what we experienced in 2018 with regard to the residential increase and the USAB, it is not our expectation that that's going to be there. As that continues to go down, then we should have enough capital to support the growth that we're looking at, but going out and doing a common raise is something that that's not attractive to us at any means being sensitive to the shareholder dilution is really where the focus.

Thomas A. Iadanza -- Chief Banking Officer

Yes, and don't forget too, There was about $22 million of items that negatively affects that income that shouldn't be there in 2019. Right? So that's, you might be able to argue they were additional infrequent items that were not included in that.

Austin Nicholas -- Stephens. -- Analyst

Understood. I appreciate the message. Thanks guys.

Operator

Thank you. And our next question comes from the line of Steven Alexopoulos with JP Morgan. Your line is now open.

Steven Alexopoulos -- JP Morgan -- Analyst

Hey, good morning everybody.

Ira Robbins -- President and CEO

Morning. (multiple speakers)

Steven Alexopoulos -- JP Morgan -- Analyst

So given the outlook for 6% to 8% loan growth that you guys are looking for in 2019, can you talk about how you plan to fund the loan growth, is it mostly going to be retail deposits and is the plan to keep the loan to deposit ratio relatively flat?

Ira Robbins -- President and CEO

Yeah, I think so, if you look at what we did just this quarter, we did time deposits plus core deposits that probably would have funded a loan growth number, similar to what we've targeted for next year. So the current initiatives that we've already outlined probably support that. That being said, I think there's a lot of things we're looking at doing as Alan mentioned, we hired additional treasury salespeople during the year. I think we're at probably 11 year-over-year. There's going to be much more of a focus on going after not just Valley commercial customers, but as well as non-commercial customers. Actually tomorrow, we're going to be introducing a brand new Valley authorizer, automated call back, and we're going be one of the first banks in the entire country with automated call backs for our commercial customers. We think different investments like that are going to begin to have differentiated solutions (ph) for us as to how we can attract commercial customers. We've been migrating to a brand new commercial treasury platform. We've seen significant growth in commercial deposits as a result of that. So I think, 2018 was a lot of investments that we put forth to make sure that we had the ability to grow core deposits in 2019. We saw massive growth year-over-year and in units of accounts, and now we just need to make sure that those balances come along with us.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

And the other thing I'll just point out is that we have also made some changes to our compensation programs for both the deposit people and the lending people in order to attempt to grow deposits at a greater level than we did in the past.

Steven Alexopoulos -- JP Morgan -- Analyst

And for a follow-up, Alan, can you give us a sense of the cost of new money deposit, non-equity broker because it doesn't sound if you're going to grow them next year, but if you look at the quarter, just the cost of customer new deposits, what was the incremental new money deposit costs in 4Q?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Hold on, I'll give you that in one second, because I don't have that off the top of my head.

Ira Robbins -- President and CEO

The commercial customer came out at 72 basis points Steve, and the consumer customer came on at 170.

Steven Alexopoulos -- JP Morgan -- Analyst

170, OK that's helpful. It's just a clarification and almost has two (ph) questions, but the loan growth, is that guidance based on period end or average?

Ira Robbins -- President and CEO

That's based on average.

Steven Alexopoulos -- JP Morgan -- Analyst

It's average. Okay. Thanks for taking my questions.

Ira Robbins -- President and CEO

Thanks Steve.

Operator

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

Collyn Gilbert -- KBW -- Analyst

Thanks, good morning everyone. (multiple speakers). Just a question on the mortgage banking, I just want to make sure I understand your comments, can you just clarify where you see that business going and the growth? I know it sounded like you indicated maybe flat from the fourth quarter into the first quarter on a revenue basis but yet still expects robust opportunities in '19. Just kind of frame, I know you Alan you went through the commission component of it, but just trying to think about it on the revenue side, what the expectations are there?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Look, I think we grew $700 million in loan growth during the year on residential, largely from a jumbo perspective. I think, what we've done is adjust pricing within the jumbo. We've introduced additional outlets for the jumbo to create some gain on sale. And, I think, what we've seen is the overall pipeline come down as a result of that, but the pipeline supportive of the gain on sale number that we reflected in the current quarter. However, as a result of not portfolioing the significant number of loans that we did in 2018, we're going to have commissions come back dramatically. It's one of the challenges obviously in being in the mortgage business is, the commissions get expensed to a large degree in a current period and the interest income for a loan that you put on your balance sheet aren't really recognized over a period of time. So in 2019, that'll be rightsized a little bit better than what we did in 2018, where the balance sheet growth will be more in line with what we think is appropriate for us, appropriate gain on sale and appropriate commissions to come along with it.

Rick Kraemer -- Investor Relations Officer

Yes, Collyn, this is Rick, from an income perspective, we're contributor revenue to in terms of the efficiency ratio, we would only be, we're only expecting pretty much exactly what we got this quarter. So no growth in that category.

Collyn Gilbert -- KBW -- Analyst

For the full year '19?

Rick Kraemer -- Investor Relations Officer

Fourth quarter annualized number. Right, so it's gain on sale by $2.4 million annualized would be all that we're expecting, that's basically just, that's just income from conforming flow business,

Collyn Gilbert -- KBW -- Analyst

Okay.

Rick Kraemer -- Investor Relations Officer

Which has been remarkably steady all year long.

Collyn Gilbert -- KBW -- Analyst

Okay, and I,

Alan Eskow -- Chief Financial Officer and Corporate Secretary

So, you know, number, (ph) saying the expectation is, is that the commission number comes down significantly.

Collyn Gilbert -- KBW -- Analyst

Great. Got it, OK. And I apologize, I don't have it in front of me. I mean I think that's, so it's, the mortgage revenue side of this is a lot lower in '19 than what you were anticipating, perhaps in the second quarter or even third quarter, is that correct?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

That's correct.

Collyn Gilbert -- KBW -- Analyst

Okay, but you're point of it is, is that you're rightsizing the expense side of it, so that it shouldn't have a material impact to the efficiency goals that you've set for '19.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Correct.

Collyn Gilbert -- KBW -- Analyst

Okay. And then just, and I know limited on the questions, but I just wanted to understand too on the taxi side, the $8.6 million that you drew out in the press release indicating that you'd probably have to add to the reserve this year, what kind of assumptions went into that?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Basically it does not take any assumptions into place that we go below the current valuation level, that we use, but rather loans that are renewed or mature and go into TDR status and get impaired, they will have to be written down to the current valuation. Obviously if valuations go down further that number goes up as it does for the rest of the portfolio, but at this point, that's all we've factored in.

Collyn Gilbert -- KBW -- Analyst

Okay, and then Alan, what went into the 220 valuation estimate you're using.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

That's just an analysis of the trend of sales that takes place.

Ira Robbins -- President and CEO

We track it to, Ira, Collyn, we track on a regular basis the sales in the market, we're aware of a number of sales that are over the value that we have. We look at it on a constant basis, and I just want to kind of point out on that portfolio -- we have unimpaired over about 70% of the portfolio, we have over 95% of the portfolio still paying, even though, we classified 56%-57% of the portfolio as non-accrual.

Collyn Gilbert -- KBW -- Analyst

Okay, that's helpful, and then just one final thing on the, just kind of taking into consideration some of your comments, Alan on the NIM, and just obviously the competitive pricing pressures that are still there on the deposit side, how it is, all of this tie into maybe what your ROA target would be either near-term or long-term?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

I don't think it negatively, we don't expect it's going to change our long-term target. I mean we're going to have to produce, if not exactly on the NIM, then, and again, I think we're more worried about driving NII than the NIM while we are trying to guard against the NIM going down. NII is important. So, because that really is what drives at the end of the day the ROA as well as the efficiency ratio.

Collyn Gilbert -- KBW -- Analyst

Okay. All right, I will leave it there. Thank you.

Operator

Thank you. And our next question comes from the line of Matthew Breese with Piper Jaffray. Your line is now open.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning.

Ira Robbins -- President and CEO

Good morning. (multiple speakers)

Matthew Breese -- Piper Jaffray -- Analyst

I wanted to focus in on the salary expense line. I know the $2.7 million in severance will come out and there is some positive commentary in terms of mortgage commissions that will come out, but to what extent might we see the the mortgage commission drop off? So maybe you could give us an idea of what the total mortgage commission was in '18 and what the expectations are in '19 at this point.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

I think we gave about $4.2 million or whatever, I think, was the number for 4Q, that's probably a good estimate as to annualizing that, what we recognized in 2018, and the expectation is that number will be cut more than half in 2019, that'll be a contraction in that. Like I mentioned earlier, we didn't convert USAB until about three to four months later than what we originally anticipated. So a lot of the cost saves that we anticipated didn't happen until later in the year. Now we are getting the benefit of being able to focus on some of the technology initiatives that we had outlined originally for 2018 and implement them for 2019. So, we made significant progress in reducing salary expense in 4Q. We think that's going to continue. There are additional branches that we have already outlined, that are going to close this additional cost saves that are going to come from the ensuing implementation on the back-end, from the encompassed implementation on the back-end, those haven't been recognized that all, but now the technology is pretty much in place. Those will get recognized in 2019. So, we definitely got a little bit behind ourselves based on some of the merger into integration. The software is there, you know, the other piece is, as I mentioned, we were linked, on an annual basis, up $20 million in technology. You're not going to have that increase in 2019 to the same level that you had in 2018. That's going to be positive when we look at the efficiency ratio when we move into 2019 as well. So we're feeling pretty positive about what we've set as an objective in 2019.

Matthew Breese -- Piper Jaffray -- Analyst

So as I think about that $4.2 million annualized and the severance coming out, it seems like, I know there will be some noise from the first quarter, but it seems like the salary expense line could come down by perhaps $4 million, $5 million on a normalized basis, in the first quarter, is that, is that accurate? And then and it feels like through the tech spend that there's going to be a push for less FTEs, not more? And so, perhaps that line item has more to go in 2020 is that the way to think about it?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

I think on the salary side, there's, obviously you're going to have, first, first quarter is going to have your payroll taxes and I think (ph) like that again, but outside of that on a seasonal basis, I think your estimate as to what we're looking at in contraction is an appropriate estimate.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then I know you touched on, on the branch initiatives. So with the nine coming off in 1Q, that leaves I think 54, that were essentially targeted for either improvement or closure, and I wanted to get a sense for how many of those 54 are breaking the right way and improving, and how many are not and would you gauge are more likely to be closed over the next 12 months.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Yes, I think there's still 11 left to close that we had referenced, that will happen in 1Q as well. So there is going to be positive momentum based on just closing those 11 when it comes to operating expenses. For the 54, I think we really want to give it a year timeline to make sure that they have the opportunity to hit some of the objective that we outlined and we'll come back to you at the end of the second quarter and give you an idea as to where they're at.

Matthew Breese -- Piper Jaffray -- Analyst

Understood, OK. The other thing was just, Alan, I think you talked about the composition of growth in 2019, I missed all the specifics. Could you just repeat where you expect the 6 to 8 to come from?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Well, I think we would expect more, yeah Tom, let Tom (multiple speakers)

Thomas A. Iadanza -- Chief Banking Officer

Hi Matt, it's Tom Iadanza. I think, the good news of '18, is that it really was across the board, every region, every department, every product type C&I and real estate. We expect the same, we began as we referenced in previous calls, some niches in late '17 early '18 of small ticket type of lending programs that really took off during the course of '18, and we expect those to continue to grow. So I fully expect the growth to come from all segments and all regions.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, but a little less so on residential, that's the message.

Thomas A. Iadanza -- Chief Banking Officer

Yes. I'm sorry, I'm referring to other question, I think you'll see, you'll see a reduction on residential, as we've talked about, a reduction in the auto side with the (ph) expectations of where the market's going, and keeping in mind that our core C&I customer are companies up to $100 million in revenues. Those loans just take a little bit longer to grow. We had a strong 2018 in that path, but it levels off. We hired a lot of teams, we brought people in, you get that splash early, and then it starts leveling off. So we're going to level off on much of what we did in '18, but we still expect that 6% to 8% to be reasonable.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay, that's all I had. Thank you.

Operator

Thank you. And our next question comes from the line-up, David Chiaverini with Wedbush Securities. Your line is now open.

David Chiaverini -- Wedbush Securities. -- Analyst

Hey, thanks. Just one nitpicky one for me remaining is on the expense line for net occupancy and equipment expense. Since you've closed 11 branches, I was curious as to why that expense went up $1.5 million from third quarter to fourth quarter, but yet you closed 11 branches, and then a follow-up to that is, should we assume that that line item essentially comes down roughly 10% as we look forward once those 20 branches are exited.

Ira Robbins -- President and CEO

There's a lot of reasons, number one even when you close a branch, in some cases, it takes time to get out of a lease or whatever else we may be doing with it. We have additional depreciation going on based on branding change and other kinds of equipment changes. We also, I think that goes in that category is things like snow plow removal. The winter months for us are always a little, a little stronger in terms of cost on that area. So there's lots of areas, I mean, over time, you would expect that as a result of the branch closures, we'll see some decline, but we also have transformation going on, meaning the other branches are going to be renovated, we're going to spend money on them. So it's not just a one-way street.

David Chiaverini -- Wedbush Securities. -- Analyst

Yeah, you also have, you also have just a normal course of rent increases in that, I think, Alan referred equipment expense obviously upgrades, lot of machines within?

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Real estate tax increases. I mean all that stuff, doesn't stop.

Ira Robbins -- President and CEO

I think on net basis, David, the linked-quarter expenses on this core number came down, and we anticipate further contraction going into 2019 for each individual quarter.

Rick Kraemer -- Investor Relations Officer

Yes. And quite frankly, a lot of those branches that we closed they were closed later in the quarter, and then if you think about. So, the reference to the branch transformation. I think we had originally estimated around $9 million in annualized operating expense reduction from that, and approximately half of that was related to property expenses (ph).

David Chiaverini -- Wedbush Securities. -- Analyst

Got it. That's all I had. Thanks very much.

Ira Robbins -- President and CEO

Thank you.

Operator

Thank you. And our next question comes from the line of Arren Cyganovich with Citi. Your line is now open.

Arren Cyganovich -- Citi -- Analyst

Thanks. On the technology side, and I know that's probably going to be an ongoing investment for a number of years, but I think in the past, we've talked about it being a kind of a three-year plan for the large pieces that you're looking to overhaul, where are you in that timeline? And what are the larger projects that still remain on the technology side?

Rick Kraemer -- Investor Relations Officer

So we're about halfway there. We had talked about one of the big ones just even (ph) the data center migration, which we think will happen in 2019. There will be significant tech telecom saves that come out of that piece of it, but I think overall when we look at it, there is obviously, there's definitely a lot of efficiencies that we're going to begin to see in 2019 as a result of what we did in 2018. I think when you look at it Just on the residential space, where processing time is down by about a third from where we were just in the beginning of 2018, just by implementing the auto decisioning on the auto side, we're probably able to do twice the buy that we were able to do before without increasing staff overall. The problem is, is, those things didn't get implemented until the end of 2018. So the efficiency expectations that we have are not going to come a little bit later into 2019, but they're going to be real, we're already beginning to see a lot of them. But the incremental increase in technology expense is not going to be at the same level that we saw in 2018.

Arren Cyganovich -- Citi -- Analyst

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Collyn Gilbert with KBW. Your line is now open.

Collyn Gilbert -- KBW -- Analyst

Hi guys. I'm really pushing my limits here, but getting back into the queue with a question, but I apologize I lost power for a minute. And it may be was covered, but I just want to clarify. Rick, you had said that the loan growth, the 6% to 8% loan growth, was average, but that would indicate that end period growth would be flat. I just want to make sure.

Rick Kraemer -- Investor Relations Officer

No, I'm sorry. It was an average off of the year, off of the last quarter average number.

Collyn Gilbert -- KBW -- Analyst

Okay. So not the full year average for '18, just for the fourth quarter.

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Right.

Rick Kraemer -- Investor Relations Officer

Right.

Collyn Gilbert -- KBW -- Analyst

Got it. Okay. All right. Thank you.

Operator

Thank you. And I show no further questions at this time. I would like to turn the call back to Rick Kraemer for any further remarks.

Rick Kraemer -- Investor Relations Officer

Thank you all for joining us today on our fourth quarter earnings call. If you have any additional questions, please reach out to Alan Eskow and myself. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a great day.

Duration: 54 minutes

Call participants:

Rick Kraemer -- Investor Relations Officer

Ira Robbins -- President and CEO

Alan Eskow -- Chief Financial Officer and Corporate Secretary

Kenneth Zerbe -- Morgan Stanley -- Analyst

Thomas A. Iadanza -- Chief Banking Officer

Frank Schiraldi -- Sandler O'Neil -- Analyst

Austin Nicholas -- Stephens. -- Analyst

Steven Alexopoulos -- JP Morgan -- Analyst

Collyn Gilbert -- KBW -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

David Chiaverini -- Wedbush Securities. -- Analyst

Arren Cyganovich -- Citi -- Analyst

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