Q4 2019 Earnings Call
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Core earnings conference call.
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I'd now like to hand, the conference over to your speakers today Mr. Rick Grammar. Thank you. Please go ahead.
Thank you Skyler good morning, and welcome to the valleys fourth quarter 2019 earnings conference call on the call today's valley, President and CEO , I, Robyn Chief Financial Officer, Mike Hagadorn, Chief Banking Officer, Tom I Dan.
Before we again I would like to make everyone aware that you can find or fourth quarter earnings release, and supporting documents on our company website.
The dot com.
Regarding our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to todays earnings release for reconciliations of these non-GAAP measures to GAAP results.
Additionally, I would like the direct you to slide two of our Fourq you 19 earnings presentation, where the reminded her comments made during this call may contain forward looking statements relating to valley national bank or and the banking industry.
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 Levered I Robyn.
Thank you Rick good morning welcome.
Our fourth quarter results are a reflection of the tremendous progress we've achieved over the past couple of years.
Continue to make significant strides towards delivering on and repeating our previously stated goals of consistent growth.
Improved operating efficiency and great diversification or revenue.
The fourth quarter 2019.
Now they reported adjusted earnings per share of 24 cents.
Our adjusted he P.S. was up 14% from the fourth quarter last year.
Furthermore.
Full year 2019, adjusted EPS of 92 cents was also up 14% versus the full year 2018.
Keep in mind, we delivered these results can 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 Wow announcing a 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.
And 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 or core cost, beating our estimated adjusted see adjusted efficiency ratio goes for the full year of 2019.
Our multiyear branch transformation initiative has resulted in consolidations and cost saves, while delivering a better product for our customers, which can be seen in many underlying deposit trends.
Just as important guys 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 mortality, which was amelie credit 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 in retail core deposit growth.
Continuing improvement inefficiency and very sound credit metrics.
I'm extremely proud of the progress we've made over the past two years I believe this is only the beginning of a long run a success for valley.
Now I'd like to turn the call over to Mike Hagadorn for some additional financial highlights for the quarter.
Thank you IRA turning to slide five and quarterly net interest income in margin trends, our net interest margin increased five basis points to 2.96% from the prior quarter, while the interest rate spread increased 10 basis points from 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 come competitively in the market.
Furthering our efforts to lower the cost of funds was the distinguishment of approximately 635 million of longer term FHLB debt during the fourth quarter.
We had originally side of the intention to extinguish this debt this debt in conjunction with the closing of the or Tony transaction.
This action resulted in an approximate 23 million dollar after chart after tax charge as 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 or 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 six of our EPS presentation. There are still substantial ability to reprice, both retail Cds and other wholesale borrowings meaningfully lower should the current rate outlook remain.
As illustrated on slide nine we continue to see the effects of lower repricing on our monthly deposit rate averages.
As such we believe we're defensively position for the current rate environments 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 base multifamily loans. They 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, our index 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 eight 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 signals.
Moving on our noninterest 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 quarters, 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 decline declining fee ratio, which is a good issue to have.
Diving into the results in more detail, we generated swapped volume of approximately 10 million during the fourth quarter of 29 team originated 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 noninterest 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.
Were 145 million up approximately 5 million from the previous quarter.
Importantly, this does include one full month of direct or a tiny 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 item.
We also incurred approximately 350000 in quarterly expense aimed at resolution of or tiniest preexisting 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 or a tiny related expenses from December we saw a decline of approximately 1.6 million from third COVID-19.
This fourth quarter adjusted level equates to a quarterly year over year decline of 6.4, <unk> corporate 6.4% as compared to Fourq you 18.
As we have spoken about many times in the past we are hyper focused on creating grady greater operating leverage.
Nowhere is that more obvious than looking at our adjusted efficiency ratio.
For the fourth quarter report, we reported 52.4 million over a 152.4% sorry over a 100 basis point decline versus the previous quarter, while full year 2019 declined an impressive 412 basis points from 200 from 2018 ending at 53.78%.
Huh.
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 in closing a significant acquisition.
It has become ingrained in our management culture to focus on reallocating resources towards 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've been approximately 9% or just over the high end of our guidance.
As illustrated on slide eight much of this quarter's organic growth came in commercial real estate Cnine and construction.
The average size CRB loan originated during the quarter remains relatively small at 2.1 million while average CN I was just 376000 further diversifying our risk.
From a geographic perspective, our growth was well distributed.
Approximately 40% of our total quarterly commercial growth came from Florida in Alabama, While New York, and New Jersey made up approximately 55% with the balance coming in or national commercial businesses.
We sold approximately 300 million and residential loans during the quarter, approximately 44% of which came in the form of the jumbo portfolio bulk sale in which we retain servicing.
Conforming loans sold increased 19.6% from the previous quarter, which generated the balance of gains vias sales through our standard GFC 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 X oritani increased approximately 4% linked quarter and 8%, 8.6% for the full year.
Excluding oritani noninterest bearing deposits grew 10.5% annualized on a linked quarter basis, while our core branch deposits grew 6.4% for the full year.
We witness 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 balance sheet growth balanced growth in our checking accounts at 11.3% on an annualized linked quarter basis.
Our efforts in online banking, while still relatively amateur saw net account growth of 9.3% from the previous quarter.
While all of our geography has 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 transportation 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 nine we had been managing deposit rates lower across both business and retail segments.
As shown in 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 for Q1 9, given the anticipated lag effects.
Notably the months of November and December experienced accelerated declines and 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 diminished by approximately 732 million.
This was facilitated by a combination of pay downs 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 towards 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 Cecil.
Our total nonperforming 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 quarters 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 see an eye credit.
Turning to Cecil we're lowering our estimated range of impact that we spoke about last quarter.
After running additional parallel test and updating the expectations of the forecasted economic conditions and portfolio balances as of December 30, Onest 2019, we estimate that Cecil could result in an increase to our non PCI allowance of approximately 30 to 40 million as compared to our current reserve levels.
Yes.
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 PCIA 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 or a tiny capital and significant progress made towards lowering the risk weights associated with much of the acquired portfolio.
Further the decline in risk weights was the same.
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 valleys 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 and our tax rate tax reserve and as a result are fully reserved for the tax position related to DC solar at December 30, Onest 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 in 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 as percentage growth is elevated due to the timing of the or a tiny acquisition and the expected full year realized net interest income from the acquired portfolio. In addition to organic growth.
On a standalone valley, the expected growth would be approximately 3% to 6%.
Our net interest income outlook assumes a 25 basis point rate cuts in 2020.
In terms of net interest margin cadence it would be reasonable to assume some modest pressures in the first quarter 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 Iran for some additional commentary thanks, Mike.
I'd like to provide a brief update on the Orange County merger.
After receiving regulatory approval in record time for Valley, we were very pleased to close that transaction in early December .
We look forward to the many benefits this transaction will provide including new customers.
Deeper penetration into valuable fluid market and additional capital to fuel future growth.
We are planning integration later in the first quarter and should begin to deliver on additional cost save shortly thereafter I.
I'm extremely happy with the progress made to date and want to thank all valley and former Orange County employees that made this deal it's a special and successful.
In closing 2019 was an important year for valley. Many the themes that we laid out to you for the past two years are progressing and the financial results and momentum our illustrate about these efforts.
I have been able to deliver on significant goal as 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 the 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.
Thanks 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 operating to begin culinary. Thank you.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press the pound Keith.
Please limit yourself to one question and one follow up.
We have a question from Ken Zerbe with Morgan Stanley . Your line is now open.
Great. Thanks, Good morning, guys.
Hello.
I guess, maybe just starting off in terms the launch shale the to this quarter I just wanted to shake out all the pieces here specifically the question is what was the gains that you made on that sale and the reason I ask because it if you look at sort of it well we note that the loans are yielding around 3.4% you're saving three nights that's maybe.
50 basis points per year about $3 million of savings, but it costs you $32 million to get out of this debt.
So there must be some very large gain to make this economically makes sense for you guys.
Hey, Ken It's Tom I Dan.
I can't comment on the terms of the loan sale.
I will tell you is that we believe there was prudent to exit or lower our exposure to New York City multifamily portfolio that with no credit issues within this portfolio of loan fees called actually was performing fairly well with 63% loan to value in a 1.7 times debt service coverage a similar to the.
Loans, we have they'll they didnt fit into our relationship banking return at deposit strategy that we have yeah within the bank their capital intensive with lower relative yield with minimal cross sell deposit opportunity and we'll always a assess our capital leads in our our asset business.
Has to make sure that they all fit.
Oil will seek better opportunities so guys want to stressed with no cap with no credit issues with it it was a sound portfolio. It was an opportunity they get out of lower yielding assets and the class that we thought it was prudent to reduce Ken. This is I think.
In our mind, there 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 or attending transaction. So basically what we did as we took a little bit of the excess capital that was generated through the oritani deal use that to to pay down debt that took a prepayment charge. So we still had a positive capital.
Position that resulted from mortality and this created positive EPS as we began to move forward. So the.
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 as connected at all.
Got even though you used fair chunk of the proceeds from the sale to fund the FHLB repayment.
We were looking at him from from an independent perspective, right, So where we announced the Orange County transaction, we announced the $635 million. So the state that was going to come from that was largely a function of just reinvesting or we borrowing back in.
Different different term debt at a lower rate.
It's still happen that we were able to as Tom identified entrance. This unique transaction that they come inside in the 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 the borrowings was largely.
Connected with what we're doing from the or Tanni deal and really utilizing some of that excess capital.
Gotcha, Okay. So so if assuming there is no gain which is my assumption or we can make that assumption.
This could have been a net negative from you guys in day, one, but you're just saying you want to do because strategically it makes you better bank going forward, even if you've lost money on this transaction.
So I don't say that long term 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 really a time value of money, which are forecasted saves our versus what your onetime prepayment penalty as I think for us as we looked at it what was the additional capital that we are.
Prior to the or attending transaction.
How much of that additional capital we needed versus where we wanted to be on an EPS perspective on on a prospective basis. It was really just the balance of those to once again separately.
We entered into a unique transaction that provide us an opportunity as Tom mentioned.
To be do 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 didnt provide us opportunity to cross sell from a relationship perspective. So we think it's a much more efficient use of capital and on the on a go forward basis.
Okay that helps and then maybe my second question if I if I may the what was the PPA adjustment during the quarter.
And how much of that said NIM and I. Thanks.
So that so the tore this is Mike this for the total credit related Mark was 28 million of which roughly half of that is.
The credit interest portion of it.
And that has a average life of about four years.
Sorry, I meant a piece that actually flowed through eni in the quarter.
I think what we're giving is that's one thing we tried not to really do.
In regard to many transaction. So you might give you a number $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 at forward earnings we try to make them as sustainable as possible and not have a lot of purchase accounting adjustments within them.
Okay. Thank you very much.
Our next question comes from Frank Cheryl.
Hi, Chris Danley. Your line is now open.
Hi, good morning, guys.
Just on the on loan growth assumptions for 2020.
Just wondering what that 6% to 8% might include or in terms of.
Runoff of the multifamily portfolio.
Hey, Frank It's Tom again, I think the multifamily portfolio New York piece is now stands at about 1.4 billion pretty strong loan to values are in that kind of 50 to 60 range, depending on the or a tiny versus legacy valley portfolio. The valley portfolio is all customer relationship driven so we're not anticipate.
Operating a significant runoff 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 need these loans to people we knew well longtime customer is that we're really the positive relationship driven so there could be an.
Spectator action that we will see some repayment through the normal course of business, maybe a little bit extra but I think with what weve built and other aspects of our business I will make up for that the I'll keep in mind yellow, Mike Mike mentioned, the granular nature of the portfolio at 2.4.
Really out of average CR re loan you had 375 million honesty, and I thought I am not new production.
Yeah, well, that's our focus our focus is to be well diversified without any reliant on any significant asset class. So we're going to continue that approach and we expect to meet to 6% to 8% guidance.
Sure how how much time did you say is new York multifamily with with the Oritani booked 1.1 point $4 billion 600 as legacy Valley about 800, a little over 800 million is or a tiny and again.
The loan to value on the valley pieces around 60% on they are a tiny piece is 48. All has performed we expect that to continue I think if you look at 2019 as a guide we originate about $6.2 billion in total loans across the entire footprint and in each of the individual products I think for us as we can.
18 to move forward you know, there's absolutely not a focus on expanding the multifamily 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 seen I products that is.
He going to continue for next year for us.
Okay, and just just as a follow up then the sale in the quarter.
If you could maybe just talk through.
Why that.
Got bucket was was a bit different in terms of you know Chris on the credit quality was still fine there.
What made.
Given the pickup in capital from or timing and then you know you mentioned Cecil also 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 different between this and the the rest of the portfolio at this.
This bucket was that was a transaction oriented bucket of loans. There was no deposits associated with it our loan to deposit ratio was quite high and this piece the balance of our portfolio portfolio is relationship driven it's the people that we have long term relationships that use us for many products and services. So again it was 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 yes return.
Against volume.
Okay, and then I'm sorry, you might decide but this was not part of autonomous portfolio. This thus a multifamily sold.
It was not part of our topic I call. It was a valley portfolio.
Great. Okay. Thank you.
Thanks Frank.
Our next question comes from Steven Alex Bolis with JP Morgan. Your line is now open.
Hi, good morning, good Alicloud on for Steve.
Oh sure the closing of Oritani can you give an update on branch consolidation and also.
In update on underperforming branches. Thanks.
Sure Alex It's Tom I'd answer again.
We've identified and announced that there are nine branches all in less than a mile from each other that will be closed as part of the Jack acquisition that that's what we're announcing and that's where we are today.
With regards to the valley branches in our branch transformation, we had a previous calls announced we would be reducing the valley footprint by 10 branches. During 2020 was still on target for that I think on the positive side the retention of deposits in the close branches has been very high.
Hi, I and that's really the based on us getting out in front of the customers 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, there were nine and 85% retention or so range, we'll continue to manage it that way.
We do manage our branches individually that just to make sure that we have the right mixes deposits right mix of people. The right service levels are focusing 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 as you know I.
I'm speaking as a proud father on this if they came out extremely well and now it's very well received by our customer base. So we're on on track it on the way with our branch transformation.
Thanks for the and just a follow up on your loan to deposit ratio.
Or tiny what is the here I mean, the range that you're comfortable with and would that be below 100%.
Yes, 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.
Okay. Thank you.
Our next question comes from David Chang.
Securities. Your line is now open.
Hi, Thanks, a couple of questions for you so starting off looking on slide eight.
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.
And 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 that and what the overall portfolio yield does that should we expect additional pressure kind of through 2020.
Yes, so absent the comments, we made about the first quarter, which I think you have right keep in mind that are 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 it bottom yet on it but it certainly encouraging maybe that those those two lines in the bottom left quadrant of the slide would start to narrow somewhat.
Okay, great. Thanks for that and then on the other side.
Of the equation now that you you know prepaid the expensive FHLB debt.
And that some of your cost 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 30, Onest was that way it can give us an indication.
As to what what to expect into the first quarter.
We're going to look.
David I don't think we have the handy, but I can certainly reach out the afterwards with that.
Okay, and then one last one related to that is.
And I like this slide where you're showing the.
You know cumulative cash flow gap and you show that the maturing CD rates are.
In the two 2.2% range what are you guys renewing Cds that currently.
So ill answer that in two parts first one of the things that management tracks very.
Very well here's the retention of the Cds as well so those have ranged from roughly to 80% to 90%.
For new rollover retain retained Cds were 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.
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.
Great. Thanks very much.
As a reminder question. Please press Star then one our next question comes from Collyn Gilbert with KBW Your line shall bench.
Thanks, Good morning, everyone I'm just to continue on with the the NIM question, if I just want make sure.
Understood you all correctly you are assuming a fed caught in this guidance is that correct.
Yes, okay.
Okay.
And then just trying to understand it seems like if we if we look at your and I I 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 in a much better way then what DNA I guidance would imply so if there is opportunity could be on the upside I mean, where do you where do you think you have a better opportunity on the funding side on the asset side, because I just it just seems like it and I haven't until all the numbers, but it seems like you're setting up for.
And I growth to be higher then what you're offering and a targeted range I want to.
Trying to figure out what what it might be missing here.
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 maybe achieve the net interest margin numbers that you might otherwise think are a function of whether or not curb 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 I've as I said in the third quarter, we're going to replay.
Nice down on the CD and wholesale funding. The question is how much we're going to fund down and we're going to ladder 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 or 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.
Okay, I think Halloween you'd look at I. I think you obviously highlighted the 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.
Losses today versus where we're seeing.
Overall market rates and then on the asset side, obviously, there's a significant amount of assets that are tied to short term indexes. So if there was a rate move right up to that Theres, 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.
To move forward.
Okay that helps.
Okay. Okay, and then Mike just to clarify your comment was that one quarter NIM would be down.
<unk> insinuating.
Well you have to consider the margin.
Got to consider a couple of factors first you got to different day count in first quarter. You also got a full quarters worth of Oritani, which are different and them than legacy valley. So theres those two right there provide some headwinds.
Okay. Okay and then my last question is on on can you provide us what's what's the guide on that tax credit expense for the year.
I want to make sure I understand your question and it's the amortization expense.
24% to 26% slash sorry, not the tax rate to tax credit.
Yes, I think were flat from everywhere in the for Q. I think you know your point is quite a few years ago Isa 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're 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.
Okay, Okay, I will leave it there thanks guys.
Thanks.
And we have a follow up question from David Shafir, any with Wedbush Securities Count.
Hi, Thanks for taking the follow up so I wanted to touch on expenses.
So previously you've given you know in absolute dollar kind of expense range.
For the next quarter or 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.
This is Mike. So obviously, we're not going to give guidance on an expense increase year over year 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 and 2019.
Okay. Thanks for that and then.
Question on other income is.
It was higher than 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 good run right there.
And I want to make sure I direct you to the right slide here. We go. So if you take a look at slide five you can see the components of that in 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.
Feel that the sheer 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 that category and it's been averaging about 13 to 15 million accord.
Got it thanks very much yes.
And at this time Im showing no further questions I'd like to turn the call back over to Mr., Rick Kramer for any closing remarks.
Thank you all for joining US for earnings Conference call. We look forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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