Valley National Bancorp (VLY) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Valley National Bank's second quarter earnings release.

(Operator Instructions) And as a reminder, today's conference is being recorded.

I'll now turn the conference over to Rick Kraemer.

Please go ahead.

Thank you, Brian.

Good morning, and welcome to the Valley National Bancorp's Second Quarter 2018 Earnings Conference Call.

Leading our call today will be Valley President and CEO, Ira Robbins; and our Chief Financial Officer, Alan Eskow.

Before we get started, I want to make everyone aware that you can find our second quarter earnings release and supporting documents on our company website, valleynationalbank.com.

Additionally, I would like to point everyone to Slide #2 of our 2Q '18 earnings presentation and remind everyone that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry.

Valley encourages all participants to refer to our SEC filings, including those found on Form 8-K, 10-Q and 10-K, for a complete discussion of forward-looking statements.

And now it's my pleasure to turn the call over to Ira Robbins.

Thank you.

Good morning, and thank you, everyone, for joining us this morning.

We made significant progress at the bank during the second quarter of 2018.

During the month of May, we successfully completed our systems conversion of USAmeriBank, fully integrating our 2 companies.

Additionally, we have begun implementation of an extensive multiyear branch transformation, which we will cover in more detail shortly.

I'm extremely proud of what all of our associates have been able to accomplish in such a short period of time, and I thank them for their tireless dedication.

There are many changes taking place within the walls of Valley today.

These changes might appear less obvious from the outside with only getting a chance to look at the numbers.

We have done a tremendous job attracting new talent to the bank through improved compensation and incentive plans, simplified organizational procedures and a new comprehensive vision for Valley.

All of which should help grow revenues at a level far greater than we have in the past and create a foundation for continued growth in operating leverage.

The ongoing investment in infrastructure is necessary to our future success.

We are embracing technology and developing new relationships with Fintech companies.

Improving the experience, ease and speed of online account openings is a priority.

Our use of the salesforce marketing cloud, combined with the investment in our internal data hub, should positively impact both the -- the cost of customer acquisitions, increase our success rate, and improve operating efficiencies.

While the timing of investments such as these may temporarily slow the progress of driving absolute operating earnings expenses lower, we are investing for the future and remain confident that our long-term expenses will result in greater operating leverage and a much more robust and efficient bank.

It is important to note that despite all of these investments taking place, we expect absolute operating expenses will continue to decline.

With that, we will move to earnings presentation to cover some additional highlights during the second quarter.

Please turn to Slide 3.

For the second quarter of 2018, Valley posted diluted earnings per share of $0.21.

Included in this number were several merger-related items totaling approximately $3.2 million pretax or $0.01 per share on an after-tax basis.

On an adjusted basis, earnings per share were $0.22, which represents growth of approximately 22% over the same period just 1 year ago.

We successfully completed our systems conversion of USAmeriBank during the month of May and continue to see impressive operating results out of our newly acquired markets.

Our customer and employee retention remain on target.

Loan growth remained strong.

Our quarterly annualized loan balances grew over 12% during the quarter.

We continue to see great success in our middle market C&I businesses, driven apart by changes in employee compensation structures, which have levered our ability to attract greater talent.

Our revenue growth on an annualized linked quarter basis was over 16%, fueled by a previously mentioned loan growth, coupled with noninterest income growth in most categories.

Valley's adjusted return on average assets exceeded 1%, which was both an internal short-term target and externally communicated to everyone as a near-term benchmark in assessing the improved performance of the bank.

Despite this growth, we believe the current period of results are well below the core earnings power of our franchise.

While we are showing obvious progress in terms of revenue growth, we are cognizant of the continuous need to improve our absolute level of expenses and more efficient use of our current cost structure.

As you can see on Slide 4, Valley continues to diversify both geographically and by product set.

We posted impressive organic loan growth across most portfolios.

The linked quarter growth did not consist of any wholesale loan purchases or unusual participation.

Our commercial lending compensation plans, which are now more closely aligned with the industry, are helping us to acquire strong talent with meaningful experience and significant relationships.

In recent months, we have added a new Head of C&I in New York, a lending team in Jacksonville, several relationship managers in our national equipment leasing business and a new syndications department.

We remain encouraged by the level of new loan originations, which exceeded $1.7 billion for the quarter.

The yields associated with the new and existing loans continue to significantly improve, partially reflecting a portfolio that is placing more emphasis on C&I growth coupled with rising short-term rates.

In fact, our yield on new loan originations increased to 4.53% from 4.36% in the prior quarter, reflecting an asset beta on new originations of nearly 60% compared to the change in average effective funds for the quarter.

The shift in asset class origination from longer data treasury index products should continue to have a positive impact on the bank's overall asset sensitivity as short-term rates continue to escalate.

As a result of our recent success, we feel comfortable raising our annual loan growth targets for 2018 to a range between 8% and 10% net of loan sales from the previously disclosed 7% to 9%.

As always, we are committed to maintaining our historically conservative underwriting standards.

We are confident that despite our improved growth, we remain one of the more conservative underwriters in our markets.

We will not sacrifice quality for short-term gains in revenue.

Turning to Slide 5. You will note that our deposit balances experienced a linked quarter decline of approximately $300 million.

While this is clearly a disappointing result, I would point out that part of the decline was driven by outflows in municipal deposits and other escrow balances.

Balances related to those account types often show considerable fluctuation, driven by seasonal forces.

On a more positive note, we saw noninterest-bearing balances grow at 6% on an annualized linked quarter basis.

It is also worth noting that while still in the early days, we have seen a sharp rebound in quarter-to-date deposits of over $200 million with approximately 1/3 of that coming in the form of noninterest-bearing deposits.

We anticipate seeing a return to positive deposit growth trends in the third quarter of 2018.

As we suggested in the prior quarter, competition for deposits within our markets remains fierce.

Deposit betas remain on the rise, and as a result, we did place greater reliance on short-term borrowings while allowing some longer duration borrowings and CDs to roll off.

Tactically, we think this was a reasonable balance sheet decision recognizing some of the rate specials we were competing with in many markets.

From a longer-term perspective, we are making the necessary investments in technology to enhance both our consumer and commercial customers' digital experience, while piloting leading technology within our marketing department to acquire new customers.

We fully acknowledge the need to build greater core deposit balances, and ultimately, our goal is to fund the majority of our loan growth with deposits.

I'd now like to turn the call over to Alan to cover some additional financial topics.

Thank you, Ira.

Turning to Slide 6, you will notice we grew net interest income by 6% on an annualized linked-quarter basis.

Our significant quarter-over-quarter loan growth combined with a relatively stable net interest margin continues to provide some cushion from increasing borrowing pressure.

That said, we are anticipating modest margin headwinds to remain in the current environment.

While early third quarter deposit trends, as mentioned by Ira, have been favorable, we are anticipating that in the near term, our loan growth will remain partially funded by wholesale borrowings.

This will likely act as a governor on any net interest margin expansion in the near term.

In addition, approximately 35% of our loans adjust with movements in short-term interest rates.

And with the Fed increase in June, they will show a full adjustment in the third quarter.

Turning to noninterest income.

We experienced growth across most major business lines during the quarter.

Some of that growth was concentrated in swap fees due to strong commercial loan production.

Our insurance business also saw an increase during the quarter, while service charges on deposits were disappointing, driven primarily by lower balances over the quarter.

Gain on sale revenue related to our residential mortgage business increased over 13% from the prior quarter.

We sold approximately $195 million in residential loans during the quarter for a pretax gain of $7.6 million.

We remain comfortable on our ability to originate in excess of $1.5 billion in residential mortgage loans in 2018 despite the macro headwinds facing the industry.

Turning to Slide 7, you will notice that our LIFT initiative remains slightly ahead of schedule, as we have captured approximately 60% of the savings.

To date, virtually all of the benefit we received has been on the expense side with the originally estimated $3 million in annualized revenue enhancements that come later in the program.

We remain on track to complete the program by the end of second quarter 2019.

Our reported operating expenses of $149.9 million included approximately $3.2 million of merger-related expenses.

We think third quarter 2018 will paint a much cleaner picture of expenses as we achieve 1 full quarter of USAB integration -- integrated within Valley.

We made significant hires during the quarter in several lending departments.

While those additions added approximately $1 million to quarterly expenses on annualized, we are confident that they will be producing significant revenues for the bank in short order.

Our focus on improving operating efficiency and greater operating leverage is paramount.

We continue -- we believe we will be able to achieve an adjusted efficiency ratio less than or equal to 54% by the end of the fourth quarter of this year.

On Slide 8, we cover some of the key credit quality highlights.

During the quarter, we recorded an additional $3.3 million loan loss provision related to the valuation of taxi medallion loans.

Additionally, we moved approximately $31 million into nonaccrual status, driven by internal downgrades and not actual loan performance.

Our level of related reserves, as a percentage of exposures, continues to build and now stands at over 17% of the entire taxi medallion loan portfolio.

Our current model values the average New York City medallion on our books to a level of 246,000.

Based on the larger recent medallion transfer activity, we anticipate valuations could continue to experience some downward pressure.

We continue to monitor the positions closely to reflect any dramatic changes in the market.

Despite a somewhat higher level of provision, our credit losses remained generally benign with net charge-offs at $692,000 in the second quarter.

Our level of nonaccruals, excluding medallion loans, also remained at a low level.

I would now like to turn the call back to Ira to cover the topic of Valley's branch transformation.

Thanks, Alan.

We are currently in the process of proactively redefining what the retail presence looks like at Valley National Bank.

Recognizing that branch traffic continues to decline and customer behavior continues to move more digital, we are creating a branch infrastructure that's more reflective of current times and those to come.

This is also an opportunity to allocate resources more effectively, enhance our digital channels and features.

While the bulk of this process will occur over the next 3 years, our strategy must remain fluid.

This transformation will leave Valley in a position to be more proactive and faster to react to the evolving banking landscape in the years and beyond.

As you can see on Slide 9, there are multiple workstreams in progress, all working to achieve the same goal, greater relevancy in the markets we serve, ultimately leading to improved core deposit generation and diversified revenue.

While the physical appearance, location and number of branches is part of this process, it is our people, training and services that we provide that will ultimately determine our long-term success.

Slide 10 outlines the summary of our internal analysis.

While this portion of the study focuses solely on our New Jersey and New York footprints, we will be expanding into Florida and Alabama in time to ensure all of our branches are equipped to perform at the highest potential.

Within New Jersey and New York, we have identified 74 branches out of 177 that did not meet our internal measures of success as defined by either balances, cost and/or profitability.

As such, we anticipate consolidating approximately 20 of these branches over the course of the next 3 quarters, leading to approximately $9 million in annual saves once fully consolidated.

We do not expect to recognize a material expense charge related to these potential consolidations.

The remaining branches identified during our analysis will undergo tailored action plans that will focus on improving deposit balances, cost controls and revenue enhancements.

While we are hopeful that these action plans will result in positive results for our -- all of our branches, we are setting deadlines for performances outlined on Slide 11.

If the branches do not show progress towards meeting our internal targets, they will definitely be considered for consolidation as well.

In the meantime, we will be renovating and repositioning our best-performing branches to reflect our desire for an improved customer experience, greater employee efficiency and smaller square footage in some cases.

Turning to Slide 12.

As previously stated, we are raising our full year loan growth goals.

Our new range of expected growth, net of portfolio sales, is now 8% to 10% from the previously stated 7% to 9%.

In terms of net interest margin, we expect moderate headwinds in future quarters, driven primarily by the market competition for deposits and our anticipated need to fund strong loan generation.

As stated previously, we believe new loan yield originations, combined with the floating and adjustable rate portion of our loan portfolio, should mitigate much of the deposit pressure.

Finally, due to our stronger revenue growth, we believe setting efficiency expectations is a better expense management over the long term.

While our absolute expense base remains a critical focus in management and a larger driver of future efficiencies, we are continuing to reinvest in the businesses; and generating greater positive operating leverage is the priority.

As witnessed this quarter, we are making significant strides towards greater revenue growth in shorter period of time.

Our goal is to achieve an adjusted efficiency ratio by 4Q of '18 of less than or equal to 54%.

That number excludes merger-related charges, infrequent items, and amortization of tax credits.

The new target of less than 54% by 4Q of 2018 reflects the significant contributions of our Project LIFT efforts coupled with the accelerated adoption of new technologies and greater revenue growth.

Keep in mind, just last year, when we announced our Project LIFT initiative and 2020 vision, we provided a long-term operating efficiency goal of sub-55%.

Today, we are lowering our long-term goal to sub-51% reported efficiency ratio during the year 2020.

That number would be inclusive of tax credit amortization and does incorporate estimated annual saves from our branch disclosures announced today.

On an adjusted basis, that number would be equivalent to approximately 48.5%.

With that, I would like to open up the call to questions.

(Operator Instructions) Our first question comes from the line of Frank Schiraldi with Sandler O'Neill.

Just a couple of questions to start off here.

In terms of -- Ira, could you give us just a little bit more color on the deposit gathering strategies?

And you talked about a reversal of the 2Q trend already here in 3Q.

If you could just talk about what is bringing deposits back in the door?

Is it just seasonality?

Or is it different strategy?

Or is it just matching pricing?

I think it's a combination of all of it.

They are definitely impacted in second quarter by seasonality.

We expect that to improve in the third quarter.

Additionally, we did raise some of our rates on CDs in some money markets to be able to be more competitive with what we're seeing in the market today, and we think that's having a positive impact.

But overall, it's really what we're doing on the retail sales approach at changing some of the historical dynamics, so what happened within our branches and being much more proactive in addressing customer needs.

In addition, we've set some established requirements within the commercial loan portfolio as to what increased compensating balances look like.

And I think our lenders are doing a much better job at being proactive and asking for additional deposits.

And then, I wondered if maybe you could just -- a follow up to that would be if you could quantify at all when you talk about modest pressure on the NIM.

Is that akin to what we saw in 2Q?

Or given maybe pricing has picked up more, could that -- even pressure be -- maybe even greater at this point?

I think unfortunately deposit betas, in my mind, really aren't linear.

We had a lower -- a much lower deposit beta in the first quarter versus what we saw in the second quarter.

So it's hard to give you a linked quarter trend as to what we're seeing.

I think overall, though, it doesn't seem as competitive today as it did going from first quarter into that second quarter.

That said though, many of our peers do need deposits, and there is increased pressure.

I don't anticipate significant decrease or anything like that in the margin.

I think there is moderate pressure on the deposit side.

But that said, I think we're doing a really good job on the asset side, changing some of the composition of the assets that we're bringing in and getting a better yield on the assets that we are booking.

Okay.

And then just finally, if I could, just one more on capital.

You raised your loan growth expectations.

How does that change your thoughts or color around capital accretion from here?

Are you still comfortable that you can accrete capital internally?

And then how do we think about -- if you do need external capital, how do we think about a raise versus potential room on the dividend?

I think, right now, we're focused on generating capital internally.

I think with the improved operating efficiency within the organization, we should be able to support the additional loan growth for the time being.

Next question will come from the line of Steven Alexopoulos with JPMorgan.

I wanted to start on the branch transformation, Ira, how much is it going to cost in 2019 and 2020 to overhaul the retail network, given some of these items you're outlining?

I think it's baked into the efficiency guidance that we're providing, Steven.

Okay.

So the $9 million cost saves will be net of any investment that you need to make, [potentially]?

Correct.

And then -- that's helpful.

On the strong C&I loan growth, Ira, you mentioned this new employee incentive plan helping to drive the growth.

Can you give us a little more color on that plan and why it's driving such strong growth?

Sure, Steve.

This is Tom Iadanza.

I think what the incentive plan did was put us to market to allow us to attract personnel from organizations that we've always competed with.

That process began well over a year ago, and bringing those people in, we're starting to see the benefit of that.

Additionally, the comp plan is not driven solely by loan growth, it's driven by deposit gathering, ancillary revenue opportunities as well as, just not production, but growth in deposits at the branch level and growth in loans overall.

So the plan is a very balanced plan to make sure that where we continue the lifeline of generating deposits to fund our loan growth on a long-term basis.

Okay.

But that plan was cited as one of the components of why C&I was so strong.

And I'm just trying to figure out why that helped this quarter, in particular?

Yes, it goes back to the hiring of people.

The plan allowed us to attract and retain our people.

So that process, again, we put this plan in place over a year ago, allowed us to attract people, allowed us to keep our better people, and we're seeing the fruits of that in this year in this quarter.

Okay.

And then just a final question on the deposit cost and the rise we're seeing there.

What's the incremental cost of new money that you're bringing today?

And are you needing to just raise rates across the board for your existing customers?

We're trying to be thoughtful about how we definitely attack that.

Within our new customers, it is a higher interest-bearing cost than what we're seeing across the entire portfolio.

But we are being mindful of how we go ahead and connect with our current customers, so we're not putting them so far off-market that there is a big deposit beta for them later as well.

So we are being, in our mind, strategic as to how we attempt to communicate with our current customer base to [rise up] some of those costs in a linear manner.

But we are adjusting rates throughout the portfolio.

Okay.

Ira, is it safe to say the cost of [new] money is over 2%?

Steven, I think for the high-cost money market and CDs the answer is, yes, but we're generating a 1/3 of our deposit still coming in noninterest bearing.

So on a blended basis for us, I don't believe it's 2%.

Our next question will come from the line of Arren Cyganovich with Citi.

Just looking at the originations for the quarter maybe you could break down the areas that you had, the mix of that -- those originations?

And also, where are you seeing the largest amount of credit spread pressures within your -- within those lending verticals?

Yes, it's not so much related to region, though that's part of it; it's really related to loan type, the industry and such.

Certainly, there continues to be pressure on the multifamily, on the line -- coop lines of business.

We have chosen a strategy of maintaining a strong credit culture, which also puts us in competition for quality loans in every one of our market.

So I wouldn't really relate it so much to the areas, but to the business lines and the types of loans we like.

And what was the mix of originations for the quarter?

I don't -- regionally, it was probably in line with what we -- probably 30% in Florida, probably 35% or so in New Jersey and the balance in New York.

By type, I don't really have the exact, what was real estate, what was C&I.

But we're still -- we still like the real estate business.

We're still heavy in quality real estate lending.

We're seeing the majority of the growth today in the C&I book of business.

And I think Tom alluded to that a little bit earlier, we've been hiring for the last year now and focusing on bringing on some additional C&I lenders within the organization and that's having some positive impact to us.

And then on the branch transformation, I just want to double check.

I think you said that there is not going to be any charges for the branch -- planned branch closures or consolidation?

And how many branches are you expecting to actually renovate over the next few years?

Right.

So what I was referring to was the 20 branches that we're looking at closing over the next couple of quarters, that if there is a charge it would be minimal, if any.

That said, though, over the next few years as we go ahead and work on this improvement, where it's enhancing the look and feel of some of the current branches as well as potentially consolidating some of the other branches outlined, there may be charges here and there.

But they're all within the efficiency guidance that we've targeted.

Okay.

And the -- how many branches are you expected to actually renovate?

There is a significant piece of the current portfolio that we do believe are high-performing branches that we need to -- that if we look at, to improving.

Once again though, there is not going to be a material impact to the P&L as a result of that -- a material impact to the noninterest expense, excuse me, as a result of that.

And it's Rick.

It's tough to drill down to an actual number of renovations at this point because we're starting with our -- the underperforming group, if you will.

As we put an action plan, there's a timeline associated with those.

So assuming we -- hopefully, we do see better performance out of those and then those could be add -- we could be adding that number to the number to renovate.

But at the very minimum, we're looking at renovating some portion of that 103 branches or so that's kind of defined as well performing for us.

I think to me the important message we want to get across is, look, we're being self-identifying here and understanding that we have some underperforming branches, whether it be because of profitability within those branches or the deposit balances that sit there in relation to what the market opportunity is for where these branches sit.

And we're being clear with the Street that if these branches don't improve their performance, there is going to be implications as a result of that.

We need to get better performance out of our branches and we believe we have an ability to put together a plan and a strategy that does that.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

I guess, Alan, perhaps, could you just compare the rates that you're paying on the wholesale borrowings versus -- to which, because I did hear you say that your -- that part of your loan growth is going to be supported by wholesale.

But what rates are you paying on the wholesale borrowings versus the rates that you would need to pay to attract more core deposits?

Well, Ken, that's across-the-board question, so to speak.

I mean, in terms of the borrowings, new borrowings, if you were borrowing from the home loan bank on a gross basis before dividends, is probably in about the 2 15 range right now, 2 20 in that range.

Net of dividends, it comes out substantially less than that.

In order to raise deposits, I think, Ira, pointed to the -- pointed that out before that we realize and we've already raised the fair amount of our deposit rates.

But I think the way we're seeing things is that, there is some irrationality going on out there and there is a lot of rates rising literally every other day of the week.

So we are picking and choosing the areas we want to raise rates in, in terms of large commercial customers because of the demand deposits we get.

We're paying up on some of the money market business accounts to them.

But on a blended basis, that is substantially below the 2 10 or 2 15 or 2 20 that we're paying to the home loan bank.

It's more on the consumer side that the higher payments have to be made.

And we are constantly reviewing the rates we're paying and adjusting for them.

So it's a little hard to say because there is still a fair amount of deposits we get from large commercial borrowers that are substantially below the home loan bank rates.

Got you.

Because, I guess -- and I know this is kind of a simplistic way of looking at it, but I guess, the question is just what is wrong with the philosophy of paying up for those commercial customers paying an extra 10, 20, 30 basis points whatever it might be if that net cost is actually still cheaper than wholesale, like, why choose the wholesale?

I mean, it might be for ALM, I don't know, but that's where I'm trying to compare the 2.

I think, incrementally, it's not going to give you the same balances that you need at that period of time.

I think, overall, it's a strategy that we're looking at to make sure that we have the ability to connect with these customers; to make sure that we are self-funding ourselves, or funding ourselves through our core deposit network at a period in time.

But short term, the -- we consolidate or we shrunk about $100 million in CDs during the quarter.

So if you combine the $100 million in CDs that we shrunk with the decline in the municipal and the escrow balances, from a funding cost, they're really no different than going to the home loan bank.

And we probably were a little bit cheaper in doing that.

The way that it looks to the Street is that we contracted in deposits, but from an interest expense, it's largely flat.

Got you.

Okay, and then just as a follow-up question.

When you think about your loan growth targets, which is great -- I mean, it's great that they're increasing.

The -- but the question is what -- how much of that is coming from C&I versus, say, construction or resi, just given sort of that, that can -- broader concern over term CRE and the size of the CRE portfolio that you guys have?

Again, it's Tom Iadanza here.

The construction book was relatively flat quarter-to-quarter.

We didn't see a lot of growth.

We could pick up a little bit from the utilization of lines under our existing projects.

I think that C&I growth -- yes, I -- probably running 35%, 40% on the C&I, the balance on real estate and the commercial side.

The resi side, I don't have the figures in front of me, but the resi side is probably 1/3 of the overall growth additionally to the total $680-or-so million for the quarter.

I expect those trends to continue at those levels.

Ken, this is Rick.

On originations for the quarter, so that $1.7 billion that we cited [plus] you're looking at about on auto and consumer around 17%, resi was 25%, C&I was 36% and CRE was about 22%.

Our next question comes from the line of Collyn Gilbert with KBW.

Alan, just to go back to the borrowing question.

So if we think about -- so on an end period basis, you guys grew borrowings about $1 billion this quarter.

And you've kind of indicated that roughly $300 million of the deposit outflow that occurred is going to be coming back.

So obviously, a net increase of $700 million or so of borrowings.

Do you anticipate that to reverse going forward?

I'm just trying to understand kind of how you see a mix of funding tied between borrowings and loan -- and deposits or then I'll still ask, like, what do you see the loan deposit ratio doing?

Yes, Collyn, as I said -- one of the things I said before is that we're constantly reviewing our rates and adjusting them so that we can see additional deposit inflows.

We've done some of that going back into the end of the second quarter.

We're reviewing some of them now.

And so a lot of that is why we are seeing some of the balance increases.

Today, Ira pointed out, we're up a couple of hundred million dollars in the first month here.

So it looked pretty good.

We will continue to do that and we're continuing to address all of our commercial customers.

I know Tom indicated before that one of the incentives for the lenders out there is to increase deposits, not just to increase loans.

So we're going to -- we expect, as we did this past quarter, we saw a fair amount of growth in demand deposits.

And we'd like to think we'll continue to see that.

Going forward, the more of the C&I business we do, theoretically, the more deposits and the more self-funding we should be seeing as compared to other loan products.

So I think you'll see some reversal, in this quarter, of what's going on.

We've already seen that in the first month and I expect that to continue.

I mean, Collyn, if you look at it from a macro basis, I previously said, our comfort level in loan-to-deposits should be between 95 and 105 and we're sitting at 107 today.

So obviously, there is significant desire and focus internally here to get the numbers [up at] 105.

Okay, okay.

That's helpful.

And then, I think, you may have said this, Alan, but just the borrowings that you're adding, are you extending duration at all or are you still keeping those pretty short term?

No, we're relatively short term.

Okay, okay.

And then, just some...

That provides us flexibility.

As new deposits come in, I have the ability quickly to pay those borrowings down without worrying about penalties or sitting with the borrowings out there that I don't really want.

Okay, okay.

That's helpful.

And then just some housekeeping questions.

Other other income was up on a linked quarter basis.

Was there something in particular that was driving that?

Other other income really had a couple of things.

Probably the 2 largest items, one, is swap fees, which we talked about a little bit earlier.

It's up about a little over $1 million quarter-over-quarter.

And we also have FDIC loss share in there.

And as we settle out different things with the FDIC, sometimes it's a positive, sometimes a negative, but this was a positive.

This particular quarter, we still have more to go.

So we're comfortable with the fact that we'll see more of that income coming forward.

Okay.

So backing -- so both on the swap side and then on the FDIC loss share side, so this level could stay elevated?

Yes.

Okay, okay.

That's helpful.

And then on the -- so the big jump in FDIC cost, is that -- what was going on there?

The best way I can describe -- and by the way, and I saw somebody write up something this morning.

Remember one thing about FDIC, it's not necessarily based on deposits anymore.

It's all based on your asset side of the balance sheet and what's going on there.

But yes, we saw some incremental change as a result of the merger activity.

We actually expect that to be down further -- down from this quarter into the third quarter.

Okay.

And then, if we -- just to your -- kind of your outlook on provision, you made the point that a majority of that this quarter was tied to taxi.

I know you're -- the uncertainty as to where that may go, going forward.

But just generally, how should we be thinking about the provision?

Well, the best way to think about it is, #1, it was not 50% coming from the taxis.

It was more coming from loan growth.

So we're not really seeing any loan losses at this point, but we do have to provide for loan growth.

So the loan growth was pretty substantial this quarter.

As we continue to do that, we'll continue to provide there.

And then, in terms of the medallions, there is a continued pressure, I think as both Ira and I mentioned earlier.

And it could go down further, the valuations, and if it goes down, we'll see some continued pressure on the provisioning there.

Okay, okay.

And then just clarifying, I think, I got it, but I just want to make sure.

The $9 million of savings that you expect to extract with the 20-branch consolidations, is that -- that's an absolute reduction versus like...

Correct.

Okay, okay, okay.

And then just finally, the merger charge this quarter, the $3.2 million, how does that break out from a line item perspective?

Like how much was...

Some of it is in salary and -- the salary area.

And some of it is in the, where are we, professional?

Yes, data processing.

Do you have the specific numbers?

Sorry, it's just tricky to model without that.

I don't have it.

And I think, one of the things to keep in mind, Collyn, is we didn't do the system conversion until late in May.

So the separation of some of the employees didn't really take place until June.

So we anticipate continued improvement in the overall and absolute noninterest expense as a result of not having any USAB expenses during the quarter.

Our next question comes from the line of Matthew Breese with Piper Jaffray.

Maybe just staying on the topic of expenses.

Last quarter, it seemed pretty clear that the operating expenses of $143 million, that number to 3Q, we're generally heading into the $130 million -- high $130 million, mid-high $130 million kind of range.

But it did the opposite; it went higher.

It sounds like USAB costs were still in there.

So I just wanted to make sure that the 3Q expense trajectory into that 130-type level, is that still the number?

And can you be a little bit more specific for us?

I think on part of the expenses, we're seeing enhanced revenue growth, part of that has to do with the gain on sale that we saw.

And I think the guidance we tried to give was ex-additional revenue growth, what that was going to end up being.

Overall, the over operating expenses are going to continue to come down.

What we announced today with the branches was not in any of that specific guidance that we had previously provided, but on an absolute basis, the quarterly noninterest expense number is going to continue to trend down.

Right.

One of the other items you said was that, for 2019, at least the 4Q run rate would be sub that 550, and that did not include the $9 million either.

Is that still the case?

And potentially, can we be sub that 540, perhaps?

I think long term, we're going to get to those numbers.

I think the 1 variable that we maybe didn't forecast was some of the growth that we're seeing in noninterest income today on the gain on sale and the revenue piece.

And as that continues to go up, there's obviously expenses associated with what we're doing on the residential mortgage piece.

So the incremental pieces we're seeing on the revenue side associated with gain on the sale, is a net positive to the EPS number but there is an expense number associated with that as well.

So we may be a little bit higher on some of the noninterest expense, you'll see some additional noninterest income as a result of that.

Net-net, we'll be positive though.

Okay.

I appreciate the updated efficiency targets.

What does that imply for your ROA targets?

Or are there any updated ROA targets?

No.

No.

(Operator Instructions) Our next question comes from the line of David Chiaverini with Wedbush.

I had a follow-up on the branch transformation initiative.

How much in deposits are in the 20 branches being consolidated?

You know what?

Those branches have low -- fairly low deposit levels.

And that's part of the issue that we're dealing with here.

And so I don't have the exact totals.

It's about $650 million.

But one of the things that we're targeting is that, we expect to run about an 85% to 90% retention.

We are mainly closing branches that are underperforming, that are in markets that are fairly close to other branches.

And we're already -- we will be working very closely with the branch people to make sure that the largest depositors are discussed with early on, so that we don't anticipate losing the majority of those deposits.

Got it.

And then shifting gears to how you're acquiring strong talent.

I was curious, how does the pipeline look for new hires?

And where are you attracting them from?

Are they big banks?

Or are they community banks?

I'm just curious about where they're coming from?

Yes, I mean, we're always active in talking to people and bringing people in.

And I would say, it's mostly coming from banks our size or bigger, in many cases.

But we're not -- it depends on the market.

In certain markets, a smaller bank hire may be more appropriate, but in our New York City market, it's primarily coming from bigger banks.

And then, lastly on the...

I would say that's probably across the board, not just the lenders.

We're doing a lot of hiring these days as things change with technology and so forth.

And we're seeing a lot of talent coming from some of the larger institutions.

Great.

And then lastly, on the loan pipelines, I think last quarter you had said that the loan pipelines were trending 10% to 15% higher than year-ago levels.

Do you have an updated pipeline figure for the second quarter?

It's about the same.

It's trending -- I'm sorry, it's trending in line, slightly higher than what we achieved in the second quarter.

But it comes down to timing when we could pull it through.

So we may see similar results.

It's hard to say at this point.

But our pipeline has been very steady.

And at this time, we have no further questions in queue.

Thanks.

I just want to conclude just by talking -- just real quick about the quarter overall.

And I think, overall, we were definitely pleased with the improved performance when it comes to ROA, when it comes to the improved earnings per share.

Understanding that there is obviously more work for us to do on the deposit side, we think we have some plans in place from a tactical perspective as well as the investments we're putting in on a strategic perspective.

The strong revenue growth is something that, historically, a value was always a challenge for us.

And I think the pieces we put in place to deliver sustainable revenue growth is something that's unique here.

And we're excited about the opportunity that, that's going to continue for us as we move forward.

With that, I just want to thank everyone for joining today.

And ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.