Q4 2022 Valley National Bancorp Earnings Call
[music].
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Good morning, and welcome to valleys fourth quarter 2022 earnings Conference call.
Presenting on behalf of value.
IRA Robbins President.
And Chief Financial Officer, Mike <unk>.
Before we begin I would like to make everyone aware that our quarterly earnings release and supporting documents can be found at our.
You might say the valley Dot com.
As a result, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures. Additionally, I would like to highlight fine jewelry presentation and remind you that the comments made during this call may contain forward looking statements relating to valley National Bancorp and <unk>.
Valley encourages all participants to refer to our SEC filings, including those found on forms 8-K, 10-Q10-K for a complete discussion of forward looking statements with that I'll turn the call over to IRA Robbins.
Thank you Travis and welcome to those of you on the call.
And a few comments to make this morning, and then we have Tom to provide insight on of course loans and deposits.
Mike will then discuss our financial results in more detail.
In the fourth quarter of 2022 Valley reported net income of $178 million earnings per share of 34 cents and an annualized ROE of one 5%.
Exclusive of non core charges adjusted net income EPS and our way were $183 million 35.
And one 9% respectively.
In 2022, we generated net income of $569 million and adjusted net income of $650 million.
This represents a significant increase from 2021 as a result of strong organic loan growth.
Acquisition of bakery in the USA.
And the benefit of higher interest rates ever realized for the majority of the year.
I am extremely proud about is consistent financial performance throughout my tenure as CEO .
Our profitability metrics and earnings per share has increased steadily across a variety of economic backdrops.
Despite the negative impact of interest rates or equity in 2022.
And completing the largest acquisition in our company's history.
Focused on tangible book value resulted in year over year growth.
In fact, our.
Tangible book value has increased 36% since 2017.
This compares to a 14% increase of our proxy peers over the same period.
A 14% increase for that between 2012 and 2017.
Our value creation as measured by tangible book value plus the dividends. We have paid has totaled 72% since 2017.
This is our one five times, our proxy peer median of 47%.
We have generated real franchise value on both an absolute and relative basis.
Within the context of our sustained financial success.
Focus this morning on what I see as our key accomplishments over the last five years and how the evolution of our company positions us for the years ahead.
From a balance sheet perspective, we have done a tremendous job diversifying our funding base.
At the end of 2017, approximately 92% of our deposits warehousing retail branches.
By focusing on commercial relationships and as mentioned digital deposit channels only 70% of our deposits are from the branch network today.
From a geographic perspective, 78% of our total deposits were in New Jersey, or New York branches in 2017.
Today that number is down to just 48% of total deposits.
Finally, despite a challenging few quarters.
And borrowings comprised 23% of funding today versus 31% five years ago.
Our focus on geographic diversity and a holistic approach to commercial relationships has benefited the asset side of our business as well.
In 2017, 78% of our loan portfolio was in New York and New Jersey.
Currently less than 60% of our loan portfolio is in these days.
The ongoing addition of higher yielding and increasingly adjustable hours has helped to better align our asset and liability betas.
In our view this increased balances should help to reduce the net interest margin volatility that we have experienced in prior cycles.
Ultimately.
Our sustained credit excellence provides a stable foundation upon which the aforementioned transformation can occur.
Our premier asset quality will continue to be the hallmark of our organization.
This credit strength as a result of our stringent underwriting criteria.
Our holistic relationships with wealthy sophisticated commercial clients.
Heading into 2023, we have not identified any underlying trends, which would indicate meaningful stress on the loan portfolio.
In any event, we believe that our experienced during the height of the pandemic indicates the exceptional resilience.
Our base.
In aggregate.
Balance sheet transformation that we've undergone has been a direct result of our companys strategic evolution and targeted M&A activity.
We have focused on business and geographic diversification.
Premier customer service and.
Establishing a sustainable organic growth engine.
Our hiring efforts and tactical initiatives have aligned with these outcomes and we are well positioned to navigate the near term operating environment as well.
That we pay today.
Although long term, we will continue to our diversification and sustainable growth.
We believe the progress made in the last five years will drive our continued success and obviously benefit our associates customers and external stakeholders.
With that I will turn the call over to Adam I discuss the quarters growth and financial results.
Thank you IRA.
Slide six illustrates the quarter's 15% annualized loan growth.
While quarterly loan originations remained below peak levels net growth continues to benefit from slower chaos and more sustained activity on the residential and consumer side.
Our commercial loan growth remains well diversified across asset classes and geographies.
We continue to experience significant repeat business from our longstanding and sophisticated commercial borrowers.
Legacy <unk> customers are also benefiting from the utilization of our more robust product set and balance sheet resources.
We anticipate that customer demand is always somewhat in 2023, largely due to the impact of higher interest rates.
Still we are well positioned from a competitive perspective to capture high single digit loan growth for the year.
Our continued focus on attracting and retaining top talent and preserving service excellence.
<unk> us well, despite a potentially more challenging backdrop.
On slide six you can also see the 1990 basis point increase in average new origination yields to six 2% during the quarter.
We remain successful and passing rate hikes through to our customers and anticipate further expansion.
Origination yields in the near term.
As a reminder, approximately 40% of our loan portfolio is fixed and another 20% reprice over a period beyond 30 days.
These pockets should provide a repricing tailwind that will continue.
Port increasing portfolio yields as rate hikes slow.
Before moving on to the deposit side I wanted to provide some additional color on our quarter's net charge offs.
Approximately $21 million of the quarter's charge offs were related to a single C&I loan.
Both legacy Valley <unk> and participated in this larger syndicated credit.
Our combined loan exposure had previously been classified as non accrual and the remaining exposure is fully reserved for as of 12 31 2022.
This is a discreet credit event and the vast majority of our portfolio continues to perform extremely well and as IRA mentioned, our underlying credit trends remained very strong.
Turning to slide seven you can see that deposits grew at an annualized rate of approximately 21% during the quarter.
While the quarter's net growth was largely funded by brokered alternatives. We are pleased with our ability to effectively defend our traditional deposit base in this challenging environment.
While we saw non interest deposit pressure across business lines. The largest single driver of the quarter's reduction occurred in our technology deposit area.
Despite the volatility of this business, which has been exacerbated by certain environmental challenges.
We continue to add customers and accounts and anticipate above average growth over time.
As a reminder, our technology deposits contributed approximately 5% of our total balances.
Yes.
As we indicated last quarter, we are experiencing competition for deposit sources across the franchise specifically on the commercial side.
Wealthy and sophisticated customer base that supports our strong and consistent credit performance has been actively requesting competitive deposit rates.
Incrementally pressured our betas and deposit costs.
Our retail network has been responsive to our CD offerings in both digital and cannabis deposits saw solid growth during the quarter.
We are keenly aware of the price competition that we face to defend and grow our deposit balances.
A variety of channels remain available to us and we will do our best to take advantage of the most cost effective alternatives to support our continued loan growth.
With that I will turn the call over to Mike <unk> to provide more insight on the quarter's financials.
Thank you Tom.
Good egg illustrates values recent quarterly net interest income and margin trends.
Income increased approximately $12 million or 3% from the linked quarter.
This reflects continued loan growth and expanding loan yields which were partially offset by more robust interest bearing deposit growth and funding cost pressures.
While our fourth quarter fully tax equivalent net interest margin declined three basis points to 357% from the third quarter of 2022.
Our PPP adjusted margin remains 47 basis points above the fourth quarter of 2021.
During the quarter of 69 basis point expansion in our asset yields was more than offset by a 78 basis point increase in total funding costs.
The asset yield increase was driven by both a repricing of our floating rate loans and a significant increase in the yields on newly originated loans.
During the quarter, we funded loan growth in our noninterest bearing deposit runoff, primarily with higher cost time deposits.
As you saw on slide seven we calculate a cumulative year to date deposit beta of approximately 34%.
As we noted last quarter deposit competition has accelerated rapidly and we have had to offer higher rates to attract funds to support our significant loan growth.
While we continue to benefit from asset repricing. This is likely to be more than offset by higher funding costs in 2023.
Moving to slide nine we generated just under $53 million.
Of noninterest income for the quarter as compared to $56 2 million in the third quarter.
The reduction was primarily the result of lower swap income.
This was partially offset by stronger revenues from our trust wealth and insurance businesses.
We anticipate that our 2023 fee income could grow at a mid to high single digit pace using the fourth quarter annualized number as a starting point.
On slide 10, you can see that our noninterest expenses were approximately $266 million for the quarter were approximately $256 million on an adjusted basis.
Most expense lines were well controlled during the quarter and the modest increase from the third quarter levels was partially the result of higher counterparty collateral fees related to certain hedging activities.
Continued revenue growth helped drive our efficiency ratio to 49, 3% from 49, 8% in the third quarter we.
We anticipate sustaining a sub 50% efficiency ratio in 2023, and believe there will be opportunities to drive efficiency lower from our current level.
Turning to slide 11, you can see our asset quality trends for the last five quarters.
<unk> detailed receivable loan relationship that drove the spike in net charge offs for the quarter.
We believe this was an isolated incident.
And are pleased with our aggregate five basis point net charge offs to average loan rate for 2022.
As a result of continued improvement in our underlying credit metrics and stability in the economic forecast our allowance for credit losses as a percentage of total loans declined to 1.03% at December 31 from $1. One zero percent at September 30.
As a percentage of non accrual loans, the allowance increased to 170% from 162% at September 30, and 150% one year ago.
On Slide 12, you can see the tangible book value increased approximately three 4% for the quarter.
This was the result of our strong earnings and a modest improvement in the OCI impact associated with our available for sale securities portfolio.
Tangible common equity to tangible assets improved slightly as a result of the same factors.
Our regulatory capital ratios declined modestly during the quarter as a result of our strong loan growth.
We anticipate that growth will moderate in 2023, resulting in higher regulatory capital levels a year from now.
We lay out additional 2023 guidance items on slide 13.
For simplicity, we based our forecast on 2022 full year results, which only included three quarters of impact from bank Leumi.
Based on our current pipeline and expectations for a modest pullback in demand, we anticipate 2023 loan growth of 7% to 9%.
This would result in net interest income growth of 16% to 18%.
We anticipate approximately 10 five to 12, 5% growth in expenses using 2022 reported less merger charges as the starting point.
This would imply a full year efficiency ratio at or below the mid 49% level posted this quarter.
With that I'll turn the call back to the operator to begin Q&A. Thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
And our first question comes from the line of Michael <unk> with <unk>. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my questions.
Morning, Mike.
I wanted to start drilling down on the margin a little bit.
I appreciate that the guide and the outlook, obviously, a strong end to the year.
Just curious, though I mean, I imagine you guys are assuming some more beta pressure on the funding side in the first half of the year, but how should we think about the <unk>.
The thought process around a relatively stable NIM for 2023 and asset yield improvements being offset by funding improvements are you guys also factor again.
Continued outflow on the noninterest bearing side or how are you guys thinking about mix, because obviously IRA your point's well taken about how much the business has structurally changed but is there still some kind of normalization to be had just from the environment that we're coming out of.
Yes, and I think it's a good question and I'll turn to some of the mechanics over to Mike, but I do want to highlight once again that the macro change that we have in the funding base today, and especially just out of that retail footprint I know historically, the northeast has been high on an absolute basis as well as high on databases and now have 48% of our deposits Justin.
The New York, New Jersey region versus 78% before is dramatically going to change, but the overall beta performances, but Mike you got some more details I believe.
Yes, I think the thing to really keep in mind is and we saw $900 million roughly rotate out of noninterest bearing into interest bearing between third and fourth quarter and our expectation right now as we look into 'twenty three is that that will continue and hopefully it bottoms out.
Hi, 20 type range. The reason that we think that as we bank a fairly sophisticated wealthy customer base and obviously, we pass the line, where theyre going to leave excess deposits and noninterest bearing.
Also keep in mind that with that 900 million that rotated. We also had about $700 million of excess but that in quotation marks.
Posits that we put on in the fourth quarter in anticipation of.
The fed's two additional fed actions increases in the first half of 'twenty three sort of getting out ahead of that a little bit and obviously those have a higher beta attached to them.
Just wanted to really just as you know one of the things that we have done is continue to grow the commercial book as well if you look on a year over year basis, we've seen business checking accounts increased 11% and obviously those have a lot of operating accounts associated with them. So.
There really isn't as much excess deposits and some of those so while there is pressure I do believe some of the changes and focuses that we've had in the strategic areas are really going on in order to the benefit throughout 2023.
Great. So taking that kind of all of it to contact created it's fair to say that at this point. When you guys are kind of guiding towards a stable NIM.
Youre kind of conservatively, assuming that some of the headwinds that occurred in the fourth quarter continue to occur in 2023.
And Mike I think when you think about this is Travis when you think about our 7% to 9% loan growth guide and when you kind of take the fourth quarter run rate on NII and you figure out where the guide that we're giving you is for 2023, you'll see kind of closer to 4% NII growth. So we are anticipating some amount of margin compression and don't forget to the first quarter, obviously, we will.
The additional headwinds like the day count issue is going to cost us a couple of basis points there.
Well, so I don't think where we're guiding necessarily to a stable margin I would say that if you factored altogether is a little bit of pressure thats baked in here.
And because of the factors that we've talked about.
Alright, Okay, great. Thanks, Charles and then.
Secondly.
The efficiency ratio.
I guess, just kind of a philosophical question, but I mean do you think sub 50 is kind of the new table Stakes I mean, as you guys try to manage your business from an investment standpoint, and an ROI standpoint.
In terms of like incremental margins on new business customers and stuff I mean.
Is this.
I guess the question is is this kind of the way we should be thinking about your business kind of base case, moving forward kind of irregardless of where rates are.
Yes, I guess I'll just leave it there I'm curious what your thoughts are.
Thank you Kelly.
I'd be disappointed if we went above 50% on that on a consistent basis I believe even our forecast for this year continues to invest in strategic initiatives that are really going to continue to drive franchise value for us.
I think we focus on expenses, probably too much in certain areas.
Go back to when I took over as CEO , we have 3325 employees and $29 billion of assets in the first quarter. Thereafter today, we're sitting at $57 billion of assets 3826 in place. So we've added 501 employees over five years and grown the bank $28 billion.
And there is tremendous focus here on efficiencies process, and making sure that where we're getting the most out of every single dollar that we spend on the on the expense side I think but to your point, we have to build franchise value. We are investing in our future and certain businesses that we think are going to continue to really grow and sort of outsized performance. So it is a balance for us.
But managing the macro number I think is something thats really important to everyone here within the organization.
Helpful perspective, just sneak one last one and I'll drop back just the trusted investment fees were stronger than I was looking for at least in the quarter.
Was just curious if you could maybe remind us.
What the fee structures there look like.
Pending like are they market dependent or are they more fixed so just any color there would be great. Just to have an idea of what to expect once we make some assumptions for next year.
Yes, Mike I think the fourth quarter pick up was partially related to <unk>, which has some seasonally back loaded revenues.
That flows through that trust investment insurance line, because theyre advisory fees and I do think our forecast for 2023, we assume that there is some continued improvement in that line in total because should be equity and debt markets normalize I think we would look for some improvement in our market based revenues. So I think that's reasonable, but we don't anticipate a significant.
Obviously, we're guiding to mid to high single digit growth on the east side, so its not astronomical.
Okay, and the Dudley is that seasonal revenue something that you would expect to occur kind of on an annual basis towards the end of the year.
That's correct.
Okay.
Hey, guys. Thanks.
Thank you Mike.
Thank you and one moment for our next question.
Yes.
And our next question comes from the line of Steve Moss with Raymond James Your line is open. Please go ahead.
Good morning.
Just following up on.
Good morning, maybe just following up on Mike's question here, it's gone a little further into the weeds curious.
Or is loan pricing these days.
I think when you when you it's Tom Steve when you look at our yield in the fourth quarter, we increase that 100 basis points to six two.
Monthly basis, just under six 5% for the months of December we continue to push our spreads up to counter the cost of our deposits, it's really will differ by asset classes.
Sort of anything else and as IRA mentioned earlier, we're 60% adjustable. So we'll continue to benefit by the rise in short term rates and that 40% of our portfolio tied to Salford Prime and LIBOR.
Okay. That's helpful. And then just on the deposit side, you mentioned growth in <unk>.
<unk> cannabis here just kind of curious if you give a little more color on.
The trends there.
Maybe size it up and how much is maybe not disappearing bearing versus interest bearing.
Yes.
It's a deposit driven business for us and we are focusing on the multi state operators. We now do business with 10 of them we grow accounts.
Double digits on a quarter to quarter basis.
We are I don't have it exactly but we're primarily non interest bearing on our deposit accounts.
Okay.
Great One thing one last one stratasys, we lump candidates in with a couple of other niche deposit businesses. So for us that would be candidates HOA national deposits and digital and those.
For businesses in aggregate out of $900 million in deposits during the quarter, which helped offset some of the other traditional kind of commercial deposit runoff and so that goes back to the conversation about the transformation of the bank I mean absent those businesses, which are relatively new to valley.
We'd be looking at a different deposit picture.
Okay. That's helpful. And then last question for me here just curious any color you can give on the construction loan that was moved to non performing status type geography things of that nature, Yes, sure. It's Tom again, Steve It's a single loan based in New York City.
Let's say for sale construction project.
Six units three are contracted to be sold.
We're awaiting the tcl to close those sales upon the three sales will be will be paid in full.
Okay.
I appreciate the color. Thank you very much.
Thank you and one moment for our next question.
Our next question comes from the line of Jon <unk> with RBC capital markets. Your line is open. Please go ahead.
Thanks, Good morning, guys.
Morning, John .
Question for you on the CD growth during the quarter.
IRA you mentioned it used to be I think 31% five years ago do you guys see any limits to that CD growth should we expect more of the same in the next quarter or two.
I think you will see slightly higher levels, assuming that we have loan growth rates in excess of what our expectations are in the guidance and then brokerage CD market is very liquid for us and we'll use it as a tool to fund up the balance sheet and manage our loan to deposit ratio, but as Travis commented earlier, it's really important.
Is the growth we're seeing in these other niche.
Sectors, along with the fact that we did do another CD promotion in the fourth quarter that raised just about $1 billion as well and while those are higher cost deposits as I said earlier trying to link it back to my earlier comment we expect those deposits will become cheaper.
Assuming the fed's expected rate increases occur in the first half of 'twenty three.
And gentlemen, I, just can't reiterate enough the different levers that we have today that we never historically had.
When we talk about where we used to generate funding come in all the staff to come out of the branches came out of the <unk> came out of the brokerage CD market. Those are the three choices we had.
<unk> EBITDA to support the 15% loan growth, we have a litany of additional leverage today and we had the flexibility that if we wanted to go to the retail CD market, because we think that's attractive and thats where our.
A portion of it could all come from we have the ability to extend duration on certain things that we never had before so the flexibility that we have today is astronomical compared to where we were before.
And I do believe over a period of time on a relative basis thats going to help us manage our funding cost to a much greater degree than what we're historically able to and when you look at the asset side of the balance sheet, which they should be looked at in conjunction with the floating rate assets that we've been able to put arent really helps dictate the types of funding that we wanted to do across the entire organization, we don't necessarily look at one <unk>.
The balance sheet just in isolation.
Yes that makes sense.
It's a unique period IRA right. It's we're in a period of maximum deposit pricing pressure right now.
I understand that.
And keep in mind, you, we had 60 I think as Mike was.
Alluding to we had 60 plus basis point run off early right because of the asset sensitivity. So there was an expectation that youre going to see some some increase in the funding cost to come along with that but like you said, Jon It's unique it's interesting right now, but there is massive franchise value that we're able to build by adding 50% loan growth and be able to find the funds to really support that.
Okay. Okay.
Just one quick one on <unk>.
On this topic and then I have one other one but.
You mentioned the tech vertical.
The decline in deposits or was that a surprise and what drove that was that simply making a decision on rate or was that something else in there and what was the magnitude of that.
I don't I wont give you the magnitude of it but I will tell you what.
Caused it what caused it was one customer in their portfolio that went IPO and as a result of that the bank that took them IPO.
Steve the deposits that we previously had and that should come as no surprise that the.
That is the lifecycle of what happens inside of that Tech business.
But overall our tech balances from the time, we started to now are basically flat when you've seen most everybody else in that space have declines, which I think is a good thing I mean, if you think about what <unk> seen from an industry perspective, do you see tech deposits come down because of cash burn and needs at the overall individual portfolio companies. This was a great event. If you think about it from a client perspective that David.
But to go IPO, it really still even in this market.
Generate some sizable returns from an investor base and I think it demonstrates the differentiation of what our tech business. It looks like maybe versus what some of the others do from an industry perspective.
Okay. Okay. Good.
And then maybe this is for you Mike I'm not sure but.
Buried in the.
Release, there was a comment about.
I was talking about reserves are lower quantitative factor in the reserves and I'm. Just curious what was behind that was that related to the charge off or was that something else that drove that and then just if you could give us some thoughts on the provision as well that would be helpful. Thanks.
Yes.
Early in the weeds on that one but.
Quantitative for the most part the quantitative adjustment was not an adjustment based upon economic assumptions because we kept goes the same.
So that's probably what you really want to get at it is more a function around nuances and various loan pools that we use kind of management.
Overlays as the way to think about it.
And then if thats good.
The provision question.
All else being equal.
We definitely believe that we will be able to.
All else being equal we will be able to maintain our current allowance coverage ratio of 1.0% to 3%.
But it's also important to note that from the time that we did seasonal to where we're at now.
We're actually up 14 basis points. So we started to see saw at 89 basis points. We're at 103 today.
By our math the peer group is roughly down 20 basis points, so while you've seen massive releases and reductions.
We've done the exact opposite and clearly we could have done that if we chose to in the fourth quarter and we chose not to because we think it's prudent going into this economic environment to try to preserve our allowance or our provision as best we can.
Maybe just following up on that I mean, just to put it in simplest terms, we didnt believe that reserve many of our peers did so it is not unlikely that we're not going to have to provide as much. If the economy does go into recession, congrats whereas the Petersburg.
But just it doesn't feel like you guys are.
You are being cautious, but youre not necessarily seeing the erosion that maybe we're all sharing is coming minor I think were being cautious for the last.
5% to six six quarters, where our economic condition is still had a much more significant weighting towards a recession than what everybody else did.
It unfathomable that people would drain their reserve 20 basis points below seasonal for the last cut coming out of the pandemic and put it down to the P&L. It makes no sense to me. So now where I think that we've been more conservative it's absolutely more likely that we're not going to have to build to the level that everybody else's. They should have never chopped down below seasonal from from my individual perspective.
Okay, alright, thanks for the help guys.
Thank you and one moment for our next question.
Yeah.
And our next question comes from the line of Steven Alexopoulos with Jpmorgan. Your line is open. Please go ahead.
Hey, good morning, everyone.
Wednesday morning.
To start so first following up on the NII guide the 16% to 18% in 2023 within that guidance what is the deposit beta assumption by the end of 2023.
So our through the cycle all the way through the end of 2023 is a cumulative deposit beta of 50%.
50% perfect does that.
Great.
By the way.
Sorry, I just wanted to clarify like so when you look at in just for instance, lipstick terms as Mike said it absolutely ripe for simplistic terms like we wanted to give you the metric that would be comparable to the way we present the deposit beta in our investor deck. So if you look at that and you rolled that forward to the fourth quarter of 'twenty three based on our rate assumptions that at cumulative deposit beta would be 50% yes.
Got it.
But do you assume rate cuts in that scenario to get there what's the underlying.
Assumption there there is one rate cut but it's very late in fourth quarter. So I don't think it will be very impactful.
Okay got it.
That's based off of go.
Go ahead.
No.
Go ahead, yes.
Yes, it's just based off of the current expectation for fed actions. So it is not ours in some market.
Just assumption.
Got it okay.
In terms of the funding strategy in terms of funding the loan growth in 2023 Im hearing somewhat mixed messages right. You have these lower cost niches, which helped this quarter, but you're relying more on brokered Cds.
<unk> and other <unk>, how do you see the mix evolving.
Through 2023 and is it going to skew materially towards these higher cost or do you think you can keep.
The same mix, but because of the growth youll get out of the lower cost verticals.
So in our comments, we made a comment around noninterest bearing rotation that could possibly reduce that number as a percent of total deposits down to something in the high <unk>. So I think the answer to your question is yes, we expect a further.
Rotation out of noninterest bearing I think that we expect a continued growth in those niches based upon different aspects that happened with interest rates throughout the year that will help fuel the loan growth that we expect and fund that loan growth.
But to the extent that.
Those are short falls and we don't have enough funding I think brokerage is probably the first place that we'll go.
And we've been doing that so I think it's just a continuation of demonstrating what we've been doing.
Okay. So if we put this together and think about the NIM being under pressure.
At this point from the <unk> NIM do you think.
Sort of down fairly consistently quarter over quarter through the year or is it more pronounced in the first half then you get to some level of stability in the second half.
Yes.
Yes, so I think the pressure right now.
Nobody has a crystal ball. This is really hard to try to get to figure. This out I think the pressure will be more pronounced there may be some lag, but I think it will be more pronounced in the first half of the year and then youll see a plateauing hopefully if in fact the future right.
Curve is actually realized and then Youll see a plateauing and then maybe later as we said earlier later in the fourth quarter, you get a slight reduction that wont be meaningful because of the timing of that.
You recognize how uncertainty is that sorry landscape. So many questions.
Yes.
Thanks, Steve.
Keep in mind, if you're looking at it on a relative basis right I think the day count is really going to impact where we are from <unk> going into <unk>.
I think our comments are acknowledging that when you think about the pressure we're going to see just in the first quarter and not all of the pressure is really from a funding base, but just really that day count piece as well got it.
And then just one separate question on credit, there's obviously a lot of market concern on commercial real estate given the rise in cap rates and I'm just curious looking at the detail that you can provide on slide 15 of the deck, what do you share the market's concern over commercial real estate more broad and maybe could you drill down. If you are concerned is it a particular.
Murphy, our product I'd love to hear your commentary on that thank you.
Stephen It's Tom.
We certainly can.
Shana concern of segments of the of the markets and real estate.
Still continue to see.
Robust growth of people moving into the south southern markets, especially Florida.
A lot of our real estate growth is coming down and that Florida market to support that migration of people down there.
Well no we are a very diverse granular book of business, we don't have a sizable.
Concentration in any segment looking at our real estate portfolio, our average weighted average loan to value is 62% our debt service coverage is $1 75.
So we we.
We do look at this very closely.
Our cap rates, we've always stressed at higher cap rates than our competitors. Our average cap rate is around $6 four 2%, but youll go through different categories and asset classes and as an example, when multifamily cap rates, we're being we're in that 34% range, we were stressing at five and a half that.
Laos us to obtain Wilson said, a lower leverage growth in our markets and keeps down that weighted average LTV and debt service coverage and we underwrite to cash flow, we don't underwrite to collateral value.
Got it okay. Thanks for all the color.
Thanks, Dave.
Thank you and we'll now move for our next question.
Okay.
Our next question comes from the line of Manan <unk> with Morgan Stanley . Your line is open. Please go ahead.
Hi, good morning.
I had a question on Cds, you noted that customers have been responsive to your CD offerings could.
Could you expand on what you're putting on I know you were talking about in the thoughts. So has there been any change in the duration mix given that work relative to the fed holding rates steady or potentially cutting.
And.
If you could also help us with how much of the CD portfolio will likely there is likely to reprice in the next couple of quarters.
Yes. This is Mike so our retail CD promotions that basically started in the middle part of 'twenty two.
Continued into the fourth quarter have all been around 12 or 18 month duration. So we're not going out.
Long on the curve, because obviously related to the the answers we gave to earlier questions around our expectation for rates is that we do expect rates to come down in the very very end of 'twenty, three and obviously spillover into 'twenty. Four we're also trying to build a fairly flat maturity schedule. So that we don't have any one quarter, where you have a lot.
Coming due so generally 12 to 18 months and we've been very fortuitous on those offerings. So that while at the time they might have been a little bit on the high side. The high beta side. When you look back now where we are with rates. After the 425 basis points of fed increases you now look at that.
<unk>.
As being fairly good funding for us actually fairly cheap in some cases now the one we did in the fourth quarter was obviously on the more expensive side of that.
And that's public so I can definitely tell you where that was that that was at four 5%.
And it raised just under $1 billion.
Got it very helpful. And then apologies if I missed this but I think last quarter. It sounded like you were tightening lending standards a little bit.
Can you talk about how you what are you doing this quarter and how your feedback.
Go ahead Sir.
Oh, yes, yes I'm.
Im sorry.
We consistently look at our lending standards and our criteria and we began tightening those standards early on in the pandemic and to remind everyone, 70% of our business into our existing customer base that have been through the ups and downs of any economic cycles.
We manage our the we never compromise standards to grow we maintain our standards and as we've talked about before we typically use higher cap rates to evaluate our loan to values.
Great. Thank you.
Thank you and one moment for our next question.
And our next question comes from the line of Matthew Breese with Stephens. Your line is open. Please go ahead good morning.
Everybody.
Matt.
A couple of quick ones first of all was the accretable yield for the quarter and what's the outlook for Accretable yield in 'twenty three.
Yes, so Matt we said the third quarter was $8 $5 million on the loan side that ticked up about $3 million this quarter.
And we anticipate I think that $8 million to $10 million a good run rate on a quarterly basis and that remains kind of our guidance.
Okay.
And then.
What is just give us some outlook for the securities portfolio.
In 2023, and whether or not you see.
Much of any growth or to match kind of overall balance sheet composition stay the same.
Yeah. So as a reminder, it represents a little less than 10% of earning assets. So it's not a material driver of income.
Nevertheless that portfolio is very high quality.
And remember the majority of that is held in held to our held for held for maturity. So 75 ish percent or so theyre 25 is only held in the Ams portfolio.
I don't really expect a lot of changes I guess the biggest change you have seen probably this is this is an industry change has been that any kind of pay ups have ground to a halt.
And so you have very little coming due that way what we will add is in the highest quality ranges and probably in the lowest risk weighted asset ranges.
And we'll keep pace, obviously, we have as a reminder, we have a lot of public fund money and this bank as well in government banking as a niche for US is an important niche. So we do have to have collateral for that business. So we will continue to maintain it at a minimum what chefs.
Got it okay.
And then IRA just would love your thoughts in 'twenty three around M&A previously the message was look we got a ton of stuff to do organically theres plenty of opportunity on that front.
It felt like M&A would have to be incredibly spectacular for you to do it but my read was probably not.
Just wanted some updated thoughts there.
I would probably say you could copy and paste back into the comments for this quarter as well, yes, I think we're very fortunate that we are likely.
An acquirer of choice a partner of choice for many people that are out there today, which is wonderful I think based on the experience and successes that we've had.
Maximizing and focusing on tangible book value is something that I've always talked about from day, one when I became CEO and that really continues and today. When you look at the economic environment I think it's very difficult to do an M&A transaction.
That isn't necessarily just a resource strain, but really draining the tangible book value as well and thats not something that I am comfortable with doing outside of that I do believe that we have such tremendous opportunities on an organic basis that we should continue to focus on those resources, we still need to continue to.
Convert and get some of the synergies associated with the bank Lee in media and this tremendous offer opportunities with that so.
Like I said, probably copy and paste Matt.
<unk>.
Lastly, just just thank you for adding the expense guide for 2023 I appreciate that additional guidance Thats all I had thank you.
Anything for you.
Yes.
Thank you and one moment for our next question.
Okay.
And our next question comes from the line of French Ravi with Piper Sandler. Your line is open. Please go ahead.
Hi, guys.
Yes.
Good Thanks, just on the.
Our niche businesses I think Tom you talked about.
Sort of the way you approach that you lump in the cannabis the HOA.
The national deposits and you mentioned the growth rate in the quarter just wondering as we.
Think about those businesses, maybe ramping up.
I'd assume that.
We could see greater contribution on a quarterly basis going forward and then just also curious does that largely low to no cost deposits within that umbrella.
Yes, when you when you look at the individual components, certainly we've been ramping up the HOA and thats largely noninterest bearing deposits, we talked about the national deposits business. That's primarily in interest bearing program and process. There. The tech will have a large portion of noninterest bearing but.
All have interest bearing mixed in there also in the plan on tech is really to broaden the users and have reliance in addition to domestic vcs that go along with the Israeli Vcs that we're doing business with today.
There are other cannabis Gan will be multistate operators, primarily our noninterest bearing program. So yes. The plan is to ramp up our specialty our niche businesses focusing on the deposit side of it.
And then on the technology deposits.
You mentioned, there's been some volatility there, but overall I guess, it's sort of flattish with where you acquired the business in terms of balances it sounds like and so.
Can you give any put any parameters around how volatile it has been.
I think you said, 5% of deposits right now.
Where that's gotten too over the last couple of quarters.
And do you see it just continuing to be volatile here in the short term.
That's a great question.
Other than the IPO event, they're very discrete events that we talked about it's not actually been that volatile for us.
We know from talking and listening to industry folks and other portfolios. It can be incredibly volatile, but ours has not been granted we only had three fourths of a year of experience with it so you've got to take that for what it's worth.
Okay and can you lump in there or is that like.
Bank Leumi umbrella you lumped a private banking that you got from from that acquisition with those technology deposits or how is that growth rate then for you guys.
The private banking, both international and domestic is not included in technology.
Okay.
And.
Have you.
Have you seen a contraction in that business or do you have any.
The size the relative size of that business at this point.
Yes, So I think we've said this before the international businesses from a deposit perspective is larger than the domestic business and the domestic business is going to grow. This is one of the one of the synergies that we.
Identified as part of the Leumi acquisition will grow because of the private banking business that we have on our side the legacy side of the business I should say.
The international private banking business has had some reduction in deposits. The good news is remember that's both the deposit and the AUM business and for the most part they're they're value add has been structured notes and obviously the market has not been conducive to that so we've been able to retain those clients by moving the vast majority.
80 of them into Treasury Securities and then in a different interest rate environment I would expect some of those.
As they mature to come back on balance sheet.
And just one thing to add in the last six months, we've had over $250 million of referrals from the legacy valley customers into the domestic private bank for assets to manage and it's a constant flow.
Consumer loan business that comes out of that private bank portfolio into valley.
Okay, and then just lastly, sorry, if I missed it but did you give any more color on the participation I thought I heard you mentioned that you wanted to leave and I think you mentioned nuomi in there as well but.
Just wanted to make sure I heard right.
Okay.
With the partial charge off.
Yes, certainly so this is a customer that began banking with us in 2006. So almost 17 years, we began with a $7 $5 million share and totaled $25 million credit facility was 30% companies performed well over the years.
The credit facility grew to $160 million since that 2006 inception.
We always manage our exposures and we increased our exposure from seven 5% to 19, but reduced our overall from 30% to 12%.
Company sales cardboard boxes for shipping produce their their customers customer at a concentration to Russian entities. The embargo has put a very very big strain on your customers' ability to pay them.
We saw that early on took early action. We put this on nonaccrual early in 2022, and we reserved 100% of the loan during 2022. This represents about a 50% charge offs of our outstanding loans.
Isolated we do constant reviews of all of our receivable backed loans received as any stretching of payments on those.
And as IRA mentioned generally our credit metrics remained strong.
And it's probably important to note that <unk> had a piece of this as well so.
The combined numbers will be different because they had a piece.
Okay. So.
So I am sorry leumi.
The American bank out a piece and so youre, saying its larger youre telling us.
Okay, Yes, yes, I was referring to the management of the Valley total over those 16 17 years. When we acquired <unk>. They were also a participant in the bank group. So the charge offs and the reserve represents both bancshares.
Got you okay. Thank you.
Thank you and I'm showing no further questions and I would like to turn the conference back over to CEO IRA Robbins for any further remarks.
Well I wanted to thank everyone for taking the time and the interest in value today, and we look forward to showing you our performance for 2023.
This concludes today's conference. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Yes.
[music].
Okay.
Okay.
Yes.
[music].
Okay.
[music].
Yeah.
Sure.