Q4 2022 Valley National Bancorp Earnings Call
Speaker 1: You Ho.
Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.
Speaker 3: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 4: Good morning and welcome to Valley's fourth quarter 2022 earnings conference call. Presenting on behalf of Valley today are CEO Ira Robbins, President Tom Iadanza, and Chief Financial Officer Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com.
Speaker 5: When discussing our results, we refer to non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. Additionally, I would like to highlight slide two of our earnings presentation and remind you that the comments made during this call may contain forward-looking statements related to Valley National Bank Corp. in the banking industry.
Speaker 6: Valley encourages all participants to refer to our SDC filings including those found on forms 8K, 10Q, and 10K for a complete discussion of four looking statements. With that, I'll turn the call over to Ira Robbins.
Speaker 7: Thank you, Travis, and welcome to those of you on the call.
Speaker 8: I have a few comments to make this morning and then we ask Tom to provide insight on the Corps' loan and deposit results.
Speaker 9: Mike will then discuss the financial results in more detail.
Speaker 10: In the fourth quarter of 2022, the applicant reported net income of $178 million.
Speaker 11: earnings per share of $0.34 and an annualized ROA of 1.25%.
Speaker 12: Exclusive of non-core charges, adjusted net income, EPS, and ROA were $183 million, 35 percent, and 1.29 percent, respectively.
Speaker 13: In 2022, we generated net income of $569 million and adjusted net income of $650 million.
Speaker 14: This represents a significant increase from 2021 as a result of strong organic loan growth, the acquisition of Bank of Italy USA, and the benefits of higher interest rates that were realized for the majority of the year.
Speaker 15: I am extremely proud about his consistent financial performance throughout my tenure as CEO .
Speaker 16: Our profitability metrics and earnings per share have increased steadily across a variety of economic and competitive backdrops.
Speaker 17: Despite the negative impact of interest rates on equity in 2022 and completing the largest acquisition in our company's history, our focus on tangible book value resulted in year-over-year growth.
Speaker 18: In fact, our stated tangible book value has increased 36% since 2017. This compares to a 14% increase for our proxy peers over the same period and a 14% increase for Valley between 2012 and 2017.
Speaker 19: Our value creation as measured by tangible book value plus the dividends we have paid has totaled 72% since 2017.
Speaker 20: This is over one and a half times our proxy peer median of 47%.
Speaker 21: We have generated real franchise value on both an absolute and relative basis. Within the context of our sustained financial success, I want to 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, I want to focus on the importance of our own financial success.
Speaker 22: We have done a tremendous job diversifying our funding base.
Speaker 23: At the end of 2017, approximately 92% of our deposits were held in retail branches.
Speaker 24: By focusing on commercial relationships and both niche and digital deposit channels, only 70% of our deposits are from the branch network today.
Speaker 25: From a geographic perspective, 78% of our total deposits were in New Jersey or New York branches in 2017.
Speaker 26: Today, that number is down to just 48% of total deposits.
Speaker 27: Finally, despite a challenging few quarters, CDs and borrowings comprise just 23% of funding today versus 31% five years ago.
Speaker 28: Our focus on geographic diversity and a holistic approach to commercial relationships has benefited the answering side of our business as well.
Speaker 29: In 2017, 78% of our loan portfolio was in New York and New Jersey.
Speaker 30: Currently, less than 60% of our loan portfolio is in these states.
Speaker 31: The ongoing addition of higher yielding and increasingly adjustable loans has helped to better align our asset and liability basis.
Speaker 32: In our view, this increased balance 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 could occur.
Our premier asset quality will continue to be the hallmark of our organization.
This credit string is the result of those stringent underwriting criteria and they focus on holistic relationships with wealthy and 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 experience during the height of the pandemic indicates the exceptional resilience of our bar or base.
In aggregate, the balance sheet transformation that we've undergone has been a direct result of our company's 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 feel well positioned to navigate the near-term operating environment as we face today.
Over the long term, we will continue to focus on diversification and sustainable growth.
We believe the progress made over the last five years will drive our continued success and ultimately benefit our associates, customers, and external stakeholders.
With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results.
Thank you, Ira.
Slide 6 illustrates the quarter's 15% annualized long growth.
While quarterly lawn originations remain below peak levels, net growth continues to benefit from slower payoffs and more sustained activity on the residential and consumer side.
Our commercial long growth remains well diversified across asset classes and geographies.
We continue to experience significant repeat business from our longstanding and sophisticated commercial borrowers.
Legacy lately customers have also benefited from the utilization of our more robust product set and balance sheet resources.
We anticipate that customer demand will wane 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 long growth for the year.
Our continued focus on attracting and retaining top talent and preserving service excellence positions us well despite a potentially more challenging backdrop.
On slide 6, you can also see the 99 basis point increase in average new origination yields to 6.2% during the quarter.
We remain successful in passing rain heights through to our customers and anticipate further expansion in origination yields in the near term.
As a reminder, approximately 40% of our loan portfolio is fixed.
and another 20% re-prices over a period beyond 30 days.
These buckets should provide a re-pricing tailwind that will continue to support increasing portfolio yields as rate hikes slow.
Before moving on to the deposit side, I wanted to provide some additional color on the quarter's net charge loss.
Approximately 21 million of the quarters charged to us were related to a single CNI loan.
Both Legacy Valley and L'Ouilme has 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 discrete credit event and the vast majority of our portfolio continues to perform extremely well and as Ira mentioned our underlying credit trends remain very strong.
Turning to slide 7, you can see that deposits grew at an annualized rate of approximately 21% during the quarter.
While the quarter's net growth is largely funded by broken 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 Portis 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 contribute approximately 5% of our total balances. As we indicated last quarter, we are experiencing competition for deposit sources across the franchise.
Specifically, on the commercial side, the same wealthy and sophisticated customer base that supports our strong and consistent credit performance has been actively requesting competitive deposit rates.
This has incrementally pressured our betas and deposit costs.
Our retail network has been responsive to our CD offerings and both digital and cannabis deposits to a solid growth during the quarter.
We are keenly aware of the Christ 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 long-growth.
With that, I will turn the call over to Mike Hagedorn to provide more insight on the Coordinate Financials.
Slide 8 illustrates Valley's recent quarterly net interest income and margin trends.
The interest 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 4th quarter fully tax-equivalent net interest margin declined 3 basis points to 3.57% from the 3rd quarter of 2022, our PPP adjusted margin remains 47 basis points above the 4th quarter of 2021.
During the quarter, a 69 basis point expansion and our asset yield was more than offset by a 78 basis point increase in total funding costs.
The asset yield increase was driven by both the re-pricing of our floating rate loans and a significant increase in yields on newly originated loans.
During the quarter, we funded loan growth and our non-interest bearing deposit runoff primarily with higher cost time deposits.
As you saw on slide 7, we calculate accumulative 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 9, we generated just under $53 million of non-christ 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 non-increased expenses were approximately $266 million for the quarter, or 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 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.
Tom detailed the single-moam relationship that drove this bite in net charge-offs for the quarter.
We believe this was an isolated incident.
are pleased with our aggregate five basis point net charge ops 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 percent of total loans declined to 1.03% at December 31st from 1.10% at September 30th.
As a percentage of non-accrual loans, the allowance increased to 170% from 162% at September 30th and 150% one year ago.
On slide 12 you can see the tangible book value increased approximately 3.4% 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. From low common equity to tangible assets improves slightly as a result of the same factors.
Our regulatory capital ratio has 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 forecasts 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 7-9%.
This would result in net interest income growth of 16 to 18 percent.
We anticipate approximately 10.5 to 12.5 percent growth in expenses using 2022 reported less merger charges as a 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.
As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
And our first question comes from the line of Michael Petro with KBW. Your line is open. Please go ahead. ask the Butt pool at flash rate.
Hey guys, thanks for taking my questions.
Where am I?
I wanted to start drilling down on the margin a little bit. I appreciate the guide and the outlook and obviously a strong end to the year. I'm just curious though, I imagine you guys are assuming some more beta pressure on the funding side in the first half of the year, but as we think about the...
the thought process around a relatively stable name for 2023 and asset yield improvements being offset by funding improvements. Are you guys also factoring in continued outflow on the non-interest bearing side or how are you guys thinking about mix because you 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?
Yeah, and I think it's a good question and I'll turn some of the mechanics over to Mike, but I do want to re-highlight once again 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 a beta basis and to now have 48% of our deposits just
roughly rotate out of non-interest bearing into interest bearing between third and fourth quarter. And our expectation right now as we look into 23 is that that will continue and hopefully it bottoms out into the high 20s type range. The reason that we think that is, you know, we bank a fairly sophisticated, wealthy customer base and
in anticipation of the Fed's two additional Fed actions increases in the first half of 23. So we're getting out ahead of that a little bit and obviously those have a higher beta attached to them. And I do want to really just add to you know one of the things that we have done is continue to grow the commercial book as well. If you look at a year-over-year basis we've seen business checking accounts increase 11%
Great. So taking that kind of all into context, I mean, it's fair to say that at this point, when you guys are kind of guiding towards a stable name, you know, you're kind of conservatively assuming that some of the headwinds that occur 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% long growth gap.
couple of base points there as well. So I don't think we're guiding necessarily to a stable margin. I would say that if you factor it all together there's a little bit of pressure that's baked in here and it's because of the factors that we've talked about.
Okay, great. Thanks, Travis. And then secondly, Ira, on the efficiency ratio and I guess just kind of a philosophical question, but 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 on in terms of incremental margins on new business customers and stuff.
disappointed if we went above 50% on a consistent basis. I believe even our forecast for this year continues to invest in strategic and this is really going to continue to drive franchise value for us. I think we focus on expenses probably too much in certain areas. If you go back to when I took over as CEO , we have 3,325 employees.
and $29 billion of assets the first quarter thereafter. Today we're sitting with $57 billion of assets, 3,826 employees. So we've added 501 employees over the five years and grown the bank $28 billion. There's tremendous focus here on efficiencies, process, and making sure that we're
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 so outsize performance. So it is a balance for us but managing the macro number I think is something that's really important to everyone here within the organization.
And then just think one last one and then I'll drop back. Just the trust and investment fees were stronger than I was looking for, at least in the quarter. And I was just curious if you could maybe remind us, you know, what the fee structures there look like and, you know, depending like are they market dependent or are they more fixed or just any color there would be great just to...
2023, we assume that there's some continued improvement in that line in total because should the 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 fee side, so it's not astronomical.
Okay, and the Dudley, if that seasonal revenue is something that you would expect to occur kind of on an annual basis towards the end of the year?
is something that you would expect to occur kind of on an annual basis towards the end of the year? That's correct.
Okay, great guys, thanks.
Great guys, thanks. Thank you, Smar.
Thank you. And one moment for our next question.
Our next question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.
Good morning.
I've just fallen up on.
Maybe just following up on Mike's question here, just going a little further into the weeds. So where is loan pricing these days?
When you look at our yield in the fourth quarter, we increased that 100 basis points to 6.2. On a monthly basis, we were just under 6.5% for the month of December . We continue to push our spreads up.
to counter the cost of our deposits. It's really will differ by asset classes, more so than anything else. And as Ira mentioned earlier, we're 60% adjustable. So we'll continue to benefit by the rise in short-term rates on that 40% of our portfolio tied to Sulfur Prime and Liveware.
Okay, that's helpful. And then just on the deposit side, you mentioned growth in, I think tech and cannabis here, just kind of curious to give a little more color on the trends there, maybe size it up and how much is maybe not just bearing versus interest bearing?
Yeah, 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 in double digits on a quarter to quarter basis. I don't have it exactly, but we're primarily non-interest bearing on our deposit account.
for businesses in aggregate out of $900 million in deposits during the quarter, which helped offset, you know, some of the other traditional kind of commercial deposit runoff. And so, you know, that goes back to the, you know, Ira's conversation about the transformation of the bank. I mean, absent those businesses, which are relatively new to Valley, you know, 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, you know, type, geography, things of that nature? Yeah, sure. It's time again, Steve. It's a single loan based in New York City.
It's a for sale construction project of six units. Three are contracted to be sold. We're waiting to TCO to close those sales upon the free sales we will be paid in full.
Okay. Appreciate the color. Thank you very much.
Thank you and one moment for our next question.
Our next question comes from the line of John Arstrom with RBC Capital Markets. Your line is open. Please go ahead.
Thanks, good morning guys. Good morning John . Question for you on the CD growth during the quarter. You know, 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 long growth. It's in excess of what our expectations are in the guidance and the brokered 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, what'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 a billion dollars 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 that the Fed's expected rate increases occur in the first half of 23. And John , 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, all you used to have to come out of the branches, came out of the FHLB or came out of the broken CD market. Those were the three choices we had.
is astronomical compared to where we were before. And I do believe over a period of time on a relative basis that that's gonna help us manage our funding costs to a much better 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, the floating rate assets that we've been able to put on really really important.
helps dictate the types of funding that we want to do across the entire organization. We don't necessarily look at one side of the balance sheet, just in isolation.
Yeah, that makes sense. I mean, it's a unique period, Ira, right? We're in a period of maximum deposit pricing pressure right now. And I understand that.
And keep in mind, we had 60, I think Mike was alluding to, we had 60 plus basis point run off early, right, because of the asset sensitivity. So there was an expectation here that we were going to see some increase in the funding costs to come along with that. But like you said, John , it's unique, it's interesting right now.
But there's 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. Yeah, okay, just just one quick one on on this topic and then I have one other one, but you mentioned the tech vertical the decline in deposits there. Was that a surprise and what 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 won't 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 received the deposits that we previously had. And that should come as no surprise. That is the life cycle 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 you've seen from an industry perspective, you've seen tech deposits come down because of cash burn and needs at the overall individual portfolio companies. This is a great event if you think about it from a client perspective that they were able to do a great deal of work with the CEO IPO and really still even in this moment.
Buried in the release, there's a comment about.
talking about reserves, a 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.
Yeah, you're really in the weeds on that one. But the quantitative, for the most part, the quantitative adjustment was not an adjustment based upon economic assumptions because we even kept those the same. So that's probably what you really wanted to get at. It's more a function around nuances in various loan pools that we use, kind of management of an overall level onto the last point.
You know, but it's also important to note that from the time that we did CECL to where we're at now, we're actually up 14 basis points. So we started CECL at 89 basis points. We're at 103 today and by our math, the peer group is roughly down 20 basis points. So while you've seen massive releases and reductions, you know, 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 I think it's prudent going into this economic environment to try to preserve, you know, our allowance or our provision as best we can.
And then they just following up on that, I mean, just to put it in simplest terms, we didn't bleed the reserve, many of our peers did. So it's not unlikely that we're not going to have to provide as much if the economy does go into recession compared to where the peers were.
But just it doesn't feel like you guys are...
You're being cautious, but you're not necessarily seeing the erosion that maybe we're all fearing is coming later? I think we were being cautious for the last five or six quarters, where our economic conditions still had a much more significant weighting towards a recession than what everybody else did. I find it unfathomable that people would drain their reserve 20 basis points below Cecil for the last coming out of a 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 is. They should have never dropped down below Cecil from my individual perspective.
Okay, all right, thanks for the help, guys. Thank you, and one moment for our next question.
And our next question comes from the line of Steven Alexopoulos with JP Morgan. Your line is open. Please go ahead. Yes We will not, please tell us.
Hey, good morning, everyone. Good morning, David. Good morning. I want to start. So, first, following up on the NII Guide, the Up 16 to 18% in 2023, within that Guide is what is the deposit beta assumption by the end of 2023? Yes, that is correct.
So our through the cycle all the way through the end of 2023 is a cumulative deposit beta of 50%.
50% perfect. Does that, by the way, hold on a second. Sorry. I just want to clarify. Like, so when you look in just for a simplistic terms, because Mike said it absolutely right. The person put the terms like we wanted to give you the metric that would be comparable to the way we present the deposit data in our investor deck. So if you look at that and you rolled that forward to the fourth quarter of 23 based on our rate assumptions, you know, that that cumulative deposit data.
Set it up.
It's just based off of the current expectation for Fed action. So it's not ours, it's a market-based assumption.
Yeah, it's just based off of the current expectation for Fed action. So it's not ours, it's a market based assumption. Got it. Okay.
And then in terms of the funding strategy, in terms of funding the loan growth in 2023, I'm hearing somewhat mixed messages, right? You have these lower cost niches which helped this quarter, but you're relying more on brokered.
CDs and other CDs. How do you see the mix evolving through 2023 and is it going to skew materially towards these higher costs or do you think you could keep about the same mix but because of the growth you'll get out of the lower cost verticals.
So in our comments we made a comment around non-interest bearing rotation that could possibly reduce that number as a percent of total deposits down to something in the high 20. So I think the answer your question is yes we expect a further rotation out of non-interest bearing. I think that we expect a continued growth in those niches based upon different
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 4Q NIM, do you think, you know, it's sort of down fairly consistently, quarter over quarter through the year, is it more pronounced in the first half, then you get to some level of stability in the second half? Yeah, so I think the pressure...
curve is actually realized and then you'll see a plateauing and then maybe later as we said earlier in the fourth quarter you get a slight reduction that won't be meaningful because of the timing of that cut.
We recognize how uncertain it is. That's why we're asking so many questions. I do think Steve, but just 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 4Q going into 1Q. So I think our comments are acknowledging that when you think about the pressure we're going to see just in the first quarter.
provide on slide 15 of the deck. You know, one, 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 geography or product? I'd love to hear your commentary on that. Thank you. Yeah, it's David, it's Tom. No, we, we.
certainly share the concern of segments of the markets in real estate. We still continue to see robust growth of people moving into the Southern markets, especially Florida. A lot of our real estate growth is coming down in that Florida market to support that migration of people down there.
As you well know, 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 weighted average loan to value is 62%. Our debt service coverage is 175.
So we do look at this very closely. Our cap rates, we've always stressed that higher cap rates than our competitors, our average cap rate is around 6.4, 2%. But you'll go through different categories than asset classes. And as an example, when multifamily cap rates were being, were in that.
Thanks for all the color.
Thanks, Pete. Thank you. And one moment for our next question.
Our next question comes from the line of Mennon Guzalia with Morgan Stanley . Your line is open. Please go ahead. Your line is open.
Hi, good morning. I had a question on CDs. You noted that customers have been responsive to your CD offerings. Can you expand on what terms you're putting on? I know you were terming them out in the past. Has there been any change in the duration mix given that we're closer to the Fed holding rates steady or potentially cutting?
and 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 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 23 and obviously spill over into 24.
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, 18 months. And we've been very fortuitous on those offerings so that while at the time they might've 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 those 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 at. That was at 4.5%.
and it raised just under a billion dollars. Got it, very helpful. And then apologies if I missed this, but I think last quarter it sounded like you were typing lending standards a little bit. Can you talk about how you, what you're doing this quarter and how you feel about going in?
Yeah. Oh, yeah. Yeah. I'm sorry. I did. We, we consistently look at our lending standards and our criteria. Uh, and we began tightening those standards early on in the pandemic. And to remind everyone 70% of our businesses to our existing customer base that have been through the ups and downs of the economic cycle.
Thank you, and one moment for our next question.
And our next question comes from the line of Matthew Breeze with Stevens. Your line is open. Please go ahead. Good morning, everybody. My name is Matthew Breeze.
And our next question comes from the line of Matthew Breeze with Stevens. Your line is open. Please go ahead. Good morning, everybody. Bye, Matt. All right.
A couple quick ones. First, what was the accredable yield for the quarter and what's the outlook for accredable yield in 23?
We said the third quarter was $8.5 million on the loan side. That picked up about $3 million this quarter. We anticipate $8 million to $10 million is a good run rate on a quarterly basis. That remains our guidance.
the third quarter was eight and a half million on the loan side. That picked up about three million dollars this quarter and we anticipate, I think we said that eight to ten million is a good run rate on a quarterly basis and that remains kind of our guidance. Okay.
And then, just give us some outlook for the securities portfolio in 2023 and whether or not you see much of any growth or should a match kind of overall balance sheet composition stay the same.
So as a reminder, it represents a little less than 10% of our 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 for maturity.
we've seen probably this is an industry change has been that any kind of payouts have ground to a halt. Um, 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 what we'll keep pace. Obviously we have, uh, as a reminder, we have a lot of public.
23 around M&A. Previously the message was, look, we got a ton of stuff to do organically. There's plenty of opportunity on that front. 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. 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 stream, but really drains the tangible book value as well. And that's not something that I'm comfortable with doing. Outside of that, I do believe that we have such tremendous opportunities on an organic basis that we should continue to...
Just thank you for adding the expense guide for 2023. I appreciate that addition to guidance. That's all I had. Thank you. Anything for you. Thank you. One moment for our next question. Our next question comes from the line of Frank Suraldi with
Piper Sandler, your line is open. Please go ahead.
Good, good. Thanks just on the.
The niche businesses, I think Tom you talked about the guy you could sort of the way you approach that you lump in You know the cannabis the HOA The national deposits and you mentioned a growth rate in the quarter Just wondering as we you know, as we think about those businesses may be ramping up I'd assume that
We could see greater contribution on a quarterly basis going forward. Is that largely low to no cost deposits within that umbrella?
Yeah, when you when you look at the individual components, you know, certainly we've been ramping up the HOA and that's largely non-interest-bearing deposits. We talked about the national deposits business. That's primarily an interest-bearing program and process there.
The tech will have a large portion of non-interest bearing, but will have interest bearing mixed in there also. And the plan on tech is really to broaden the users and have reliance in addition to domestic VCs, it will go along with the Israeli VCs that we're doing business with today. There are other cannabis...
again will be multi-state operators primarily a non-interest bearing program. So yeah the plan is to ramp up our specialty on 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, sounds like. So, can you give any.
put any parameters around how volatile it has been. I think you said 5% of deposits right now and where that's gotten to 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, the very discreet event that we talked about, it's not actually been that volatile for us.
We know from talking and listening to industry folks that in other portfolios it can be incredibly volatile, but ours has not been. Now, granted, we've 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 do you lump in there, is that like a bank luemi umbrella? I mean, do you love the private banking that you got from that acquisition and with those technology deposits or, you know, how has that growth rate been for you guys? Not at all. 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, you know, the size, the relative size of that business at this point?
Yeah, so I think we've said this before, the international business is from a deposit perspective is larger than the domestic business and the domestic business is going to grow. This is one of the synergies that we identified as part of the Lamy acquisition will grow because of the private banking business that we have on our side, the legacy side of the business actually.
So we've been able to retain those clients by moving a vast majority 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. 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.
I thought I heard you mention that you weren't the lead and I think you mentioned the lemme in there as well, but I just wanted to make sure I heard right.
with the partial charge on. Yeah, yeah, certainly. So this is a customer that began banking with us in 2006. So almost 17 years. We began with a seven and a half million dollar share in a total $25 million credit facility or 30%.
The company 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 7.5 to 19, but reduced our overall from 30% to 12%.
The company sells cardboard boxes for shipping produce.
their customer's customer at a concentration to Russian entities.
The embargo has put a very big strain on their customers' ability to pay them.
We saw that early on, took early action. We put this on non-accrual early in 2022, and we reserved 100% of the loan during 2022. This represents about a 50% charge off of our outstanding loans.
Isolated, we do constant reviews of all of our receivable backed loans to see if there's any stretching of payments on those. And as Ira mentioned earlier, our credit metrics remain strong. It's probably important to note that Leomie had a piece of this as well. So the combined numbers are different because they had a piece.
I'm sorry, the American bank had a piece, so you're saying it's larger?
Okay. Yeah. Yeah. I was referring to the management of the valley total over those 16, 17 years when we acquired Lioum and they were also a participant in the bank group. So the charge officer and the reserve represents both bank shares. Okay. Thank you.
Thank you. And I'm showing no further questions. I would like to turn the conference back over to CEO Ira Robbins for any further remarks.
Well, I want to thank everyone for taking the time and the interest in Valley 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 your hand during Q&A, you can dial star 1-1.
And pro pro.
I have you.
I.
Goodbye.
Good morning and welcome to Valley's fourth quarter 2022 earnings conference call. Presenting on behalf of Valley today are CEO Ira Robbins, President Tom Iadanza, and Chief Financial Officer Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures which exclude certain items from reported results.
Please refer to today's earnings release for reconciliation of these non-GAAP measures. Additionally, I would like to highlight slide two of Ernie's presentation and remind you that the comments made during this call may contain forward-looking statements related to Valley National Bank Corp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on form 8K.
10Q, and 10K 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.
I have a few comments to make this morning and then we ask Tom to provide insight on the quarter's loan and deposit results. I will then discuss the financial results in more detail.
In the fourth quarter of 2022, the Alligator reported net income of $178 million.
earnings per share of $0.34 and an annualized ROA of 1.25%.
Exclusive of non-core charges, adjusted net income, EPS, and ROA were $183 million, 35 cents, and 1.29% 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, the acquisition of Bank of Wyoming USA, and the benefits of higher interest rates than were realized for the majority of the year. I am extremely proud about its consistent financial performance throughout my tenure as CEO . Our profitability metrics and earnings per share have increased steadily across a variety of sectors.
of economic and competitive backdrops. Despite the negative impact of interest rates on equity in 2022 and completing the largest acquisition in our company's history, our focus on tangible book value resulted in year-over-year growth.
In fact, our stated tangible book value has increased 36% since 2017.
This compares to a 14% increase for our proxy peers over the same period and a 14% increase for Valley 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 over one and a half 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, I want to focus this morning on what I see as our key accomplishments over the last five years and how the evolution of our company positioned 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 were held in retail branches. By focusing on commercial relationships and both niche and digital deposit channels, only 70% of our deposits are from the branch network today. From a geographic perspective.
78% of our total deposits were 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, CDs and borrowing comprise just 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 states. The ongoing addition of higher yielding and increasingly adjustable loans has helped to better align our asset and liability data.
In our view, this increased balance should help to reduce the net interest margin volatility that we have experienced in prior cycles.
In our view, this increased balance should help to reduce the net interest margin volatility that we have experienced in prior cycles. Ultimately, we will have to reduce the net interest margin volatility that we have experienced in prior cycles.
Our sustained credit excellence provides a stable foundation upon which the aforementioned transformation could occur. Our premier asset quality will continue to be the hallmark of our organization. This credit strength is the result of those stringent underwriting criteria and they focus on holistic relationships with wealthy and 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 experience during the height of the pandemic indicates the exceptional resilience of our borrower base.
In aggregate, the balance sheet transformation that we have undergone has been the direct result of our company's 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 feel well positioned to navigate the near-term operating environment as we face today.
Over the long term, we will continue to focus on diversification and sustainable growth. We believe the progress made over the last five years will drive our continued success and ultimately benefit our associates, customers, and external stakeholders.
With that, I will turn the call over to Tom and Mike to discuss the Corps' growth and financial results. American Center for Social Sciences
With that, I will turn the call over to Tom and Mike to discuss the Court's growth and financial results. Thank you, Ira.
Slide 6 illustrates the quarter's 15% annualized loan growth. While quarterly loan originations remain below peak levels, net growth continues to benefit from slower payoffs and more sustained activity on the residential and consumer side.
Our commercial long growth remains well diversified across asset classes and geographies.
We continue to experience significant repeat business from our longstanding and sophisticated commercial borrowers.
Legacy lately customers have also benefited from the utilization of our more robust product set and balance sheet resources.
We anticipate that customer demand will wane 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 positions us well despite a potentially more challenging backdrop.
On slide 6, you can also see the 99 basis point increase in average new origination yields to 6.2% during the quarter. We remain successful in passing rate hikes through to our customers and anticipate further expansion in origination yields in the near term.
As a reminder, approximately 40% of our loan portfolio is fixed and another 20% re-prices over a period beyond 30 days. These buckets should provide a re-pricing tailwind that will continue to support increasing portfolio yields as rate hikes slow. Before moving on to the deposit side,
I wanted to provide some additional color on the quarter's net charge loss. Approximately 21 million of the quarter's charge loss were related to a single CNI loan. Both Legacy Valley and LYUMI has participated in this larger syndicated credit.
Our combined loan exposure has previously been classified as non-accrual and the remaining exposure is fully reserved for as of 12-31-2022. This is a discrete credit event and the vast majority of our portfolio continues to perform extremely well and as Ira mentioned,
our underlying credit trends remain 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 broker alternatives... seventeen U.S. dollars will neverued up again coming Hmm. Animation as a Substantial
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 Portis reduction occurred in our technology deposit area.
Despite the volatility in 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 contribute approximately 5% of our total balances.
As we indicated last quarter, we are experiencing competition for deposit sources across the franchise.
Specifically, on the commercial side, the same wealthy and sophisticated customer base that supports our strong and consistent credit performance has been actively requesting competitive deposit rates.
This has incrementally pressured our betas and deposit costs. Our retail network has been responsive to our CD offerings and 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.
we will do our best to take advantage of the most cost effective alternatives to support our continued growth.
With that, I will turn the call over to Mike Hagedorn to provide more insight on the quarter's financials. Thank you, Tom. Slide 8 illustrates Valley's recent quarterly net interest income and margin trends. Net interest 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 3 basis points to 3.57% from the third quarter of 2022, our PPP adjusted margin remains 47 basis points above the fourth quarter of 2021.
During the quarter, a 69 basis point expansion and our asset yield was more than offset by a 78 basis point increase in total funding costs.
The asset yield increase was driven by both the re-pricing of our floating rate loans and a significant increase in yields on newly originated loans.
During the quarter, we funded loan growth and our non-interest bearing deposit runoff primarily with higher cost time deposits.
As you saw on slide 7, we calculate accumulative year-to-date deposit beta of approximately 34 percent.
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 9, we generated just under $53 million of non-christ 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 non-interest expenses were approximately $266 million for the quarter or 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 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. Tom detailed the single 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 5 basis point net charge-offs to average loan rate for 2022. As a result of continued improvement in our underlying credit metrics, we believe this was an isolated incident and are pleased with our aggregate 5 basis point net charge-offs to average loan rate for 2022. Tom detailed the single loan relationship that drove the spike in net charge-offs to average loan rate for 2022. Tom detailed the single loan relationship that drove the spike in net charge-offs to average loan rate for 2022.
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 off the funding side in the first half of the year, but how should we think about the.
The thought process around a relatively stable NIM for 2023 and asset yield improvement is 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 had in our 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 a database essentially half 48% of our deposits just any of the new year.
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 as 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 into the high Twenty's 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 net rotated. We also had about $700 million of excess but that in quotation marks.
Harvest that we put on in the fourth quarter in anticipation of the <unk>.
Feds 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.
And I do want 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 you guys 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 in <unk>.
Physically 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 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 guidance 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 have.
The additional headwinds like the day count issue is going to cost us a couple of basis points there.
As well so I don't think where we're guiding us generally to a stable margin I would say that if you factor. It all together it was a little bit of pressure thats baked in here.
And it's because of the factors that we've talked about.
Alright, Okay, great. Thanks, Charles and then.
Secondly.
On 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.
Terms of the incremental margins on new business customers and stuff.
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.
Kelly.
I'd be disappointed if we went above 50% on that on a consistent basis and 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.
If you 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 with $57 billion of assets 3826 employees. So we've had a 501 employees of the five years and grown the bank 28 billion.
Addition, mendes 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 that's 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.
Depending 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 revenue. 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 W 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, great guys. Thanks.
Thank you Mike.
Thank you and one moment for our next question.
Okay.
And our next question comes from the line of Steve Moss with Raymond James Your line is open. Please go ahead.
Good morning.
Maybe just following up on.
Good morning, maybe just following up on Mike's question here, just going a little further into the weeds curious.
Is loan pricing these days.
I think when you when you its Thomas Dave when you look at our yield in the fourth quarter, we increased that 100 basis points to six two on 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.
More so than anything else and as IRA mentioned earlier, we're 60% adjustable. So we will continue to benefit by the rise in short term rates on that 40% of our portfolio tied to sulfur prime and LIBOR.
Okay.
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 how much.
Much as maybe not disappearing bearing versus interest bearing.
Yes.
It's a deposit driven business for us and we are focusing on them multi state operators. We now do business with 10 of them, we grow accounts and 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 logical strategy.
We lump candidates in with a couple of other niche deposit businesses. So for us that would be candidates HOA national deposits and digital in those four.
<unk> businesses in aggregate added $900 million in deposits during the quarter, which helped to offset some of the other traditional kind of commercial deposit runoff and so that goes back to the Iris 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 from 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.
Say for sale construction project.
It's six units three are contracted to be sold.
We are 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.
Good morning, John .
Question for you on the CV growth during the quarter.
IRA you mentioned that 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.
Next quarter or two.
I think you will see slightly higher levels, assuming that we have loan growth that's in excess of what our expectations are in the guidance and the brokerage CD market is very liquid for us and we will 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.
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 August .
Ali staff to come out of the branches came out of the <unk> came out of the broker CD market. Those are the three choices we had.
Today to even 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 thats attractive the network.
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, that's going to help us manage our funding costs for a much greater degree than what we're historically able tail 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>.
Side of the balance sheet just in isolation.
Yes.
Sense I mean, if 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 then 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 wasn't expectation here 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, 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 there 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.
Cause it what caused it was one customer in their portfolio that went IPO and as a result of that the bank that took them.
<unk> received 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 the 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 they are.
What's your IPO it really still even in this market.
<unk> generated 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 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.
Really 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 wanted to get at it is more a function around nuances in various loan pools that we use kind of management overlays as the way to think about it.
And then if thats good.
Their vision 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 <unk> at 89 basis points, we're at 103 today.
And 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 is.
We can and.
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's not unlikely that we're not going to have to provide as much. If the economy does go into recession congratulated the Petersburg.
Okay.
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 hearing is coming later I think we're being cautious for the last.
$5, six six quarters, where our.
The condition is still had a much more significant weighting towards a recession than what everybody else did I find it unfathomable that people would drain their reserved 20 basis points below seasonal for the last cut coming.
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.
Absolutely more likely that we're not going to have to build to the level that everybody else's. They should have never dropped down below seasonal from from my individual prospectus.
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 I.
I wanted 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.
I'm there by the way.
Alright, I just wanted to clarify like so when you look at in just for in simplistic 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%.
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.
Got it and Thats the Thats based off of go.
Go ahead Sir.
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 based assumptions.
Got it okay.
And then in terms of the funding strategy in terms of funding the loan growth in 2023, I'm hearing somewhat mixed messages right. You have these lower cost niches, which helped this quarter, but you're relying more on brokered.
These and other cities, 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.
About 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 will go and.
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.
Okay.
Yes, so I think the pressure right now no.
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.
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 okay.
You recognize how uncertainties that sorry for asking 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>. So I think our 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.
Do you share the market's concern over commercial real estate more broad and maybe could you drilled out. If you are concerned is it a particular geography or 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 in the 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 you are looking at our real estate portfolio. Our average weighted average loan to value is 62% our debt service coverage is $1 75.
So we yes.
We do look at this very closely.
Our cap rates, you'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 three 4% range. We were stressing at five five that will.
Allows us to obtain Wilson said, a lower leverage growth in our markets and keeps down the 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, Steve.
Thank you everyone 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.
That customers have been responsive to your CD offerings.
You expand on what you're putting on.
We're telling them out and 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.
Is that going 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.
And continued into the fourth quarter have all been around 12 or 18 months duration. So we're not going out.
Long on the curve, because obviously related to 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 know look at those.
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.
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.
Going in.
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 the 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.
By that.
A couple of quick ones.
First of all is 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.
2023, and whether or not you see.
Much of any growth or it should match kind of.
Overall balance sheet composition stay the same.
Yes, 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 there are 25 is only held in the <unk> 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 in 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 at a minimum what shops.
Got it okay.
And then IRA just would love your thoughts in 'twenty three around M&A.
Obviously the message was look we got a ton of stuff to do organically theres plenty of opportunity on that front.
Felt like M&A would have to be incredibly spectacular free 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.
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 drained potential book value as well and that's 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 on this tremendous offer opportunities with that so.
Like I said, probably copy and paste Matt.
Lastly, just thank you for adding the expense guide for 2023 I. Appreciate that addition to guidance. That's all I had thank you.
Anything for you.
Yeah.
Thank you and one moment for our next question.
Yes.
Okay.
And our next question comes from the line of French Ravi with Piper Sandler. Your line is open. Please go ahead.
Hi, guys.
Okay.
Good Thanks, just on the.
Our niche businesses I think Tom you talked about.
So the way you approach side, you lump in the cannabis the HOA.
The national deposits, you mentioned the growth rate in the quarter just wondering as we.
Think about those businesses, maybe ramping up.
I would 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.
Yeah. 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 Thats, primarily in interest bearing program and process. There. The tech will have a large portion of noninterest bearing but well.
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 game 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 in them.
No.
Can you give any put any parameters around how volatile it has been.
You said, 5% 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 Amit has 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 got to take that for what it's worth.
Okay and can you lump in there or is that like a bank leumi umbrella you loved the private banking that you got from from that acquisition with those technology deposits are.
Does that growth rate then for you guys know 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 <unk> 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 are they are 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.
Any 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.
The partial tangela.
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 have 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 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 off 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 I'm sorry, let me.
The American bank out of Pizza, So you're saying it's larger.
Correct, Okay, yes.
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.