Q2 2023 Valley National Bancorp Earnings Call
Good day and thank you for standing by welcome to the Valley National Bank second quarter of 2023 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the <unk> assertion you'll need to press star one one on your telephone and you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today <unk>. Please go ahead.
Good morning, and welcome to Valley second quarter of 2023 earnings conference call presenting on behalf of valley today, our CEO IRA Robbins President.
The Chief Financial Officer, Mike Hegadorn.
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 <unk> Dot com.
When discussing a results we refer to non-GAAP measures, which excludes certain items from reported results. Please refer to today's earnings release for reconciliation for these non-GAAP measures. Additionally, I would like to highlight slide two of earnings presentation and remind you. The comments made during this call may contain forward looking statements relating to valley National Bank Corp. In the banking industry Valley encourage us all participants to refer to.
SEC filings, including those found on forms 8-K N Q and 10-K for a complete discussion of forward looking statements and the factors that could cause actual results to differ from those statements with that I'll turn the call over to Iraq Rabbit.
Thank you Travis.
And the second quarter of 2023 valued reported net income of $139 million in earnings per share of 27 cents.
Exclusive of non-core items, adjusted net income and EPS for $147 million.28, respectively.
The quarterly results were highlighted by strong and stable S a quality metrics.
Consistent loan activity.
Improved deposit generation and solid not interest income growth.
The interest rate environment continues to create cyclical pressures for traditional spread banks like valley.
We have can serve you positioned our balance sheet in a neutral manner, which is both prudent and generates largely stable net interest income and burying interest rate environments.
The current inverted curb pressures this approach yet.
Over the long run we believe it is appropriate.
We firmly believe franchise value is not created by taking interest rate positions, but rather by increasing clients and diversifying the balance sheet.
The current cyclical pressure with the inverted curve will ultimately normalized and.
In the recent client growth realize by valley will generate significant value.
Outside of the cyclical variables impacting profitability the banking environment has recently undergone structural changes related to the new <unk> money.
These changing trends will have long term implications to the banking environment.
Our investment in technology or the last few years, but from a client and internal operating perspective.
Coupled with the diversity of our balance sheet will mitigate some of the structural changes and ultimately position valley to capitalize on the evolutionary changes in which clients interact with your financial institution.
During my tenure, we have focused on consistent Tangela book value growth as a key driver of long term shareholder value.
While recent market disruption has overshadowed these efforts I am extremely proud of the near 50% increase intangible book value over the last five years.
In fact, when adjusting for the common cash dividend paid we have generated over 90% growth intangible book value since March of 2018.
At the market return to valuing banks on fundamentals are consistent tangible book value growth will continue to be differentiating as we move forward.
In an effort to offset a certain cyclical revenue headwinds, we began to implement a cost saving exercise in late June .
We remain focus on sustainable longterm growth that acknowledged that we need to flexibly respond to your term pressures.
Alright, <unk>, we're primarily come from lower head count.
More efficient third party consulting in service usage and specific technology saves.
These opportunities are expected to generate more than $40 million of annual pretax savings and will be realized over the next four quarters.
Culturally we are reinvigorating the attention to detail, which drove our efficiency improvement from the high 60% range in the beginning of my tenure to the low 50 per cent range in late 2022.
Consistent with our history, we will continue to position ourselves to capitalize on the dislocation around us.
We anticipate that there will be significant growth opportunities at the environment stabilizes and the yield curve ultimate normalizes.
Values are strong and vibrant institution operating in great markets.
I remain extremely confident in our ability to execute and I'm incredibly excited for what the future holds for our company.
With that I will turn the call over to <unk> to discuss the quarter's growth and financial results.
Thank you IRA.
<unk> four illustrates the 2 billion dollar growth and our total deposits starting the quarter, which reflects the ongoing shift to higher cost products.
The overwhelming majority of non interest bearing deposit run off occurred by midnight. Since then both non interest bearing an interest bearing transaction balances have been materially unchanged.
The quotas growth reflects accelerated C D generation, which pressured hour deposit beta and wait on our net interest margin.
Slide five provides more detail on the continued diversity of our deposit portfolio.
Many of our specialty verticals continues to perform well as we saw solid growth within our online channel and our national deposits of private banking areas.
To greater utilization of insurance products like Ics, we have continued to reduce our adjusted uninsured deposit exposure.
Adjusted uninsured deposit balances declined to $12 billion with 24% of total deposits and are now covered more than 200% by on balance sheet cash in available liquidity.
Slide six further illustrates the diversity and granularity of our deposit base.
No commercial industry accounts for more than 10% of our deposits.
Our government portfolio remains diversified across our footprint and is fully collateralized relative to state collateral requirements.
Turning to slide seven you can see it overview of our loan growth and portfolio composition.
Annualized loan growth slowed to 10% from 60% in the first quarter, while origination yields continue decline.
We have worked through the majority of the strong pipeline that existed coming into the year and anticipate mid single digit annualized growth for the remainder of 2023.
We will continue to be selective on the lending side and generally supportive of compelling projects led by our high quality and tenured customer base.
Slide eight further illustrates the diversity of our commercial real estate portfolio by collateral type in geography.
As a reminder, we have an extremely granular loan portfolio with an average loan size of roughly $5 million.
From a metric perspective are weighted average LTV and debt service coverage ratio remained at 58% and 1.8 times respectfully.
We believe these metrics compare favorably to peers as we have consistently and conservatively underwritten to hire cap rates.
Our experience with recent refinancing activity has been positive given the adequacy of our past underwriting discipline.
Slide nine provides additional detail on our granular office portfolio.
Loan to values declined during the quarter in our office portfolio remains well positioned with a low average loan size.
With that I will turn the call over to my <unk> to provide additional insight on the quarter's financials.
Thank you Tom Slide.
Slide 10 illustrates valleys recent quarterly net interest income and margin trance. The sequential 16 million dollar decline in net interest income was approximately half of the reduction experienced in the first quarter of the year.
While asset yields continue to improve deposit mix shift in the first half of the quarter and continued pricing competition pro funding cause higher.
Are fully tax equivalent net interest margin declined 22 basis points versus 41 basis points in the first quarter of 2023.
We estimate that are elevated average cash position in the second quarter wait on the absolute margin by approximately eight basis points.
As you saw on side for our accumulated deposit beta increased to 47% in the quarter.
During the quarter, we enhance our efforts to extend duration on the funding side.
To this and we added approximately 1 billion of C. DS beyond nine months and put an incremental fade Shelby funding out three years.
We will continue to focus on prudent balance sheet management and further enhancing our maturity ladder as opportunities present themselves.
While noninterest deposit balances have been stable since mid May is total deposits grow we anticipate that the contribution of noninterest deposits will decline into the low 20% range.
Through the cycle date is now appear likely to peak out at the mid 50 per cent range by year end.
As a result of these factors we anticipate that are 2023 full year net interest income growth will be in the low single digit percent range.
We are seeing initial signs of stabilization in net interest income and margin and increasingly expect that we're approaching a trough.
Moving to slide 11, we generated over $60 million of noninterest income for the quarter as compared to $54 million in the first quarter.
We saw a strong growth in a variety of noninterest businesses during the quarter.
Capital markets revenue increased 6 million, primarily due to stronger swap activity.
We also saw growth in our wealth management and insurance lines, and a modest rebound and gain on sale revenue.
While we continue to diversify our revenue sources were pleased that stronger fee income results helped to slow revenue compression as compared to the first quarter.
On slide 12, you can see that our noninterest expenses, where approximately $283 million for the quarter or approximately $267 million on and adjusted basis.
The increase in adjusted expenses from the first quarter was largely related to a higher FDIC assessments and consulting costs.
Expenses in other categories were generally well controlled.
As I remember <unk>, we have identified over $40 million of annualized expense opportunities, which we have begun to execute on.
During the quarter, we took approximately $11 million with restructuring charges, primarily in the form of severance associated with these efforts.
While these saves will take time to materialize, we expect that they will help to offset potential revenue pressure and more regular expense growth over the next few quarters.
We expect that just less than half of the annualized saves will be in our run rate by the end of the year with the rest of the savings to be achieved by the mid point of 2024.
These expense efforts should help to get efficiency back on track and we will continue to focus on opportunities beyond the $40 million that we have already identified.
Coming into the year, we set of 2023 expense growth guide of between 10.5% and 12.5%.
We continue to feel this is a reasonable level and believe these initiatives could bring us towards the lower end of that range.
Turning to slide 13, you can see our asset quality trends for the last five quarters non.
Nonaccrual loans were effectively flat at five 1% of total loans and early stage delinquencies declined by nearly 40% from the linked quarter.
Second quarter net charge offs were normalized as well with nearly 50% coming from a single fully reserve a construction loan charge offs.
We are proactively address discrete problem credits in the last few quarters and the data we see continues to indicate asset quality strength in the near term.
On Slide 14, you can see that tangible book value increased approximately 1.8% for the quarter.
This was the result of our retained earnings which was partially offset by a modest increase in the OCI impact associated with are available for sale securities portfolio.
Tangible common equity to tangible assets rebounded to 724% during the quarter as we repaid maturing short term debt with excess cash.
We estimate that our remaining excess cash position at June 30th weighed on our T. C E T a ratio by approximately 12 basis points.
For the second quarter R. C E T. One in tier one ratios were effectively flat.
Our total risk base ratio declined somewhat as a result of a partial disallowance of a legacy subordinated debt instruments.
With that I'll turn the call back to the operator to begin Q&A. Thank you.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need a press star one one on your telephone and wait for a name to be announced to withdraw. Your question. Please press star one one again, one moment will be compiled a CUNY roster.
Our first question comes from the line of Michael Prieto with K P. W. Your line is open.
Hey, guys. Thanks for taking my questions. This morning.
[noise] I wanted to I wanted to start on just a couple of clarification questions around some of the the guidance you guys. Just just provided I guess first on on the.
On the Outback side, so so like basically it sounds like you know less than 50 per cent contribution of the $40 million is expected to kind of maybe put you at the low end of the 10% to 12% range.
Can can you just remind us that that's off of kind of the adjusted expense number not the gap number correct and would you generally agree with that that summary.
Yeah. That's accurate my kids is Travis so the base in 2022 was are reported expenses less merger charges, and then that 10.5% to 12.5% growth was based on that and again X merger charges for 2023 from Paris.
Perfect and then are you guys expecting any other noise in the FDIC insurance premium line moving forward here what are your expectations around that.
At this point.
It might get its Travis again, so uhm in our initial analysis of the potential special assessment associated with the first two bank failures you know the number looks to be in the 40 million dollar range. Obviously, that's for us and based on our our assessment base. That's a preliminary analysis still to be confirmed.
Right and and that's one 224 until the end of 25 correct.
Describe that plays out over eight periods I think I was just going back to the accounting folks. This morning, I think he may accrue for it all a one but still need to confirm that as well, okay. Alright, perfect. Thanks, and then just around.
The the NII outlook, so I mean, it sounds like there is expected to be yeah, maybe another step lower in the third quarter and then some stabilization uhm I mean does that kind of Jive also in terms of that.
Dollar Guide you gave Mike, but does that drive also maybe with kind of what you're expecting at this point is dejectory of name I mean is there another step lower here and then.
Based on where the curve is today and in the movement yesterday that you hope would be especially with the growth taking maybe a few hundred basis points step back you know on a net basis to to stabilize as well or are there other factors over the back half of the year, we should be thinking about.
Yeah, So based on our modeling right now and the use of the applied forward curve.
The forecast implies a flat NII. So I think it's it's gonna be flattish heading into third quarter give or take a few basis points either way and then also it's important to remember as we mentioned that when you take the excess cash off you get back to it adjusted name of 302, So I think as we work that cash.
Down in the third quarter, you'll also see that.
Help increase the name a little bit.
Perfect and then I'll just do one more than.
Others have questions as well, but just or maybe he just would love your thoughts around you know you guys were able to do a couple.
Really productive M&A transactions, leading into this current environment over the last handful of years, obviously right now the M&A outlook is a little challenge, but but you know I imagine at some point there will there will be some opportunities and I'm just curious that your current size with everything going on the market you know what what are you just upped.
The thought generally on the M&A opportunity for valley longer term understanding it's not probably something that's on the near term agenda, but just would love your your thoughts there.
Thanks, you know, it's Stephanie and that's something that we're focused on from a prioritization perspective, I think organically, there's a lot of excitement within the organization.
Based on some of the vertical is that we've done in just the peer capabilities that we've established over the last few years. So definitely inwardly focused at this point in time, that's it I think as we think about M&A, they're definitely going to be opportunities for us to continue to grow from a strategic perspective, and any time, we see something that fits within the financial discipline that we're focused on.
That could accelerate some of the strategic objectives that we are looking at you would definitely be open to it right now I think the interest rate environment creates a bit more challenges when it comes to that though.
Perfect that makes sense. Thank you guys for all the color of this morning I appreciate it.
Thank you.
One moment for our next question.
Our next question comes from the line of Matthew for use with Stephen Each line is open.
Good morning, everybody.
Hey.
Hey, Mike just on the the normalized liquidity commentary what what are you kind of defining is normalized liquidity and how soon do you get there.
Yeah, I think it's in the roughly in the range of about a half a billion dollars when we're in a normal environment.
You you know obviously when you compare superiors you saw in the first quarter.
Significant bills you saw that retain some of that build throughout the second quarter, but I think somewhere in that <unk>.
<unk> half a billion dollars is probably a normal go forward for us.
What would be considered a normal economy.
Okay.
Can you provide a little bit more color on perhaps when you're you're mall shows a normal economy.
Yeah, I think we're headed that direction right now I think.
Our belief right now as we model forward, especially prone i-i around further fed rate increases is that this increase it happened yesterday as the last one so that normalizes. The the economy going forward. There are some adjustments, obviously, the unemployment and GDP and there, but overall I think we're starting to get there at the beginning of it is the best way of saying.
Okay.
I appreciate all the commentary on demand deposits remaining stable after mid may.
How does the NIM progress through the quarter and did you start to see similar signs of stability towards the end of the quarter.
Matt This is Travis show on a monthly basis at the margins generally flat throughout the corner. We ended June 294, which was the quarterly number as well I'd say that there was a little bit more excess liquidity throughout the corner as opposed to the June margin. So cash adjusted maybe June down somewhat they are clearly signs of stabilization.
Pretty consistent and you said I mean, the name deposits. We're we're generally flat over the last two or three months. That's that's kind of continued so our model conservatively projects more compression from non interest deposit outflows, but.
Yeah, that's not really what we've experienced so far.
And a credible yield was that like a similar kind of 9 million dollar number for the quarter.
All in purchase accounting income declined $2 million from the first quarter.
Okay, so $7 million.
Yep correct.
And then the last one for me fee income a lot of items, what your way this quarter.
Maybe maybe just a little bit of help there with the guidance looks like for the next couple of quarters and I was surprised to see how strong commercial swap fees were.
Maybe just some insight as to what happened underneath the hood there.
Sure He mad it's Tom.
The fees were strong for the quarter swaps just the bigger demand on the swap front from our customer base and you know we expect for the next two quarters to report in the mid fifties on the fee income will offset some of it through our our newly the tax credit business as a seasonal uptick.
The fourth quarter, and we've been doing a lot more affection <unk> finance <unk> through the products, we receive from Leoni.
Great.
I will leave it there I appreciate taking my questions. Thank you.
Excellent.
One moment for our next question.
Our next question comes from the line of Stephen <unk>, <unk> <unk>, sorry from J P. Morgan Your line is open.
Hey, good morning, everyone.
Mercy.
I'm gonna start on the non interest bearing deposit the outflows accelerated a bit this quarter. Thank you were calling for 25%. It by year end here. They already I think now you're saying down to low 20 per cent range, what could you take us behind the scenes in terms of why that's coming in even lower than you guys expected our company just optimizing.
To a lower level of operating balance.
Yeah, I think there are two main points to consider their Steve first we're starting to see and we're continuing to see consumers utilize their checking accounts for purchases.
Some of our commercial treasury optimization from our customers standpoint, as they manage their cash balances more precisely.
The other thing that is important to note that over the longterm history Valley. The average non interest bearing as a percent of total deposits has only been 24%. So we're not that far off of what the average is.
For a longer period of time that I was seeing incorporates a lot of different economic environments.
Got it okay.
That's helpful and I'm curious the original guidance on the efficiency ratio is around 50% for the full year clearly erotic above that taken it and I got that down now so what's a more reasonable target for the efficiency ratio for this year.
Yeah, I think for the full year in the lower fifties with the help of the 40 or $40 million annualized expense saves that we announced that again, obviously not all of those are gonna be realized on the income statement and twenty-three, but I think it will help us get to the lower 50% range.
Got it okay.
And final question.
This is a pretty strong idea to quite a bit of growth in commercial real estate scenario, where not too many banks grow give some color on what you are saying there why you feel comfortable taking on more commercial real estate here. Thanks.
Hey, Steve It's Tom.
Our focus has really been on servicing our longterm existing customers that commercial real estate growth, 84% came from our customer base still very granular the metrics of our debt service coverage over 1.8 times, which is consistent with our historical underwriting and <unk>.
Q as in the 60 per cent range. So we're bringing them on to existing customers solid projects with the same credit metrics underwriting standards that we have always used.
You will see 11% quarterly annualized growth and CNI and that's been consistent for the past several quarters. So we continue to drive our CNI business, which gives us deposit and an additional fee opportunities while servicing no strong want longterm real estate customers.
Got it and then there's mid single digit law growth for the rest of the year I haven't worked out the map yet how does that change the prior outlook was seven to nine for the full year.
We should be at the higher.
Higher end of that seven to nine range.
Got it okay. Thanks for taking my questions.
Thanks to you.
One moment for our next question.
Our next question comes from the line of <unk>, but it's Morgan Stanley . Your line is open.
Hey, good morning, I just wanted to follow up on the the last set of questions on Niv deposits. So I think you said that an ivy deposits I've been stable <unk> and yeah, you were saying that your guide <unk> further out to us as a client to optimize their cash so I'm just trying to square that too.
Are you being more conservative or is that based on you know any conversations you're having with clients you know maybe white ECR rates are going or even any flaws that you see in a quarter today and thank you.
Yeah, it's none of those things, it's really what you started out with that were being a little more conservative on our estimate right now as we take a look at and we reached the absolute bottom of customers rotating into interest bearing products and we don't think we're quite there yet.
Got it and I think last quarter, you had mentioned that the deposits are coming in around like 250.
Towards the end of the quarter can you tell us what what the number is four four children.
Yeah June we generate new deposit new customer deposits at a blended rate of 377.
Alright, perfect and that just a question for me on a lawn job. Some of your parents have announced added on sales Joanna quart, particularly in commercial real estate.
Is that an opportunity that you're looking at or you could look at it in the future.
Yeah at this point, we're not looking at that we're comfortable with our return and risk requirements within our portfolio that said if something compelling comes along that's the right economics and allows us to redeploy into higher value capital opportunities, we would certainly look at it.
Great. Thank you.
One moment for our next question.
Our next question comes from the line of Steve Moss, but Raymond James to your line is open.
Good morning.
Wednesday morning.
Yeah, maybe just on loan.
You know.
I'm, just curious where his loan pricing. These days in terms of just what is the total at all I mean, I know you guys, particularly talking spreads, but just kind of curious as to you know or are you in the seventh for a loan pricing these days or just how to think about that.
Yeah.
Steve the loan yields for the quarter was around 735 for June It was <unk> just about seven seven we've been consistently receiving spreads in the mid threes for the past several quarters, the new business new production, we're putting on it's coming at a higher spread then historical levels.
Okay, Great and then in terms of a similar deposit the date I think I heard mid fifties earlier it kind of sounds like you guys think the margin maybe troughs here are made.
Maybe deposit cause peak in the fourth quarter I should say.
Stabilize for 2020 horse can how you guys are thinking about right now just want to make sure I heard that correctly.
Yeah, I think that's a fair assumption you know also we're starting to see we've been seeing this but we started to see in the second quarter very.
Very nice ramp up in the generation of new accounts. So as an example, new depository accounts with the highest level they've been in the in the prior six quarters and two quarter, our second quarter of 23.
So I think you have you have the migration of non interest bearing interest bearing which is going to impact. Your your beta you also have the ability to add new deposits as well those incremental new deposits probably come on a little higher cost. So that the engine that we've created obviously shows as I mentioned that were at the highest level in the last 18 months.
See what are the things I think that impacts that is the decline in some of the projected loan loan growth. You know we were going 17 per cent of the first quarter of 10%. This last quarter as we guide towards the meat the mid single digits. After the next two quarters.
The demand for deposits are gone into decline within the organization as well so that should have a significant impact on what this forward looking data is look like.
Okay appreciate all that it.
Just one more thing in terms of dynamic of of swelling longer up here you know.
<unk> how much do you think is <unk>.
Customer conservatism versus.
Wider spreads here going hard just kind of any any cynthia for the economy.
How customers are.
Yeah, Steve It's it's it's really both are a factor you know certainly the widening spreads has has had customers re look at the value of the projects and many are holding off and pausing until they see what the interest rate environment.
Levels out at from the cautious standpoint, we're not seeing as much certainly CNI companies are managing their inventory tighter than they had been but we're not we're not seeing the same level of cautiousness.
Okay, great. Thank you very much.
Thanks.
One moment for our next question.
Our next question comes from the line of John auction with RBC capital markets. Your line is open.
Good morning, guys.
Hi, John .
Just a few follow ups I think most of my questions about answered, but just just back on.
Margin.
Bigger picture you guys optimistic on the margin beyond the third quarter does it is it returning to normal would feel that way but.
I thought I'd ask.
Yeah, I think one of the interesting things is is is how we looked at the margin and then you go back over a two year period.
The balance in our margin it's been about a 22 per cent number versus about 30 per cent of appears so I think you know in an inverted curve, which are cyclical. These things happen you know for us to Steffi margin compression I don't anticipate operating in it and burn a curve for the rest of my career I just think about the rest of the management team does either so the margin will also.
Rebound and come back up to more normalised level and.
And when that happens I think.
Franchise value of the organization is going to increase dramatically. We're opening up more accounts today than we've ever opened before when amazing individual vertical business lines that we weren't in before and the balance sheets. Obviously shifted you know 345 years ago, 17% is balance sheet was in residential mortgages and look at the concentration I'm, having CNI today and the diversification.
And even within the Cree portfolio, it's a very different balance sheet, and we believe that there'll be definitely some benefit coming coming forward as the interest rate environment normalizes.
Okay. So control what you come right.
Yep Yep, Okay, Mike on Slide 12, there's a comment about the last bullet additional variable expense opportunities.
What's an example of that and what's the potential magnitude Sir.
Sure. It's some of the usage things right that we have discretion over a good example of that could be consulting cause it could do the additional usage of contracts cause we're gonna go through a core conversion in the fourth quarter that might spill off and we might have some additional savings there as well, but it's also add.
Two knowledge, it's having an organization that looks at cost and with a critical eye and tries to eliminate everything that we don't really need to do.
Okay.
And then I guess the last one on the allowance, but did you guys change your qualitative.
Thinking at all in terms of your reserve levels I'm just curious.
Check you expect a worsening economy.
Do you feel like a worse in the economy's already inflicted in your reserves just give us some thoughts on thanks.
You know I'll I'll start off here. This is Mike and then our Chief credit Officer is here as well so I'll have some feeling where I, where I get this wrong, but.
I think the first thing to note on this as we did migrate the weightings on movies. That's the first thing to kind of take into account and we went to a slightly higher percentage 10 per cent more on the baseline and we reduced S for which is that more severe recessionary why did we do that as movies.
Uhm refines their estimates each quarter. The basslines started to capture more of the if you will negative both G. D. P. In unemployment numbers and so we've always been conservative in our weightings I think relative to our peers on this but as we've taken a look at their numbers it became pretty apparent that the baseline would capture more of that so we did make that change.
Change, which has some bearing on allowance and the Cecil model and then I'll turn it over to Mark.
Right of it's Mark Fager, Yeah might that's absolutely accurate, we we had been holding at the 50.
50, 30 20.
30, and 20 I'm at your downside scenarios based off of a continued migration to a slightly more negative conservative outlook on where these baseline we did back that all that being said that was not a material change in the in the overall waiting because our movement of the 10% was off.
Satisfied the more negative outlook on the Bay side. So we do that that is modest.
We did not impose any additional qualitative overlays on the a triple oil for this quarter as we did not see any any material weaknesses and portfolio that warranted qualitative adjustments upwards, where we are looking at performance a portfolio.
In the future to see if that that may be a.
Necessary, but the performance of portfolio contingents be exceptionally strong and does not warrant any qualitative overlays.
Okay.
Interesting comment on the British law being almost approaching us four so that's a good comment so thanks guys I appreciate it.
Okay Sir.
That concludes the question and answer session. At this time I would like to turn it back to iron Robbins for closing remarks.
Just want to say, thank you to everyone for taking the time to listen to the call today.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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Good day, and thank you for standing by and welcome to the Valley National Bank Second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the <unk> session.
Session, you will need to press star one one on your telephone and you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Travis Lan. Please go ahead.
Good morning, and welcome to Valley's second quarter 2023 earnings conference call presenting on behalf of Valley today are CEO IRA Robbins, President, Tom <unk>, and Chief Financial Officer, Mike Hagadorn 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 Valley Dot 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 reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide two of our earnings presentation and remind you that comments made during this call may contain forward looking statements relating to valley National Bancorp and the banking industry Valley encourages all participants.
Refer to our SEC filings, including those found on forms 8-K, 10-Q, and 10-K for a complete discussion of forward looking statements and the factors that could cause actual results to differ from those statements with that I will turn the call over to IRA Robbins.
Thank you Travis.
In the second quarter of 2023 Valley reported net income of $139 million and earnings per share of <unk> 27.
Exclusive of noncore items, adjusted net income and EPS were $147 million and 28, respectively.
The quarterly results were highlighted by strong and stable asset quality metrics consistent loan activity improved deposit generation and solid noninterest income growth.
The interest rate environment continues to create cyclical pressures for traditional spread banks like valley.
We are concerned we positioned our balance sheet in a neutral manner, which is both prudent and generates largely stable net interest income and bearing interest rate environments.
The current inverted curve pressures gets approach yet over the long run we believe it is appropriate.
We firmly believe franchise value is not created by taking interest rate positions, but rather by increasing clients and diversifying the balance sheet.
The current cyclical pressure with the inverted curve will ultimately normalize.
And the recent client growth realized by valley would generate significant value.
Outside of the cyclical variables impacting profitability the banking environment has recently undergone structural changes related to the movement of money.
These changing trends will have long term implications to the banking environment.
Our investment in technology over the last few years, both from a client and internal operating perspective couple.
Coupled with the diversity of our balance sheet will mitigate some of the structural changes and ultimately position valley to capitalize on the evolutionary changes in which clients interact with their financial institution.
During my tenure, we have focused on consistent tangible book value growth as a key driver of long term shareholder value.
While recent market disruption has overshadowed these efforts I am extremely proud of the near 50% increase in tangible book value over the last five years.
In fact, when adjusting for the common cash dividend paid we have generated over 90% growth in tangible book value since March of 2018.
As the market return to value in banks on fundamentals are consistent tangible book value growth will continue to be differentiating as we move forward.
In an effort to offset certain cyclical revenue headwinds, we began to implement a cost saving exercise in late June .
We remain focused on sustainable long term growth.
Acknowledged that we need to flexibly respond to near term pressures.
Alright identified phase will primarily come from lower head count more efficient third party consulting and service usage and specific technology saves.
These opportunities are expected to generate more than $40 million of annual pre tax savings and will be realized over the next four quarters.
Culturally we are reinvigorating the attention to detail, which drove our efficiency improvement from the high 60% range in the beginning of my tenure.
To the low 50% range in late 2022.
Consistent with our history, we will continue to position ourselves to capitalize on the dislocation around us.
We anticipate that there will be significant growth opportunities as the environment stabilizes in the yield curve ultimately normalizes valley.
<unk> has a strong and vibrant institution operating in great markets.
I remain extremely confident in our ability to execute and I'm incredibly excited for what the future holds for our company.
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 four illustrates the $2 billion growth in our total deposits during the quarter, which reflects the ongoing shift to higher cost products.
Overwhelming majority of noninterest bearing deposit run off occurred by mid May since then both noninterest bearing and interest bearing transaction balances have been materially unchanged.
Quarter's growth reflects accelerated CD generation, which pressured our deposit beta and weighed on our net interest margin.
Slide five provides more detail on the continued diversity of our deposit portfolio.
Many of our specialty verticals continue to perform well as we saw solid growth within our online channel and our national deposits of private banking areas.
So greater utilization of insurance products like Ics, we have continued to reduce our adjusted uninsured deposit exposure.
Adjusted uninsured deposit balances declined to $12 billion or 24% of total deposits and are now covered more than 200% by on balance sheet cash and available liquidity.
Slide six further illustrates the diversity and granularity of our deposit base.
No commercial industry accounts for more than 10% of our deposits.
Our government portfolio remains diversified across our footprint and is fully collateralized relative to state collateral requirements.
Turning to slide seven you can see an overview of our loan growth and portfolio composition.
Annualized loan growth slowed to 10% from 16% in the first quarter, while origination yields continue decline.
We have worked through the majority of the strong pipeline that existed coming into the year and anticipate mid single digit annualized growth for the remainder of 2023.
We will continue to be selective on the lending side and generally supportive of compelling projects led by our high quality and tenured customer base.
Slide eight further illustrates the diversity of our commercial real estate portfolio by collateral type and geography.
As a reminder, we have an extremely granular loan portfolio with an average loan size of roughly $5 million.
From a metric perspective, our weighted average LTV and debt service coverage ratio remained at 58% and one eight times respectfully.
We believe these metrics compare favorably to peers as we have consistently and conservatively underwritten to higher cap rates.
Our experience with recent refinancing activity has been positive given the adequacy of our past underwriting discipline.
Slide nine provides additional detail on our granular office portfolio.
Loan to values declined during the quarter and our office portfolio remains well positioned with a low average loan size.
With that I will turn the call over to Mike Hagedorn to provide additional insight on the quarter's financials.
Thank you Tom Slide.
Slide 10 illustrates valleys recent quarterly net interest income and margin trends the sequential of $16 million decline in net interest income was approximately half of the reduction experienced in the first quarter of the year.
While asset yields continue to improve deposit mix shift in the first half of the quarter and continued pricing competition drove funding costs higher.
Our fully tax equivalent net interest margin declined 22 basis points versus 41 basis points in the first quarter of 2023.
We estimate that our elevated average cash position in the second quarter weighed on the absolute margin by approximately eight basis points.
As you saw on slide four our cumulative deposit beta increased to 47% in the quarter.
During the quarter, we enhanced our efforts to extend duration on the funding side.
To this end we added approximately 1 billion of Cds beyond nine months and put on incremental FHL defunding out three years.
We will continue to focus on prudent balance sheet management and further enhancing our maturity ladder as opportunities present themselves.
While noninterest deposit balances have been stable since mid may as total deposits grow we anticipate that the contribution of noninterest deposits will decline into the low 20% range.
Through the cycle beta is now appear likely to peak out at the mid 50% range by year end.
As a result of these factors, we anticipate that our 2023 full year net interest income growth will be in the low single digit percent range.
We are seeing initial signs of stabilization and net interest income and margin and increasingly expect that we are approaching a trough.
Moving to slide 11, we generated over $60 million of noninterest income for the quarter as compared to $54 million in the first quarter.
We saw strong growth in a variety of noninterest businesses during the quarter.
Capital markets revenue increased $6 million, primarily due to stronger swap activity.
We also saw growth in our wealth management and insurance lines and a modest rebound in gain on sale revenue.
While we continue to diversify our revenue sources. We are pleased that stronger fee income results helped to slow revenue compression as compared to the first quarter.
On slide 12, you can see that our noninterest expenses were approximately $283 million for the quarter or approximately $267 million on an adjusted basis.
The increase in adjusted expenses from the first quarter was largely related to a higher FDIC assessment and consulting costs.
Expenses in other categories were generally well controlled.
As IRA mentioned, we have identified over $40 million of annualized expense opportunities, which we have begun to execute on.
During the quarter, we took approximately $11 million of restructuring charges, primarily in the form of severance associated with these efforts.
While these savings will take time to materialize, we expect that they will help to offset potential revenue pressure and more regular expense growth over the next few quarters.
We expect that just less than half of the annualized saves will be in our run rate by the end of the year with the rest of the saves to be achieved by the midpoint of 2024.
These expense efforts should help to get efficiency back on track and we will continue to focus on opportunities beyond the $40 million that we have already identified.
Coming into the year, we set a 2023 expense growth guide of between 10, 5% and 12, 5%.
We continue to feel this is a reasonable level and believe these initiatives could bring us towards the lower end of that range.
Turning to slide 13, you can see our asset quality trends for the last five quarters.
Nonaccrual loans were effectively flat at five 1% of total loans and early stage delinquencies declined by nearly 40% from the linked quarter.
Second quarter net charge offs were normalized as well with nearly 50% coming from a single fully reserved construction loan charge offs.
We are proactively address discrete problem credits in the last few quarters and the data we see continues to indicate asset quality strength in the near term.
On Slide 14, you can see that tangible book value increased approximately one 8% for the quarter.
This was the result of our retained earnings which was partially offset by a modest increase in the OCI impact associated with our available for sale securities portfolio.
Tangible common equity to tangible assets rebounded to seven 4% during the quarter as we repaid maturing short term debt with excess cash.
We estimate that our remaining excess cash position at June 30th weighed on our TCE to Ta ratio by approximately 12 basis points.
For the second quarter, our CET, one and tier one ratios were effectively flat.
Our total risk based ratio declined somewhat as a result of a partial disallowance of the legacy subordinated debt instruments.
With that I'll turn the call back to the operator to begin Q&A. Thank you.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment will be compile the Q&A roster.
Our first question comes from the line of Michael Perito with <unk>. Your line is open.
Hey, guys. Thanks for taking my questions. This morning.
Yes.
Yes.
I wanted to I wanted to start on just a couple clarification questions around some of the guidance you guys. Just provided I guess first on on the.
On the Opex side, so so Mike basically it sounds like less than 50% contribution of the $40 million yet is it expected to kind of maybe put you at the low end of the 10% to 12% range.
Can you just remind us that that's off of kind of the adjusted expense number not the GAAP number correct and would you generally agree with that summary.
Summary.
Yes, that's accurate Mike business travelers. So the base in 2022 was our reported expenses less merger charges and then that 10 five to 12, 5% growth was based on that.
And again ex merger charges for 2023 comparison.
Perfect and then are you guys expecting any other noise in the FDIC insurance premium.
Your line moving forward here, what are your expectations around that.
At this point.
Yes, Mike it's Jonathan again, so our initial analysis of the potential special assessment associated with the first two bank failures.
Number looks to be in the $40 million range, obviously, that's for us and based on our assessment base. That's our preliminary analysis is still to be confirmed.
Right and Thats.
124 until the end of 'twenty five correct.
Scribed as it plays out over eight periods I think I was just going back to the accounting folks. This morning, I think you may accrue for it all a one.
Still need to confirm that as well, okay, all right perfect. Thanks.
And then just around.
The NII outlook, so I mean, it sounds like there is expected to be.
Maybe another step lower in the third quarter and then some stabilization I mean does that kind of Jive also in terms of the NII dollars Guide you gave Mike but does that Jive also maybe with kind of what you're expecting at this point and trajectory of NIM. I mean is there another step lower here and then.
And based on where the curve is today and the movement yesterday that you hope would be.
Especially with the growth taking maybe a few hundred basis points step back on a net basis to stabilize as well or are there other factors over the back half of the year, we should be thinking about.
Yeah, So based on our modeling right now in the use of the implied forward curve.
The forecast implies a flat NII. So I think it's going to be flattish heading into third quarter give or take a few basis points either way and then also it's important to remember.
As we mentioned that when you take the excess cash or do you get back to an adjusted NIM of 302, So I think as we work that cash down in the third quarter. You'll also see that help increase the NIM a little bit.
Perfect.
And then I'll just do one more in.
Others have questions as well, but just IRA maybe just would love your thoughts around <unk>.
You guys were able to do a couple.
Really productive M&A transactions.
Leaning into this current environment over the last handful of years now obviously right now the M&A outlook is a little challenge, but but I imagine at some point there will there will be.
Some opportunities and I am just curious that your current size with everything going on in the market.
What are you just updated thoughts generally on the M&A opportunity for valley longer term understanding it's not probably something that's on the near term agenda, but just would love your thoughts there.
Thanks, Ian stepping not something that we're focused on from a prioritization perspective, I think organically. There is a lot of excitement within the organization based on some of the verticals that we've done and just the the peer capabilities that we've established over the last few years. So definitely inwardly focused at this point in time that said I think as we think about M&A there are definitely going to be opera.
<unk> for us to continue to grow from a strategic perspective, and anytime you see something that fits within the financial discipline that we're focused on that could accelerate some of the strategic objectives that we are looking at we would definitely be open to it right now I think the interest rate environment creates a bit more challenging when it comes to that though.
Perfect that makes sense. Thank you guys for all the color. This morning I appreciate it.
Thank you.
One moment for our next question.
Our next question comes from the line of Matthew Breese with Stephens. Your line is open.
Good morning, everybody.
Good morning, Matt.
Hey, Mike just on the normalized liquidity commentary.
What are your kind of defining as normalized liquidity and how soon do you get there.
Yes, I think it's roughly in the range of about a half a billion dollars.
In a normal environment.
Obviously, when you compare us to peers you saw in the first quarter.
Significant build you saw that retain some of that build throughout the second quarter, but I think somewhere in that.
<unk> have a $1 billion is probably normal go forward for us.
What would be considered a normal economy.
Okay.
Can you provide a little bit more color on perhaps when Youre your model shows a normal economy.
I think we're headed that direction right now I think.
Our belief right now as we model forward, especially for NII around further fed rate increases is that this increase that happened yesterday as the last one and so that normalizes.
The economy going forward there are some adjustments, obviously, the unemployment and GDP in there, but overall I think we're starting to get there at the beginning of it is the best way of saying it.
Hey.
I appreciate all the commentary on demand deposits remaining stable.
After mid May.
How does the NIM progressed through the quarter and did you start to see similar signs of stability towards the end of the quarter.
Matt This is Travis so on a monthly basis. The margin was generally flat throughout the quarter. We ended June at 294.
Which was the quarterly number as well I'd say that there is a little bit more excess liquidity throughout the quarter as opposed to the June margins. So cash adjusted maybe June was down somewhat and there are clearly signs of stabilization.
Pretty consistent if you said I mean demand deposits were generally flat over last two or three months.
That's that's kind of continued so our model conservatively projects more compression from noninterest deposit outflows, but.
<unk>.
That's not really what we've experienced so far.
And the Accretable yield was that like a similar kind of $9 million number for the quarter.
All in purchase accounting income declined $2 million from the first quarter.
Okay, so $7 million.
Yes, correct.
And then the last one for me.
Fee income a lot of items went your way this quarter.
Maybe just a little bit of help there what the guidance looks like for the next couple of quarters and I was surprised to see how strong commercial swap fees were.
Maybe just some insight as to what happened underneath the hood there.
Sure Hey, Matt its Tom.
The fees were strong for the quarter.
Swaps, just a bigger demand on the swap front.
From our customer base and we expect for the next two quarters to report in the mid fifties on the fee income will offset some of it through our newly the tax credit business has a seasonal uptick in the fourth quarter and we've been doing a lot more FX in trade finance.
Through the products, we received from Leoni.
Great.
I will leave it there I appreciate you taking my questions. Thank you.
Thanks Pat.
One moment for our next question.
Our next question comes from the line of Stephen I'll OXXO.
Alexa Bliss sorry from Jpmorgan Your line is open.
Hey, good morning, everyone.
Good morning, Steve.
To start on the noninterest bearing deposits the outflow has accelerated a bit this quarter. I think you were calling for mid 25% by year end Youre. There already I think now you are saying down to low 20% range.
Take us behind the scenes in terms of why that's coming in even lower than you guys expected our company just optimizing to a lower level of operating balance.
Yes, I think there are two main points to consider there Steve.
First we are starting to see and we're continuing to see consumers utilize their checking accounts for purchases and some of our commercial treasury.
Optimization from our customers' standpoint, as they manage their cash balances more precisely.
The other thing that is important to note that over the long term history of valley. The average non interest bearing as a percent of total deposits has only been 24%. So we're not that far off of what the average is.
For a longer period of time that I havent seen incorporates a lot of different economic environments.
Got it okay.
That's helpful and I'm curious the original guidance on the efficiency ratio was around 50% for the full year you can clearly you're running above that taken the NII guide down down now so what's a more reasonable target for the efficiency ratio for this year.
Yes, I think for the full year in the lower <unk> with the help of the 40 or $40 million annualized expense saves that we announced but again, obviously not all of those are going to be realized on the income statement in 'twenty, three but I think it will help us get to the lower 50% range.
Got it Okay, and then final question.
The loan growth was pretty strong and you had quite a bit of growth in commercial real estate scenario, we're not seeing many banks grow give us some color on what youre seeing there why you feel comfortable taking on more commercial real estate here. Thanks.
Hey, Steve It's Tom.
Our focus has really been on servicing our long term existing customers that commercial real estate growth, 84% came from our customer base still very granular the metrics debt service coverage over one eight times, which is consistent with our historical underwriting and loan to value.
And the 60% range, so we're bringing them on to existing customers solid projects with the same credit metrics underwriting standards that we have always used.
You will see 11% quarterly annualized growth in C&I and that's been consistent for the past several quarters. So we continue to drive our C&I business, which gives us a deposit and additional fee opportunities while servicing those strong long term real estate customers.
Got it.
This mid single digit loan growth for the rest of the year I haven't worked out the math yet how does that change the prior outlook was 7% to nine for the full year.
We should be.
Higher end of that 7% to nine range.
Got it okay. Thanks for taking my questions.
Thanks, Steve.
One moment for our next question.
Our next question comes from the line of <unk> <unk> with Morgan Stanley . Your line is open.
Hey, good morning, I just wanted to follow up on the last set of questions on Niv deposits.
I think you said that and IV deposits have been stable since mid may.
And yet youre, saying that your guidance bakes in further outflows as clients optimize their cash so I'm just trying to square the two.
Are you being more conservative or is that based on any conversations youre, having with clients, maybe why ECR rates are going.
Any flows that you've seen quarter to date and that's retail.
Yes, it's none of those things is really what you started out with that we're being a little more conservative on our estimate right now as we take a look at and we reached the absolute bottom of customers rotating into interest bearing products and we don't think we're quite there yet.
Got it and I think last quarter, you had mentioned that.
The deposits were coming in.
Around 250.
Towards the end of the quarter can you tell us what the number is four for June .
Yes, and then June we generate new deposit new customer deposits at a blended rate of $3 77.
Alright perfect.
Matt.
Just a question for me on <unk>.
<unk>.
Some of your peers have announced launch sales during the quarter, particularly in commercial real estate.
Is that an opportunity that youre looking at or you could look at it in the future.
Yes at this point, we're not looking at that we're comfortable with our return and risk requirements within our portfolio that said if something compelling comes along thats. The right economics and allows us to redeploy into higher value capital opportunities, we would certainly look at it.
Great. Thank you.
One moment for our next question.
Our next question comes from the line of Steve Moss with Raymond James Your line is open.
Good morning.
Morning, Steve.
Maybe just on loan yields.
I'm, just curious where is loan pricing. These days in terms of just what is the total add on yields I know you guys typically talk in spreads but.
Curious as to are you in the sevens for loan pricing these days or just how to think about that.
Yeah, Steve.
Steve the loan yields for the quarter was around 735 for June It was just about seven seven.
Consistently receiving spreads in the mid threes for the past several quarters, the new business new production, we're putting on it's coming at a higher spread than.
Historical levels.
Okay great.
And then in terms of.
Cumulative deposit beta I think I heard mid fifties earlier.
It kind of sounds like you guys think the margin maybe troughs here or may.
Deposit costs peak in the fourth quarter I should say.
And stabilized for 'twenty 'twenty horse kind, how you guys are thinking about right now just want to make sure I hear that correctly.
Yes, I think Thats a fair assumption.
Also we're starting to see we've been seeing this but we started to see in the second quarter, a very nice ramp up in the generation of new accounts. So as an example.
New depository accounts were at the highest level they've been in the prior six quarters in two quarter or second quarter of 'twenty three.
So I think you have you have the.
<unk> of noninterest bearing to interest bearing which is going to impact. Your beta you also have the ability to add new deposits as well as those incremental new deposits probably come on at a little higher cost, but the engine that we've created obviously shows as I mentioned that were at the highest level in the last 18 months what are the things I think that impacts.
That is the decline in some of the projected loan loan growth, we were growing 17% in the first quarter at 10% This last quarter and as we guide towards the mid single mid single digits for the next two quarters.
The demand for deposits are going to decline within the organization as well so that should have a significant impact on what this forward looking data look like.
Okay. Appreciate all that and maybe just one more thing in terms of the dynamic of slowing loan growth here.
How much do you think is customer conservatism versus.
Wider spreads here going forward.
Any sense yet for the economy.
Our customers are.
Yes, Steve it's really.
Both are a factor certainly the widening spreads as has had customers re look at the value of the projects and many are holding off and pausing until they see where the interest rate environment level.
Levels out add from the cautious standpoint, we're not seeing as much certainly C&I companies are managing their inventory tighter than they had been but we're not we're not seeing the same level of cautiousness.
Okay, great. Thank you very much.
Thanks.
One moment for our next question.
Our next question comes from the line of Jon <unk> with RBC capital markets. Your line is open.
Good morning, guys.
Zach.
Just a few follow ups I think most of my questions have been answered, but just back on the.
Margin.
Bigger picture you guys are optimistic on the margin beyond the third quarter does it is it returning to normal it feels that way but.
I thought I'd ask it.
Yes, I think one of the interesting things is how we look at the margin and you go back over a two year period.
The volatility in our margin it's been about a 22% number versus about 30% of the peers. So I think in an inverted curve, which are cyclical these things happen.
<unk> staffing margin compression I don't anticipate operating in an inverted curve for the rest of my career I'm just talking about the rest of the management team does either so the margin will automate rebound and come back up to more normalized level.
And when that happens I think.
Franchise value of the organization is going to increase dramatically, we're opening up more accounts today than we've ever opened before.
Amazing individual vertical business lines that we werent in before and the balance sheets, obviously shifted.
345 years ago, 17% as balance sheet was in residential mortgages you look at the concentration of them haven't C&I today and the diversification even within the <unk> portfolio. It's a very different balance sheet and we believe that there will be definitely some benefit coming coming forward as the interest rate environment normalizes.
Okay. So control what you can right.
Yes, okay.
Mike on Slide 12, there was a comment about the last bullet additional variable expense opportunities.
What's an example of that and what's the potential magnitude there.
Sure. It's some of the usage things right that we have discretion over good example that could be consulting costs.
It could be the additional usage of contracts because we're going to go through our core conversion in the fourth quarter that might spill off than we might have some additional savings there as well, but it's also adding two knowledge, having an organization that looks at cost and with a critical eye and tries to eliminate everything that we don't really need.
To do.
Okay.
And then I guess the last one on.
The allowance, but did you guys change your qualitative.
Thinking at all in terms of your reserve levels I'm just curious.
Do you expect a worsening economy.
You feel like a worsening economy is already inflicted in your reserves just give me some thoughts on that thanks.
I'll start off here. This is Mike and then our Chief Credit Officer is here as well so I'll add some fill in where I get this wrong, but.
I think the first thing to note on this is we did migrate the weightings on Moody's that's the first thing to kind of take into account and we went to.
A slightly higher percentage, 10% more on the baseline and we reduced S. Four which is that more severe recessionary why did we do that as Moody's.
Defines their estimates each quarter the baseline started to capture more of the if you will negative.
Both GDP and unemployment numbers and so we've always been conservative in our weightings I think relative to our peers on this but as we've taken a look at their numbers it became pretty apparent that the baseline would capture more of that so we did make that change which has some bearing on allowance and the seasonal model and then I'll turn it over to Mark.
Alright, this is market failure.
Mike Thats absolutely accurate.
We had been holding.
The.
50, <unk> 'twenty with 30% and 20 on the two downside scenarios based off of a continued migration to a slightly more negative conservative outlook on Moody's baseline. We did back that all that being said that was not a material change.
The overall weighting because our movement of the 10% was offset by the more negative outlook on the base side and so we view that that is modest.
We did not impose any additional qualitative overlays on the.
The a triple oil for this quarter as we did not see any any material weaknesses and portfolio that warranted qualitative adjustments upwards.
Looking at performance of portfolio in the future to see is that that may be.
<unk>, but the performance of portfolio continues to be exceptionally strong and does not warrant any qualitative overlays.
Okay.
The interesting comment on the baseline being almost approaching us for so thats a good comment. So thanks guys I appreciate it.
Thanks Darren.
That concludes the question and answer session. At this time I would like to turn it back to IRA Robbins for closing remarks.
Just wanted to say, thank you to everyone for taking the time to listen to the call today.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.