Q4 2023 Valley National Bancorp Earnings Call
Okay.
Thank you for standing by and welcome to the Q4 'twenty to 'twenty three Valley National Bancorp Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
A question at that time, Please press star one wondering your telephone please.
Please be advised that today's call is being recorded.
During the call.
Please begin.
Good morning, and welcome to valleys fourth 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 at valley Dot com when discussing our results were.
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 to 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.
I'll turn the call over to IRA Robbins.
Travis.
In the fourth quarter of 2023 Valley.
Valley reported net income of $72 million and earnings per share of 13 cents.
Exclusive of non core items, including the one time special FDIC assessment tied to the years bank failures adjusted net income and EPS were $116 million.22, respectively.
While I'm pleased with the quarters balance sheet trends I'm disappointed with the earnings and profitability metrics, which I will discuss shortly.
On the positive side, we made progress enhancing C&I growth, while curtailing commercial real estate originations.
This enabled us to both create organic capital and reduce funding needs.
On the deposit side, we added a remarkable 14000 net new consumer households, and 8000 net new commercial deposit relationships during the year.
This represents four 5% growth in consumer households, and 10, 5% growth and commercial relationships for the same period a year ago.
The ongoing addition of new deposit clients is critical as it directly relates to valley franchise value and our future earnings potential.
Our new customer growth was broad based across all of our geographies and I might add was undertaken against the backdrop of the difficult external environment with midsize banks like valley were too often front page news.
During the quarter, our new relationships helped to generate strong customer deposit inflows, which enabled us to significantly reduce our reliance on broker deposits.
While customer deposit inflows were exceptional the organization focus on ensuring a successful core conversion in October likely led us to take our eyes off the ball relative to deposit pricing.
There is no doubt that this negatively impacted net interest income during the quarter.
And in a few minutes, Mike will illustrate some of the subsequent efforts that we've undertaken to manage these deposit cost going forward.
From a strategic perspective, we are refocusing on holistic customer profitability and will return to pricing deposits in consideration of balance and return as opposed to just balance.
The quarter was also impacted by a few additional factors worth calling out.
First wave service charges and proactive efforts taken to supplement customer support both associated with our core conversion weighed on quarterly earnings by an estimated amount equaling approximately one seven per share.
These efforts were knocked it out of an abundance of caution to ensure that our customer experienced smoothly transitioned to our new system.
I am pleased with the customer response to our core conversion.
That's some of the amounts of the extra support costs will persist in the first quarter as well.
Secondly, our provision was partially elevated as a result of a loan charge off and our commercial premium finance business.
The after tax impact of the associated provision was approximately one seven per share as well.
This business line has approximately $275 million and outstanding balances and we have an agreement in place to sell this business and a portion of the outstanding loans in what is expected to be a modest premium during the first quarter of 2024.
While this quarters earnings are not satisfactory.
Continue to believe that our strategic progress over the last few years position us well in the evolving banking landscape.
The financial consistency that we have achieved in support of the strategic evolution is evident in our tangible book value growth results.
Our state of tangible book value has increased 52% since 2018.
Which is more than double our proxy peers at 25%.
Our value creation as measured by tangible book value plus the dividends, we have paid out totaled 90% since 2018.
Or more than one seven times, our proxy peer median of 53%.
From a balance sheet perspective, we have successfully transformed and diversified our funding base.
At the end of 2017, approximately 92% of our deposits were held in our branch network.
By utilizing technology to expand our delivery channels and establishing new growth oriented deposit verticals, we have reduced our reliance on branch deposits to just 65% today.
From a geographic perspective.
78% of our total deposits were in the northeast branches in 2017.
Today that number is down to just 45% of total deposits.
Our focus on geographic diversity and holistic relationship banking has benefited the asset side of our business as well.
In 2017.
78% of our total loan portfolio was in New Jersey, and New York.
That composition has declined to just 55% today.
In 2014, we entered Florida with the acquisition of first United Bank, which had just over $1 billion in loans.
Through additional strategic acquisitions and targeted organic efforts in this dynamic growth oriented market.
Our Florida loan portfolio has expanded beyond $12 billion.
There continues to be significant diverse commercial growth opportunities available to us in Florida and across our entire footprint.
The proactive evolution of our technology infrastructure is less tangible but equally significant achievement for our organization.
We have recruited and developed a strong pool of technology talent, which has helped us to modernize our infrastructure and positions us to be on the leading edge of further advancements in the banking space.
Our technology adoption has allowed us to scale the franchise with limited net head count growth.
Since 2018, we have nearly doubled our asset base from $32 billion to $61 billion with a near 17% increase in head count.
Our recent core conversion align technology across our company and provides additional capabilities, which we look forward to leveraging for our clients.
As we move past the conversion, we anticipate that further efficiencies will offset emerge.
We are also focused on enhancing a more uniform data infrastructure, which allows us to react quickly and purposefully to changing market dynamics.
And internally I working group has been established to help us determine appropriate potential use cases and to begin to execute on related opportunities.
Yeah.
And I want to pivot to our strategic imperatives for the coming year.
While none of these are new initiatives for valley, we continue to believe that they will drive shareholder value over the long time.
We have an incredible service oriented branch network across our dynamic geographic footprint.
Generate more consumer and commercial activity out of these locations in 2024.
As the current increasingly normalizes, we will further leverage the existing specialty niches that we have established and we will build on our momentum for the second half of 2023.
Secondly.
We will continue to deemphasize investor commercial real estate lending in favor of C&I and owner occupied Cree.
We have restructured our commercial banking organization to better align expertise and experience with opportunities in our markets and business lines.
Our enhanced treasury management capabilities and product offerings will support expanded wallet share among our customer base and help us to acquire new customers on the commercial side.
We have also adjusted our incentive programs in support of our deposit gathering and lending goals, which will drive further strategic alignment across the entire organization.
Finally, we will continue to grow our differentiated noninterest income businesses to diversify our revenue base.
Through organic and acquisitive efforts, we have developed a robust suite of fee income products and service offerings for our growing customer base.
The recent enhancements of our Treasury management offering will help to offset certain capital market headwinds associated with lower swap related revenues in 2024.
The industry challenges of the past year confirmed to me that we have undertaken the right long term strategy and I'm pleased with our ability to navigate this difficult year.
2024 will be about accelerating our progress towards achieving our strategic initiatives and improving our performance as we continue to mature.
As we execute on these initiatives I wanted to reiterate that we continue to prioritize tangible book value growth we.
We believe that consistent growth intangible book value would drive shareholder value over time.
And we continue to expect to outperform our peers on this metric.
With that I will turn the call over to Tom and Mike to discuss the quarters growth and financial results.
Thank you IRA.
On slide six you can see the quarter's deposit trends direct customer deposits increased approximately $1 $6 billion to largely offset the significant $2 $3 billion reduction in indirect deposits.
The meaningful reduction in our reliance on wholesale deposits was a key highlight of the quarter.
We generated strong growth in our interest bearing transaction accounts and we're pleased by the slowdown of noninterest deposit runoff.
That said, we acknowledge on a competitive interest rate is one of the tools used to support our generation efforts during the during the quarter.
Still the pace of deposit cost increase has slowed and in a moment Michael outlined efforts, which we have undertaken to control interest expense on a go forward basis.
The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business lines.
Traditional branch deposits increased approximately $600 million during the quarter.
This growth was spread across our geographic footprint.
Our specialty niches increased approximately $1 billion as.
As well with key contributions from our online delivery channel and technology deposit team.
Turning to the next slide you can see the continued diversity and granularity of our deposit base.
No single commercial industry accounts for more than 7% of our deposits.
Our government portfolio remains diversified across our footprint and is fully collateralized relative to state collateral requirements.
Slide nine provides an overview of our loan growth and portfolio composition.
At the top left you can see at a proactive growth slowdown which occurred throughout 2023.
Ultimately, we achieved the low end of the 7% to 9% growth target that we had laid out at the start of the year.
Annualized loan growth slowed consistently as the year progressed, illustrating our ability to be responsive to changing market dynamics.
The following slide breaks down our commercial real estate portfolio by collateral type and geography.
As a reminder, we have an extremely granular loan portfolio, which is well diversified by collateral type and geography.
Our debt service coverage and loan to value metrics remained very attractive.
We continue to closely monitor pools of maturing and resetting loans and believe that our borrowers are well positioned to absorb the pass through of higher rates.
This reflects consistent underwriting discipline and conservative cap rate and significant stress testing efforts at origination.
The next two slides provide additional details around our multifamily and office portfolios.
Multifamily perspective, our $8 8 billion to our portfolio includes $2 billion of co op loans with an extremely low loan to value.
Exclusive of our co op portfolio, our Manhattan multifamily exposure is a mere $600 million, which you can see in the last column of the table.
The remainder of the portfolio is well diversified across our footprint with low average loan sizes and attractive loan to value and debt service coverage ratio metrics.
With that I will turn the call over to Mike <unk> to provide additional insight into the quarter's financials.
Thank you Tom.
Slide 13 illustrates valley as recent quarterly net interest income and margin trends.
End of period noninterest bearing deposits stabilized the decline in noninterest deposits on an average basis weighed on quarterly net interest income by approximately $4 million.
Throughout the quarter, we replaced maturing direct and indirect Cds with relatively high yielding interest bearing transaction accounts and promotional retail Cds, which was the cost of our significant customer deposit growth during the quarter.
The right side of this page outlines efforts that have been undertaken to more precisely manage our funding costs on a go forward basis.
We have cut back to high yield savings rate in our online channel, but remain competitive.
We have also significantly reduced our one year CD rate, which will help to mitigate the repricing issue that we faced during the recent quarter.
Finally, we are working with our relationship bankers to ensure that deposit rates are reasonable in the context of holistic customer profitability.
In the few quarters. Following the industry has challenges in March we priced deposit products to ensure that direct customer balances rebounded.
As we continue to move past these challenges, we will price products with a more even consideration of balances and profitability.
Turning to the next slide you can see that noninterest income on an adjusted basis was generally stable from the third quarter of 2023.
Deposit service charges declined sequentially as we waived certain transactional fees around the time of our core conversion.
Other than this growth trends were relatively strong for the quarter. Despite the headwind of swap revenues.
On the following slide you can see that our noninterest expenses were approximately $340 million for the quarter.
Adjusting for our $50 million of FDIC special assessment, and certain other nonrecurring litigation and merger charges.
Noninterest expenses were approximately $273 million on an adjusted basis.
Compensation costs continue to be very well controlled with.
The sequential expense increase was primarily due to higher traditional FDIC assessment costs consulting costs occupancy and advertising expenses and the seasonal uptick and other business development expenses.
A portion of the quarter's expense increase was associated with certain consulting and customer support initiatives associated with our core system conversion in October.
While the customer experience associated with our conversion has been extremely positive. Some of these costs will have a tail into the first quarter.
As you know the first quarter also has traditional seasonal headwinds associated with payroll taxes.
We are very pleased with our ability to proactively control head count and associated compensation expenses throughout 2023.
We expect that 2024 will be a more normal year in terms of expense trajectory and as you will see shortly we anticipate mid single digit expense growth in the coming year.
Slide 16 illustrates our asset quality trends for the last five quarters, while non accrual loans ticked up somewhat during the quarter. They remained relatively flat on a year over year basis.
Net charge offs were $17 million during the quarter and included approximately $5 million associated with our commercial premium finance business, which is under an agreement to sell during the first quarter of the year.
As a result of our higher provision or allowance for credit losses for loans increased one basis point during the quarter to 93% of total loans.
The next slide illustrates the sequential increase in our tangible book value and capital ratios.
Tangible book value increased nearly 2% from the third quarter of 2023 and benefited from a reduction in the OCI impact associated with our available for sale securities portfolio.
We are pleased that during the year, we were able to support our strong loan growth and organically accrete regulatory capital.
Based on our expected loan growth in 2024, we would anticipate this trend to continue.
We lay out our expectations for the coming year on slide 18.
We anticipate generating mid single digit loan growth with a focus on C&I and non investor commercial real estate in 2024.
Based on consensus interest rate expectations for 2024, we would anticipate net interest income growth between three and 5%.
Noninterest income should grow between 5% and 7% on an annual basis as headwinds in our spot business are more than offset by continued scale in our wealth insurance and tax advisory businesses as well as our recently enhanced Treasury management capabilities.
Noninterest expenses should grow approximately in line with revenue.
FDIC costs and inflationary pressures are offset by savings from our core conversion and the continued benefits of our previously announced expense initiatives.
<unk>. This guidance together, we expect 2020 for EPS to come in just slightly lower than the existing 2024 consensus estimate of $1 <unk>.
With that I'll turn the call back over to the operator to begin Q&A. Thank you.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star 111 moment for our first question.
Our first question comes from the line of Frank Schiraldi of Piper Sandler Your line is open.
Pardon me Frank Your line is open.
Oh, sorry.
Sure.
Just on the.
The.
NII Guide I recognize you guys follow ups.
On the market and the forward curve here and most of those rate assumed rate cuts are.
Backloaded in the year.
What sort of annualized basis.
Our annualized pickup.
In terms of either NII or NIM.
From a given 25 basis points out what's what's the assumption.
So I want to make sure I understand the question you want to know what just the impact would be of a single 25 basis point increase.
I'm sorry.
Yes, basically as you get.
We got three or four cuts I mean, I'm, just trying to assume or get a sense of what 25 basis points does for on average for the NIM or NII.
Our modeling.
So I'm going to direct you back to our guidance around 3% to 5%. So what we're expecting right now and 2024 is roughly 175 basis points that will affect mostly short end of the curve as you get less inversion in the curve.
First increase does start and the end of March you don't get much in the first quarter, but you are correct there more back loaded on the cuts into the fourth quarter of 2024.
So while I'm not prepared to answer a question on what is it exactly at 25 basis point cut because it's going to depend upon the mix of the funding sources at that time.
For the full year, we're expecting.
3% to 5% increase in NII.
That should drive a slightly higher NIM year over year.
Thanks, Brent conceptually, we're relatively neutrally positioned to the short end of the curve. So there is not as significant.
Move based on if those cuts don't materialize, we're much more exposed to the longer end.
Impact fee.
The benefit that we'll get at our fixed rate loans mature and reprice.
Okay. So I guess over the full curve.
You're still liability sensitive, but more neutral to the front end.
Yes, Thats correct okay.
Okay and then just.
Kind of a I don't know more theoretical question in terms of the business mix has changed a bit here over the years with <unk>.
Personalize deposit opportunity the opportunity on the C&I side, which you guys.
Do you see in 2024.
More normally slow.
Yield curve.
What do you think sort of a normal sort of margin is normalized NIM is for valley and the way you build.
The balance sheet here.
Yeah. This is IRA and I think it's a lot higher I mean, obviously being an inverted curve for three years running the balance sheet in which we did where we try to take as much of a neutral stance as we can it's a real challenging environment for us.
That said as the curve does get to a more normalized focus we do anticipate significant margin expansion as we get back to an appropriate environment. We've done a really good job shifting the commercial growth within the organization, we've been running a 10% CAGR on the C&I growth for an extended period of time and as you mentioned that diversification.
<unk> of the funding base really will help us as that curve gets a little bit more normal and we can get back to an appropriate deposit pricing.
Approach across the organization.
Okay, Great and then if I could just sneak in one last one on that.
That kind of front.
In terms of the specialized deposits coming onboard in the quarter the growth there.
And.
Just thinking through the betas on your deposit book the specialized versus.
The deposits in the branch.
The beta is expanding here given.
The national businesses.
And would that help you obviously help you maybe to a greater degree in a down rate environment.
Impacted right off the bat I think the mix shift from out of noninterest bearing really impacted us during the course of the year. So thats changed a little bit of the asset Leigh Leigh ability right. So we do have more sensitivity on the downside on the deposit cost and what we did when we were running 28% to 29% noninterest bearing deposits as those are now sitting in.
Interest interest bearing deposit so that is going to be a benefit to us.
I think as you really mentioned, it's the diversity and the granularity that sits within that deposit book that we're really excited about it and what the opportunity is.
As we mentioned earlier on the call I think deposit pricing got a little bit away from us as we are focused more on the core conversion.
I do believe it's an easy fix it will.
We will focus on it and make sure that 2024. It gets back to results that you would expect from us.
Okay, Great I appreciate the color. Thanks.
Thanks. Thank you one moment please.
Our next question comes from the line of Steve Moss of Raymond James Your line is open.
Good morning.
Just following up here on <unk>.
Liability side of the business just curious with regard to her.
How much of your fixed rate loans and securities repriced in 2024.
Yes, Steve So we've talked in the past, we have $20 billion of fixed rate loans. It is not necessarily linear so we have more.
More of Arkansas loans reprice in the second half of the year than during the first half.
But in total it's between three and $4 billion that would reprice this year, but again, that's relatively back loaded.
Okay and then on the.
On the security side.
Im assuming theres, probably just minimal cash flows for the upcoming year.
Yes duration securities portfolio has extended.
Seven years give or take.
We get.
Yes, it's really de Minimis, it's a $5 billion portfolio to couple of hundred million dollars in the year.
Okay.
Then on credit here, just curious get a little more color on the uptick in C&I and CRE encase. It sounds like some of it from the premium finance that you charged off this quarter, but just kind of curious as to what the loan types are and any incremental color you can give.
Yeah, Hey, Steve It's Tom.
There there was an uptick in that non accrual primarily in the CRE business $20 million $10 million and has since been repaid when you look at our our performing past dues you will see a decline on the commercial side and very little if any in that 90 day bucket. The increase in the accruing past dues is on that residential side.
And the color on that it's our jumbo on balance sheet portfolio average loan to value of 58%. We don't expect any loss historically looking over a 15 year period, our real estate portfolio ran at about 35%.
Charge offs against our peer banks, we expect that trend to continue we are seeing.
Really improvement across the board our metrics remained solid, especially on the commercial side.
Okay and just curious.
I noticed in the Texas, you guys did refer to an uptick in classified assets just kind of curious where that criticized and classified assets in the quarter here.
You'll have the number but the uptick we do that forward review of all of our loans. Our total the total portfolio, especially looking early on in the year at the ones that are repricing of resetting there was a migration of those loans in the third quarter, primarily Internet special mentioned category, where they might have fallen below well right out of one <unk>.
<unk> debt service coverage I, just want to remind everyone. The loans that we repriced during 2023 and I'll review of 'twenty 'twenty four repriced resulted in no modifications of any of the contractual terms to the <unk>.
Repayment, but Travis if there is a different number that im referring to yes, I don't have the number in front of me, but I would say in the third quarter that stress test process that Tom referenced resulted in a more significant.
Kris and criticized and classified loans again, not an impression that we would see additional losses, but just the way the debt service coverage shakeout.
In the fourth quarter. It was a much more normal increase so it does not matter.
And this is Mike that increase would have been obviously in special mentioned credits not the more extreme.
Greetings.
Okay got it.
And maybe just following up to that point as Youre seeing some borrowers get close on debt service coverage ratios I'm just curious what color you can give around the work whether it's a workout process bars.
<unk> ability to maybe pay down the loan just kind of what youre seeing and what potential.
NPA formations you could see here in 2024.
And again, we haven't had to modify any terms to those borrowers where we were repricing in the past year year and a half.
Typically our underwriting standards, which start we use a higher cap level than probably our peers use we underwrite to current cash flow, we don't underwrite to future cash flow, our leverage tends to be lower going and our average loan to value on that real estate portfolio is about 60%.
Across all of our asset classes. So there is flexibility, we do a lot of business with existing comfort customers. They have the wherewithal.
It.
We will either get additional collateral or pay down or reserves to support any funding below.
At appropriate level.
The other piece I wanted to add the refinance activity, especially in multifamily picked up in the fourth quarter. So it did allow us to exit those non relationship noncore loans.
Sure.
Okay, great. Thank you very much for all the color.
Thank you. Thank you for a moment please.
Our next question comes from the line of Michael <unk>.
<unk> Your line is open.
Okay.
Okay.
Hey, good morning, Thanks for taking my questions.
Alright.
I understand this isn't necessarily.
Something you guys guide to but I'm trying to understand.
Some of the cadence of kind of profitability around NIM and some of the expense targets and the rationalization I think which will start to have a bigger benefit in the middle part of the year.
Are you guys willing or able to just kind of qualitatively talk about how youre thinking in the current budget about what the kind of return ROE profile will look like as you exit 'twenty four I mean, it feels like the first half of the year might continue to be a little bit depressed, but just wondering if you could kind of give any indications around that cadence.
Relative to the guide that you provided.
Yes, I think your perspective, Mike is pretty accurate. So I think in the first quarter of the year I mean, whether it's on the expense side, the headwind to payroll tax or on the NII side bake out and other things and the lack of kind of change that is projected in the industry environment.
We anticipate and are generally stable margin I'd say in the first quarter improving somewhat in the second quarter, and then getting more expansion in third and fourth quarter.
The way the budget is still now based on the implied forward curve in terms of expenses. We have if you look back to last year, there was $7 million pick up in the first quarter related to payroll taxes. So youre looking at something similar there as we stand here in December.
On an annualized basis got $20 million of expense saves out related to the headcount reduction that was enacted in June. We think there is another $8 million or so give or take on and from an annualized perspective from.
Further actions here in the first quarter on the personnel side and then as we get into the second quarter and beyond there should be some say it's related to the core conversion. Some of these elevated costs, we've talked about with customer support efforts and other things. So I think the first quarter there will be some seasonal expense headwind, but then youre looking at general stability.
Over the three quarters. Following so I do think the profitability improves throughout the year when you blend it all together again at the midpoint of our range to get to the $1 $4. Five that puts you at an ROE level that I'd say, it's similar to what we've achieved this year, but it does improve as year goes on.
Yeah, I mean, it should kind of put you maybe in the 90 days on the ROI on the exit I guess the question is if revenue to expense grow dollar for dollar right, that's not going to really improve much.
Kind of what the outlook is for 24, but I guess, what gives you confidence that in 'twenty five and beyond you guys can get back into a more positive operating leverage territory and continue to see those improvements kind of carryforward and 25 I mean is it just margin is there other kind of unit economics in some of the specialty businesses that you're growing that will benefit from scale would love some additional color there.
I think there is a lot of operating opportunity for us and I think if you look at the net interest income side right sitting in an inverted curve hopefully isn't one that we sit in for that much longer but it definitely has an impact on us I think the core conversion is really understated as we think about what the ability to scale it looks like for us we.
Every single one of our clients into a new core platform across the entire organization.
That said, we put in 261 different API is sitting on top of that core conversion to think about what that client experience looks like ego into valley you open up a checking account and one of our branches. It's the exact same platform that you do when you are opening up a digital account sitting at valley. So we're very smart I think in the approach that we took as to how we were going to leverage the <unk>.
Infrastructure and technology base, so from a scalability perspective for us and we're not paying per individual unit. We opened up an individual account to a core provider somewhere we really have a technology infrastructure that scalable here thats focused on what that client experience is going to look like and will definitely drive.
Outsized growth and.
And when I talked about some of the commercial growth numbers in the consumer growth numbers. Those are household growth numbers not not even individual accounts that was done during a core conversion when everyone hated mid sized banks. So I think theres a lot of positive.
When that we have when we think about what we're doing from a franchise value perspective. So I'm really excited about what I think the opportunity is on the expense side of the book, but the revenue side is definitely going to begin to accelerate as well.
Helpful. And then just lastly kind of on the same line of questioning just the you guys had the $5 to 7% loan growth target for 'twenty, four obviously still trying to.
Look look at our fourth quarter originations say with $2 2 billion.
One moment please.
Can you guys still hear me.
Losses.
Yes, one moment please.
Okay.
Ladies and gentlemen, please standby for one moment.
Okay.
Yeah.
Yes.
Ladies and gentlemen, please standby.
Okay.
Okay.
Okay.
Okay.
Thanks.
Okay.
Okay.
Okay.
Ladies and gentlemen, thank you for standing by.
Ladies and gentlemen, thank you for your patience with speaker should be redo.
Momentarily.
Thank you.
Okay.
Sure.
Okay.
Thank you.
Okay.
Okay.
Valerie can you hear us, yes, Sir loud and clear.
Okay, sorry about that.
We still have missing burrito and all connected Asaf.
Okay, sorry, I might have gone we were hearing your question on loan growth, but it dropped out when you say yes.
No problem.
And.
I wish it was more just asking it's kind of same line of questioning just on the loan growth as you guys focus more.
On pricing of customers and holistic kind of customer profitability et cetera. Like that is there is it fair to assume that like the incremental loan growth in the customer loans that you're bringing on you guys would think with some of the deposit pricing changes et cetera that will be coming on it at better kind of.
Profit margins than than they were in in 'twenty, three or is there like a lag to some of those impacts or how should we think about that dynamic.
We will you should expect that our spreads on those will continue to widen and increase and give you a little context around the way we have seen a an uptick in that C&I pie.
Pipeline in that business is probably 70% of what its high point was that it represents 65% of our total portfolio and its across the all business lines, especially in our health care and fund banking aligned. So we are starting to see the improvement in spreads are holding.
And really just adding to that when you think about.
The compression we've seen in the margin is largely a function as we talked about some of the mix shift and some of the other repricing as rates stabilize which they seem to have or go down and the other really is going to be a significant benefit to us. They do value margin that we put on is around $3 50 to $3 60, which reflects.
The ability that we have from a pricing perspective, and how we're going about it from a profitability perspective, the new loans that we put on and we've been able to bring an equal amount of funding associated with that from a client perspective. So it's not as even if we're out in the brokered market. So.
So once we do get some stabilization, which we anticipate having an on that mix shift.
There really is upside for what that margin looks like based on the fact that the new originations as Tom mentioned $2 billion came on at a spread of positive 350 for us.
Helpful. And then just I wanted to clarify something quick then I'll step back, but just Mike can you repeat I just want to make sure I heard it correctly.
The rate assumptions in baked into the NII guide around fed funds and then just to be clear Travis you're basically saying that like on the short end, whether its two cuts three cuts for cuts it doesn't actually have a huge impact to 2024 is more more of the long end and then some of the back book and other dynamics that we've been discussing just wanted to make sure I heard that all right.
That's correct.
While we haven't laid out specifically and we expect the fed to cut this amount on this day I can tell you. The first rate cut or anticipate is 25 basis points, but they accelerate as the year. So we get larger rate cuts in the third and fourth quarters and again, the biggest benefit to us would be a lesson.
Many of the inversion in the curve and a reduction in short term interest rates hence.
Hence why we took the cost this quarter to shorten our duration on our liabilities are just funding generally as Tom talked about around the mix of our deposits moving away from.
<unk> and some of our maturing where they were indirect or direct Cds that we had in the fourth quarter to money market and transaction accounts and that was all done purposefully to prepare the balance sheet for the fed to cut.
Yes.
Okay. Thank you guys I appreciate taking my questions.
Thanks.
Thank you one moment please.
Our next question comes from the line of John Awesome.
RBC capital markets. Your line is open.
Thanks, Good morning.
Just follow up on that Mike is that the liability shorten him is that largely complete for you guys at this point.
It's largely complete there is another big piece in the first quarter still to come because there was loaded front end loaded because we were preparing for this when we were putting on lease liabilities.
Liabilities with duration going back to even the first quarter of last year. So there is another piece in the first quarter and after that it tails off quite a bit.
Okay. Good.
And then on <unk>.
Same topics slide <unk> talked about the CD rate reductions in December.
And then you have some more coming in.
St maturing liabilities in the first quarter, what was the reaction on the CD repricing and as this maturing liability pieces that deposits as well or what is that and where can that reprice.
So that the customer impact on it is.
Is yet to be seen but I don't expect it to be exchanged so it'd be really clear about that one year CD rate. The majority of the impact of that would be the Cds that will roll. So if you remember from our previous comments back in 'twenty three we put on several CD specials, most notably around a 13 month duration.
Now those things are rolling at 12, and so we are reducing the rule.
Okay.
We generally average between 70% to 80% retention of the Cds when we're in market. So I think there should be a pretty big tailwind here, okay. Good and then.
IRA that's it's kind of a margin question, but maybe not but.
It feels like maybe the deposit pricing pressure was a little bit more than you expected, but to me I look at it and I think about the numbers and maybe we're at the bottom of the margin.
So curious on that and then also curious about the trade off decision you talked about earlier about <unk>.
Ira D. Robbins: Deposit growth against maybe some of the promotional pricing or things you did together new accounts and bring in deposits can you talk a little bit about that trade off decision that you guys made.
I think from a big picture perspective, there were a couple of Airbus blindness.
Made a conscious decision to go shorter right on our liability side. So you can sort of extend that or kept it the same duration as we were having before but when we started to see some movement in November and sort of where the expectations were maybe even a little bit earlier, where the forward curve was on that short end.
We definitely moved a little bit shorter so that definitely negatively impacted.
The interest expense for the quarter.
Do think that there'll be a positive impact to that though as we think about where 2024 comes out sort of for the full year period.
That said from a macro perspective, it was a very challenging year for an organization like ours looking at the beginning of the year, what happened with signature what happened with Seb and the others and we were really focused on retention of deposits and as a result of that I think we were probably maybe too lenient on some of our clients.
We ask them to some of their rate request.
A lot of money that move to treasuries right off the bat at that said you know we were really competing with that today and the conversations we have with clients and not so sure that we needed to have in necessarily do that and we're going back re engaging with our clients again, we were a bit distracted I think about fourth quarter basis with the core conversion and probably even in the third quarter of even leading up to that.
Core conversion for.
Getting the core conversion done was was important.
We did an unbelievable.
<unk> E mail complaints so that's it from clients add up an entire client base is really nothing so theres a lot of focus on retention of clients through that core conversion.
Again, now I, just think we get back having appropriate conversations with our clients appropriate conversations when it comes with the pricing should look like.
And we will get the deposits back to an appropriate date as to what it should look like but I think most importantly, we did have an unbelievable core conversion. We've retained all of our clients. We actually grew clients through our core conversion, which doesn't even necessarily happen. We put on as I said, 10.5% household growth in commercial during the during this year I mean those are.
On numbers so.
So well once again I said I'm, not so happy with where the fourth quarter ended up big picture I'm not that concerned.
You shouldnt be yourself up too much it's not terrible but.
Just one more thing on noninterest income I kind of asked this earlier, but it implies a decent step up your guide like about $140 million incremental from the run rate that you had in the fourth quarter do you guys think we're near the bottom or at the bottom on that interest income at this point.
So we're.
We're certainly getting close so let me do this I'm going to direct everybody to slide six I know that this is a really important topic and when you look at the quarter over quarter cost increase in deposits you will see that we started off at 60 basis points that we had two consecutive quarters at 49% in the third quarter to fourth quarter, its only 19 basis.
So why do we feel better about the direction of NIM, it's namely that combined with the fact that we're starting to see some stabilization and maybe in our noninterest bearing accounts that noninterest bearing rotation going back to when we.
Closed on what you mean, when we had 36% of our total total funding sources.
In noninterest bearing.
Ira D. Robbins: That's come down to 23% now in December starting to see some stabilization and when you combine that with the deceleration in the overall cost of deposits. That's why we feel like there is some.
Additional increase in our <unk> 2021 plays out obviously, we need fed rate cuts to.
Capture all of that opportunity.
Okay, Alright fair enough. Thank you guys.
Thanks. Thank you one moment please.
Our next question comes from the line of Steven Alexopoulos.
Of J P. Morgan your line is open.
Hey, good morning, everyone.
Hey, Steven.
IRA went to start so when you took over as CEO one of your top priorities was improving the efficiency ratio right and I know it was a rough year for everybody because of what happened with rates and NIM pressure et cetera, but when I look at the strategic imperatives for 2024 very surprise it felt like you've moved the goalpost a bid that.
Improving where we are is not on there is this still a top priority for you. It should we expect to see improvement this year.
Yes look I think the contraction of what we saw in the efficiency ratio is largely just a function of the NIM, Steven right and as we get back to better core funding as we get back to some better diversification that sits within that asset asset class. The NIM will definitely expand as a result of that.
Steven: We were down I think we were at 3325, plus or minus employees when I took over.
We're sitting around 3700 today and where we are.
Steven: 2000, $21 billion back then and $60 billion today.
I think we definitely focus on what the efficiency looks like these definitely embedded technology and here.
For me, it's not something that's even caught out as a strategic imperative is just sort of in the core of who we are today I think where we're very focused obviously on what that efficiency is as.
As I mentioned earlier, the technology infrastructure that we put into place allows for scalability, which is something that's important as to the technology that drag and what the cost is for that isn't going to be nearly what it was.
Before so definitely not focusing on it is calling it out is this something that.
But some of the takeaways of Hey, it's not a priority for us.
I think it's just day in day out what we do and I think has been the NIM gets to an appropriate level back to where we think it should be.
Youll see that number get back down to a number that you'd be happy with.
Okay.
Let me ask so.
If we look at the <unk>.
Expenses, which were elevated you pulled out related to the system conversion how much was that in the fourth quarter whats expected in <unk> and what comes out of <unk>.
Yeah in the operating expense number there was $5 million associated with the core conversion.
In the first quarter, we anticipate that will be around 3 million seen maybe declined $2 million and then from there it should be should be out.
Got it.
Those are really the one time items or infrequent whenever you want to reach further than that but keep in mind. There is dual operating expenses and running those those with multiple platforms as well as our gift that quarter. Once we get to a better place which were pretty much right on the verge of youre going to have those being eliminated as well.
And I do just want to go back to your efficiency comments, Stephen I mean, if you look back a year ago, our efficiency ratio was 50% in the fourth quarter, 2000% to 60% this year, but relative to average assets noninterest expenses declined in that same period. So I mean, I think it is directly obviously its directly tied to the revenue environment that you described but I mean, we talked about the head count reductions that we've seen.
The limited head count growth over the five years relative to the asset growth that we put on.
So the efficiency ratio does tend to be more tied to just market dynamics and things, but structurally and what we can control I think we've done a very good job.
Yes.
Okay. Let me ask you guys called out.
Deposit pricing got a bit away from you because of the system conversion, what's the connection between the two.
But we have a lot of relationship clients, which in organization our size should have.
I think we have internal models as to how we look at pricing deposits I think the focus largely on our frontline staff was on reaching out to clients retaining clients.
And some of the profitability metrics as to how we think about engaging with our clients. How we want to direct certain conversations we're probably distracted based on client retention and based on.
Just conveying to clients what was going to be new with regards to how they approach the different systems that said I think certain deposit rates from the exception pricing perspective got it little bit out of hand, and there wasn't necessary the focus that should've been on making sure that we were.
Within our targeted guidelines as to what that pricing should be.
That said I am very confident that we'll get there very very soon.
Got it okay, if I could ask one last one sorry for all the questions.
I'm trying to square that.
The NIM drive as you said, it's neutral in the short run, but IRA you said multiple times your NIM should expand I think you said very nicely.
What's the curve looks more normal.
How long are we talking like what's the lag.
I would think it would be sooner than later, but if we get a positively sloped curve towards the back end of this year.
Is it a 2026 story before your NIM start to look more normal I'm just confused why the fed cutting rates given how much you are paying on deposits. You guys are one of the higher pairs is a more beneficial in the short run.
Thanks.
Yeah, I think right. There's the front end curve I think coming down definitely definitely is going to be.
Be impactful tests, but its the London, where we have a lot more that's tied to.
It's definitely going to be a pretty significant.
He can tailwind for us as to how we're thinking about where the net interest income is going to go I think the commentary was more along you know there is there is some day count issues really that goes into that first quarter as well as we're not expecting much change within the first quarter as well. So once the curve does begin to normalize we do believe that there's going to be some positive impact that net interest income and margin as well.
That said, they're really not ask you are forecasting anything's really changed into the tail end of the first quarter and there is that pressure from the day count right.
After that as well.
Got it okay. Thanks for taking my questions.
Thanks.
Thank you one moment please.
Our next.
Question comes from the line of Nick could you rally.
However, the group your line is open.
Good morning, everyone. Just a question on the noninterest income outlook, what are the primary drivers of the 5% to 7% year over year growth.
And are you expecting a reversion of swap activity closer to the first half of 'twenty three as opposed to the back half.
So the biggest driver would be as I said.
Said earlier stabilization in our noninterest bearing deposit balances, but that was the biggest driver.
Net interest income adjusted non interest income.
Non interest income.
Steven: I missed that sorry about that.
So you can see that in our in our IP deck as well it lays out the portions of that keep in mind that in 2023. We also had some one time events related to some revenue recognition that arent going to repeat in the prior year, but I think when you look at the totality.
Our fee income, we feel very good about where we're at because it only generates about 10% of our total revenue sometimes with the increases in any one category get lost.
But I do think given the lower loan growth that we have swap income will be somewhat challenged and it will be replaced with things like FX wealth management, and we have a very strong treasury management.
Project going on in our company and as we put on more C&I business, we would expect that to contribute our fee income as well.
Okay, and then just looking at the expense base as you mentioned some investments in some reduction opportunities throughout 2023.
Now that the core conversion is complete what <unk>.
Vestments or your most focus on to drive the next leg of growth for the company.
I think a lot of line of what some of the strategic imperatives that we talked about right. I mean, I think when we think about the growth in the C&I and some are especially in efficiencies that we have there is definitely some technology investments that we put forth that said you know a lot of different kind of a foundation perspective is already there and its just enhancements at this point for things that.
Were already put in place, but really largely aligned with what we've talked about on the strategic side, mostly focus on some of the C&I stuff.
Thank you.
Thanks.
Thank you one moment please.
Our next question comes from the line of Manning the value of Morgan Stanley. Your line is open.
Hey, good morning.
Can you talk about how you're thinking about deposit betas and deposit mix as rates come down.
Manning: Is that is there still a lag in how deposit yields come down as rates come down and do.
Niv deposits start to rebound once we get to a certain level and rates.
So yes, if you can expand on that and just talk about how youre thinking about deposit costs through maybe the first rate got to us as the next few rate cuts.
Yeah. This is Travis so I do think there is some lag on the beta side on the way down our model assumes around 35% beta on the way down as you can see the cycle to date with 57% on the way up.
Relative to noninterest bearing our budget and our forecast assumes that it remains relatively stable as a percentage of total deposits around 23%, but I do think there is a terminal point at rates.
With rates that you do continue to build that back up and obviously as we expand C&I and Treasury management I mean, those are strategic initiatives that are in place to continue.
Continue to grow noninterest deposits faster than what we actually include in our budget.
Some thoughts around that.
Okay very helpful.
On the loan growth guide of 5% to 7% and I know that includes the mix shift away from Investor CRE. So can you talk about some of the drivers and <unk>.
Also.
What is the cadence of that look like this is that more backend loaded and do you need some help from the environment there or is that based on customer conversations you're having today and there's a high degree of confidence that loan growth will accelerate as we get through this year.
It is based on the confidence we have in the conversation with customers and seen the uptick in their request from us and to build on our pipeline that we've experienced in the fourth quarter and so far into January and again pointing out to the originations in that fourth quarter $2 $2 billion up about $1 8 billion.
In the third quarter and the uptick in our pipelines and C&I contribution to that pipeline, where it is now the lion's share at 65% of our pipeline. So we are seeing that activity typically the first quarter is a slow quarter as people get their financial statements in place and you start seeing progressively more business as the <unk>.
Quarters rollout.
Got it and the the loan to deposit ratio should stay at about these levels of between.
<unk>, 95% to 105%.
Yes.
Great. Thank you.
Thank you one moment please.
Our next question comes from the line of Matthew Breese of Stephens. Your line is open.
Okay.
Good afternoon everybody.
Hey, Matt.
I had a few questions bear with me.
First I was hoping on the NII guide.
Could you provide just for context, but would love a sensor.
Dynamic it is what the guide would be our estimate with the guy who would be on the right no or minimal rate cut scenario for the year.
Manning: It's effectively captured in 3% to 5% range that we provided.
If rates stayed flat then we think that there would still be upside in NII and margin from our current levels.
Again, the most exposure we would have had to significantly lower rates on the long end.
So absent that.
Manning: Most other interest rate scenarios would end up in the kind of guide that we provided.
Got it Okay and I think you had also alluded that the NIM has already started to show some stabilization hopefully stabilization in the first quarter.
Can you provide some detail as to how the NIM provides on a monthly basis throughout the fourth quarter and if we started to see that stabilization already.
We did November was the low point I would say on a monthly basis.
Some of the factors that we've already talked about in terms of shortening up the liabilities and other things provided a little bit of pressure in the fourth quarter, but I would say that the margin again was at its low point in November if you look at what we originated.
Loan yields loan origination yields also bottomed in November and bounce back in December, but deposit new deposit origination costs actually declined throughout the quarter. So October was the high point in November was lower in December was even lower than that.
One thing I would throw out there too we do provide obviously in the deck with our loan origination yields are and they were declined eight basis points in the quarter, but new deposit origination costs declined 11 basis points in the quarter.
It's kind of feeds into the commentary provided on on spreads. So November again was a low point on the margin December was somewhat better.
If that's helpful.
Yes, any frame of reference for what the difference was low to high.
It wasn't that significant to be honest, adding November was four five basis points lower than December.
Got it okay.
A couple of other quick ones I noticed that service charges on deposit accounts was quite a bit lower lower quarter to quarter like 15% was that driven by the conversion and should we expect that line item to come back to its normal kind of $10 $5 million level, yes.
So for about a month around the conversion we waived certain transactional fees. If you look at the decline it was about a million and a half 2 million Bucks that's exactly what that was so otherwise that would have been flat.
Obviously, you put out a lot of deposits throughout the fourth quarter customer deposits. So that should continue to drive deposit service charges going forward that will also be supplemented by the treasury management stuff that we've talked about that generates deposit revenue as well in the noninterest income area.
Manning: Okay.
And then on the average balance sheet it struck me as odd.
Cash balances or interest.
With bank deposits was down 90 basis points quarter to quarter, the four 6%.
I, usually look at that as kind of a fed funds proxy what happened there what drove yields down so substantially in cash categories.
I think you're generally right. So we go through an accrual process to estimate what the cash payments received from the fed or the actual payments do tend to move around a little bit. So there are certain credits to go in and out. There. So you can have a yield that may not directly aligned with the interest in overnight reserves.
Okay, but generally speaking you should hear.
Model that back with fed funds.
Yes, I think Thats, that's generally right.
Okay.
On page 11 of the presentation you show the multifamily portfolio pretty good detail. What struck me was that a number of these geographies have weighted average debt service coverage ratio of one four times.
To me it feels a little bit risky given the repricing dynamics.
So one I'm curious those debt service coverage ratios are those at origination or the updated and then two do you happen to know what the existing loan yield is on this book versus updated.
Yes.
So its weighted average debt service coverage, our current Theyre based on recent rent rolls, we update that in the loan to values on a regular basis I don't have.
The loan yields in front of me, but I will tell you again, when we look at that repricing, we've not had to modify any of the terms on our repricing and our forward look where we will reassess each loan that repricing over the next 12 months. We expect the same results, but we will have to look that up if you have a traffic yes, we at least.
No.
I don't have the full portfolio in front of me, but I'll try and give you. Some color that may be helpful. So as we show on that page, Matt we have $420 million of fully rent controlled loans those will be the lowest yielding segment and that's four 6% yield we have another call. It 1 billion eight I'd say.
Exposure to properties that have some amount of rent control in them and that portfolio yields 545. So I think when you look broadly at multifamily youre going to be closer in total to the to that 545 deals give or take.
And those those buckets to $4 20, a pure rent regulated and the $1 8 billion of some rent argument does pass the stress test and you went through as well.
Yes, yes.
The $4 20, as pure rent regulated and it's one four which is partial 20% or less rent regulated.
You had mentioned some frustration with overall profitability levels.
Can you do better defined for us at which level you'd be satisfied profitability wise, maybe as measured by <unk>.
I see.
And as we think about the forward model here. When do you think we can get back to let's call. It a 1% ROA.
Bank.
<unk>.
I don't want to go against the guidance that <unk> provided.
I'm pretty optimistic about where I think we're going to be in 2000 2024, we were generating 60% a return on tangible comment the end of last year and I think that's an appropriate level that we should begin to target and we should get back there.
Okay.
Leave it there thanks for taking all my questions.
Thank you.
Thank you I'm showing no further questions at this time I will turn the call back over to IRA Robbins for any closing remarks.
I just want to say thank you.
Dialing in today, and we look forward to talking to you next quarter.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.
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Yes.
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