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 Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press star one on your telephone.
Please be advised today's call is being recorded.
During the call to your host Mr. Travis Lan 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.
And Chief Financial Officer, Mike Hagedorn before we begin I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley 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 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.
With that I'll turn the call over to IRA Robbins.
Travis: Thank you Travis.
Travis: Fourth quarter of 2023.
Valley reported net income of $72 million and earnings per share of <unk>.
Ira D. Robbins: Exclusive of non core items, including the onetime special FDIC assessment tied to the year's bank failures adjusted net income and EPS were $116 million.22, respectively.
While im pleased with the quarter's 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 accrete organic capital and reduce funding needs.
Ira D. Robbins: 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 from the same period a year ago.
Ira D. Robbins: The ongoing addition of new deposit clients is critical as it directly relates to valleys franchise value and our future earnings potential.
Ira D. Robbins: Our new customer growth was broad based across all of our geographies and I might add was undertaken against the backdrop of a difficult external environment with mid sized banks like valley were too often front page news.
Ira D. Robbins: 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 like 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 costs going forward.
From a strategic perspective, we are refocusing on holistic customer profitability and we will return to pricing deposits in consideration of balanced and return as opposed suggest balance.
Mike: The quarter was also impacted by a few additional factors worth calling out.
Mike: 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 <unk> <unk> per share.
These efforts were enacted out of an abundance of caution to ensure that our customer experience smoothly transitioned to a new system.
I am pleased with the customer response to our core conversion, but acknowledge that 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.
Mike: This business line is approximately $275 million and outstanding balances and we have an agreement in place to sell this business and a portion of the outstanding loans at what is expected to be a modest premium during the first quarter of 2024.
While this quarters earnings are not satisfactory I 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 this strategic evolution is evident in our tangible book value growth results.
Our stated 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.
Mike: 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.
Mike: Our Florida loan portfolio has expanded beyond $12 billion.
Mike: 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.
Okay.
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 would drive shareholder value over the long time.
First we need to continue to drive core deposits to the bank.
We have an incredible service oriented branch network across our dynamic geographic footprint.
It will generate more consumer and commercial activity out of these locations in 2024.
As the curve 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.
Mike: The recent enhancements of our Treasury management offerings 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.
IRA: 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 run off.
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.
IRA: 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 in our 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.
IRA: 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 rates and significant stress testing efforts at origination.
IRA: The next two slides provide additional details around our multifamily and office portfolios.
From a 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.
IRA: 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 Hagadorn to provide additional insight into the quarter's financials.
Thank you Tom Slide.
Slide 13 illustrates values 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 remained competitive we.
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 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.
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.
Angela 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.
IRA: 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 higher 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 $1.08.
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.
IRA: Oh, sorry.
Just on the.
On the NII.
IRA: NII Guide I recognize you guys follow.
The market on the forward curve here and most of those.
Assumed rate cuts are.
Backloaded.
Sure.
IRA: What sort of <unk>.
<unk> basis or annualized pick up.
In terms of either NII or NIM.
From a given 25 basis points.
Your 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 cut I am sorry, yes.
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.
IRA: 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 lessened version in the curve.
<unk> first increase to 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.
Impacts 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.
Kind of a I don't know more theoretical question in terms of the business mix has changed a bit here over the years.
Personalize deposit opportunity the opportunity on the C&I side, which you guys.
I didn't see in 2024.
IRA: More normally slow.
IRA: Yield curve.
What do you think sort of a normal sort of margin is normalized NIM is for valley in the way you've built.
The balance sheet here.
Yes. 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 tried 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.
IRA: 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.
I mean, those definitely have a bit of a higher beta than some of those national businesses and I think that refers back to the <unk> said that its going to be a bit more neutral when we have some of that curve impacted.
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 that has 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.
IRA: 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 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 and 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.
IRA: Our next question comes from the line of Steve Moss of Raymond James Your line is open.
Stephen M. Moss: Good morning.
Just following up here on the.
Liability side of the business just curious with regard to.
Stephen M. Moss: 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 laundry price in the second half of the year than due in the first half.
Stephen M. Moss: 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.
It's a 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 loan types are and any incremental color you can give.
Stephen M. Moss: Yeah, Hey, Steve It's Tom.
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 of that 90 day bucket. The increase in the accruing past dues is on that residential.
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% of.
Charge offs against our peer banks and we expect that trend to continue we are seeing.
Really improvement across the board our metrics remained solid, especially on the commercial side.
Stephen M. Moss: Okay and just curious.
Stephen M. Moss: I noticed in the Texas you guys did referred to an uptick in classified assets just kind of curious where that criticized and classified assets in the quarter here.
Youll 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 reprice resulted in no modifications of any of the contractual terms to the repayment, but Travis if there is a different number that I'm not referring to yes, I don't have the number in front of me, but I would say in the third.
<unk> that stress test process that Tom referenced resulted in a more significant.
The increase in 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.
Stephen M. Moss: And this is Mike that increase would have been obviously in special mentioned credits not the.
Mike: The more extreme.
Earnings.
Okay and.
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 borrowers.
Power's 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.
To be lower going and our average loan to value on our 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.
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.
Mike: Sure.
Mike: 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.
Mike: Okay.
Hey, good morning, Thanks for taking my questions.
Good morning.
I understand this isn't.
Or is something you guys guide to but I'm trying to understand.
Mike: 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.
Just 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 Bay count and other things and the lack of kind of change that is projected in the industry environment.
Mike: We anticipate 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, that's kind of the way. The budget is still now based on the implied forward curve in terms of expenses and 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 about $20 million of expense saves out related to the headcount reduction that was enacted in June and we think there is another $8 million or so give or take on 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 states.
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 headwinds, 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 ROA level. This that I'd say, it's similar to what we've achieved this year, but it does improve as the year goes on.
Yes, 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.
Mike: 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 more positive operating leverage territory and continue to see those improvements kind of carryforward in 25, I mean is it just margin as there are other kind of unit economics in some of the specialty businesses that you are growing that will benefit from scale would love some additional color there.
Sure.
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 changed 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 Eagle into valley you open up a checking account and one of our branches. It's the exact same platform that you do when you're 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 infra.
Mike: Structure 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.
Mike: Outsized growth.
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 midsize banks, so I think theres a lot of positive.
Tailwind 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.
You guys had the 5% to 7% loan growth target for 'twenty, four obviously still trying to.
Look at our fourth quarter originations stay with $2 $2 billion that way.
One moment please.
Can you guys still hear me.
Yes, one moment please.
Mike: Okay.
Ladies and gentlemen, please standby for one moment.
Mike: Okay.
Yes.
Ladies and gentlemen, please standby.
Okay.
Okay.
Okay.
Yes.
Yes.
Yes.
Okay.
Mike: Ladies and.
Mike: Thank you for standing by.
Okay.
Ladies and gentlemen, thank you for your patience with speakers should be rejoining momentarily.
Sure.
Thanks.
Okay.
Okay.
Yes.
Valerie can you hear us, yes, Sir loud and clear.
Okay sorry.
Sorry about that.
Thank you, we still have Mr Burrito and out connected Asaf.
Okay, sorry, I might have gone we were hearing your question on loan growth, but it dropped out when you say yes.
Mike: No problem.
And.
I wish it was more just asking it's kind of stay in line of questioning just on the loan growth as you guys focus more kind of 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 change.
Et cetera 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.
Mike: Yeah.
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.
Mike: 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 our lines. So we are starting to see the improvement in spreads are holding to the Oklahoma much really just adding to that when you think about you know.
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.
<unk> stabilized, 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 brown $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 we've been able to bring on equal.
Amount of funding associated with that from a client perspective, so it's not as even if we're out of the broker market seven so once we do get some stabilization, which we anticipate having an on that mix shift.
Tom: 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 about positive 350 for us.
Tom: Helpful. And then just wanted to clarify something quick then I'll step back with 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, but 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 the long end and then some of the back book and other dynamics that we've been discussing just want 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 that first rate tend to be anticipated 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 lessening of the <unk>.
<unk> 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 aesthetic.
Tom: Yeah.
Okay. Thank you guys I appreciate taking my questions.
Thank you.
Thank you one moment please.
Our next question comes from the line of John Armstrong.
John Armstrong: RBC capital markets. Your line is open great.
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.
Mike: It's largely complete there is another big piece in the first quarter still to come because there was loaded from front end loaded because we were preparing for this when you were putting on lease.
Liabilities was duration going back to even the first quarter of last year. So theres another piece in the first quarter and after that it tails off quite a bit.
Okay. Good.
And then on <unk>.
Same topics slide 13, you 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 and is 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.
<unk> 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 will be savings 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 months' duration.
Now those things are rolling in 12, and so we're reducing the rule.
Mike: Okay.
We generally average between 70% to 80% retention of the Cds when we're in market sell and I think there should be a pretty big tailwind there okay.
And then.
IRA this 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 looked 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>.
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 the trade off decision that you guys made.
I think from a big picture perspective, there were a couple of variables one of the week, we made a conscious decision to go shorter right on our liability side, so any kind of extended or kept it the same duration as we were having before but when we started to see some improvement in November and sort of where the expectations were maybe even a little bit earlier, where the forward curve was.
Net short and we.
We definitely moved a little bit shorter so that definitely negatively impacted.
The interest expense for the quarter, we 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 and.
And 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 <unk>.
And the others and we were really focused on retention of deposits and as a result of that I think we were probably maybe to lean in on some of our clients and actually asking to some of their rate request.
A lot of money that moved to treasuries right off the bat at that said you know we were really competing with that today and the conversations we have our clients a massive sure that we needed to have it necessarily do that and we're going back re engaging with our clients again.
We're a bit distracted I think in the fourth quarter basis with the core conversion of copying and even in the third quarter of even leading up to that core conversion.
For us getting the core conversion done was was important we.
We did an unbelievable I have three email complaints about that from clients out of an entire client base is really nothing so theres a lot of focus on retention of clients through that core conversion.
Once again I, just think we get back having appropriate conversations with our clients appropriate conversations when it comes with a pricing should look like and we'll get the deposits back to an appropriate data as to what it should look like but I think most importantly, we did an unbelievable core conversion we've retained all of our clients. We actually grew clients through our core conversion, which doesn't even necessarily.
They happen we put on as I said, 10.5% household growth in commercial during the during this year I mean, those are unbelievable numbers. So.
So well once again, I said I'm not too 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 noninterest income at this point.
So.
We're certainly getting close so let me do this I'm going to direct everybody to slide six because 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.
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 NIM as 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.
David.
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 of 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 and should we expect to see improvement this year.
Yeah 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.
David: We were down I think we were at 3325, plus or minus employees when I took over.
We're sitting around 3700 today and we're aware.
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. It's 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 to us of 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 you know at.
Once all the takeaways of Hey, it's not a priority for us.
John Armstrong: 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.
You'll see that number get back down to a number that you'd be happy with.
Okay.
Our lumia so.
If we look at the <unk>.
John Armstrong: Expenses, which were elevated you called 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. So you maybe declined $2 million and then from there it should be should be out.
Got it so I think those are.
Those are really the one time items or infrequent whenever you want to reach further than that but keep in mind that there is dual operating expenses and running those those with multiple platforms as well as circumstance 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 of 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've talked about the head count reductions that we've seen.
John Armstrong: The limited head count growth over the five years relative to the asset growth that we put on.
Stephen: 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.
John Armstrong: Yes.
Okay. Thanks.
John Armstrong: I have called out that the deposit pricing got a bit away from you because of the system conversion.
The connection between the two.
But we have a lot of relationship clients, which in organization our size should have.
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 to certain conversations we're probably distracted based on client retention and based on a.
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 a 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 Im very confident that we'll get there theyre 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 the Travis 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 <unk>.
This year.
Is it a 2026 story before year NIM starts to look more normal I'm just confused why the fed cutting rates given how much youre paying on deposits you guys are one of the higher pairs is a more beneficial in the short run.
Thanks.
Yes, I think right. There is the front end curve I think coming down definitely definitely is going to.
Be impactful tests, but it's the long and where we have a lot more that's tied to.
John Armstrong: It's definitely going to be.
John Armstrong: Pretty significant 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's there's 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 in the margin as well.
That said, they're really not ask our forecasting anything's really changed until the tail end of the first quarter and there is that pressure from the day count right and that right off the bat 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.
John Armstrong: 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.
Earlier stabilization in our noninterest bearing deposit balances, but that was the biggest driver.
Net interest income with the success of our noninterest income.
Non interest income.
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.
John Armstrong: Our fee income, we feel very good about where we're at because it only generates about 10% of our total revenue sometimes the increases in any one category get lost.
But I do think given the lower loan growth that we have swap income won't be somewhat challenged and it will be replaced with things like FX wealth management, and we have a very strong treasury management.
Going on in our company and as we put on more C&I business, we would expect that to contribute more 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.
John Armstrong: Investments are you most focused on to drive the next leg of growth for the company.
I think a lot of them lined up with some of the strategic imperatives that we talked about right. I mean, I think when we think about the growth in the C&I in some of the specialty niche businesses that we have there's definitely some technology investments that we put forth that said you know a lot of it from kind of a foundation perspective is already there and that's just enhancements at this point for things.
And 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.
Is that is there still a lag and how deposit yields come down as rates come down and do it.
IV 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 cut to us as the next few rate cuts.
Yeah, Matt 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 of rates.
Matt: And 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 to grow noninterest deposits faster than what we actually include in our budget.
So that's some thoughts around that.
Okay very helpful.
On the loan growth guide of 5% to 7% and I know that includes some mix shift away from Investor CRE. So can you talk about some of the drivers and.
Also.
What does the cadence of that looked 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.
Yes. It is based on the confidence we have in our 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 at $2 $2 billion up about $1 8 billion in.
The third quarter and the uptick in our pipelines and C&I is contribution to that pipeline, where it is now the lion's share of 65% of our pipeline. So we are seeing it that activity typically in 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>.
Warner's rollout.
John Armstrong: Got it and 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.
I had a few questions bear with me.
First I was hoping on the NII guide could.
Could you provide just for context would love essentially.
How dynamic it is what the guide would be our estimate with the guy who would be unduly under a no or minimal rate cut scenario for the year.
John Armstrong: 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.
Yes.
John Armstrong: Again, the most exposure we would have is to significantly lower rates on the long end.
So absent that.
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.
John Armstrong: Could 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.
We were on the call last time, we looked back at six consecutive months of generally stable NII and margin.
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 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 that 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, what 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 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.
Yeah any frame of reference for what the difference was low to high.
It wasn't that significant to be honest I think November was four five basis points lower than December.
Scott 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. So 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, we put 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, we talked about that generates deposit revenue as well in the noninterest income area.
John Armstrong: Okay.
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 that 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.
John Armstrong: Okay, but generally speaking we should see her.
John Armstrong: Model that back with headphones.
Yes, I think that's 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 ratios sub one four times.
John Armstrong: 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.
Debbie.
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.
John Armstrong: The loan yields in front of me, but I will tell you again, when we look at that repricing, we've not had a 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.
John Armstrong: 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 of <unk>.
John Armstrong: 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 by 45 deals give or take.
And those those buckets are for 'twenty, a pure rent regulated and the $1 8 billion of some rent argument those pass the stress test and you went through as well.
Yes, yes, and extra for 'twenty is pure rent regulated and it's one four which is partial 20% or less rent regulated.
Okay.
I'm being long winded, but this is my last one.
You had mentioned some frustration with overall profitability levels can.
Can you better define for us at which level you'd be satisfied profitability wise, maybe as measured by our way.
GCE.
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.
For the bank.
Yes.
I don't want to go against the guidance that <unk> provided but I'm pretty optimistic about where I think we're gonna be in 2000 2024, we were generating 60% a return on tangible comment at 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 I'll leave it there thanks for taking all my questions.
Thank you.
I'm showing no further question 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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Thank you for standing by and welcome to the Q4 2023 Valley National Bancorp 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 at that time, Please press star one wondering your telephone.
Please be advised today's call is being recorded.
Now I'll turn the call over to your host Mr. Travis Lan 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 we were.
<unk> 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.
Billings, 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 that I will turn the call over to IRA Robbins. Thank.
Thank you Travis.
In the fourth quarter of 2023 Valley.
Valley reported net income of $72 million and earnings per share of 13.
Exclusive of non core items, including the one time special FDIC assessment tied to the year's bank failures adjusted net income and EPS were $116 million.22, respectively.
While I'm pleased with the quarters balance sheet trends I am 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 or originations.
This enabled us to both accrete 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 from the same period a year ago.
The ongoing addition of new deposit clients is critical as it directly relates to valleys 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 a 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 wide 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 costs going forward.
From a strategic perspective, we are refocusing on holistic customer profitability, and we will return to pricing deposits and consideration of balance and return as opposed to just balance.
The quarter was also impacted by a few additional factors worth calling out.
First waste 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 <unk> <unk> per share.
These efforts were enacted 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, but acknowledge that 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 is approximately a $275 million and outstanding balances and we have an agreement in place to sell this business and a portion of the outstanding loans at what is expected to be a modest premium during the first quarter of 2024.
While this quarters earnings are not satisfactory I 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 to support this strategic evolution is evident in our tangible book value growth results.
Our stated 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.
Actually 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.
John Armstrong: 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 also 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.
And internally I working group has been established to help us determine appropriate potential use cases and to begin to execute on related opportunities.
Yes.
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.
First we need to continue to drive core deposits to the bank.
We have an incredible service oriented branch network across our dynamic geographic footprint.
John Armstrong: Generate more consumer and commercial activity out of these locations in 2024 as.
As the curve increasingly normalizes, we will further leverage the existing specialty niches that we've established and 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 want 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 run off.
That said, we acknowledge on a competitive interest rate was one of the tools used to support our generation efforts during the during the quarter.
Still the pace of deposit cost increases flowed 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.
Specialty niches increased approximately $1 billion 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.
Slide nine provides an overview of our loan growth in our 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.
From a multifamily perspective, our $8 8 billion 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 near $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.
<unk> 13 illustrates valleys recent quarterly net interest income and margin trends, while 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 the high yield savings rate in our online channel, but remained competitive we.
We have also significantly reduced our one year CD rate, which will help to mitigate the repricing issue that we face during the recent quarter.
Finally, we're 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 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 FDIC special assessment, and certain other nonrecurring litigation and merger charges.
John Armstrong: Noninterest expenses were approximately $273 million on an adjusted basis.
Compensation costs continue to be very well controlled.
The sequential expense increase was primarily due to higher traditional FDIC assessment costs consulting costs.
Occupancy and advertising expenses and the seasonal uptick in 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 will be coming here.
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 <unk>, 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 higher FDIC costs and inflationary pressures are offset by savings from our core conversion and the continued benefits of our previously announced expense initiatives.
Factoring 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 Surely a Piper Sandler Your line is open.
Pardon me Frank Your line is open.
Oh, sorry.
Just on the.
On the NII.
NII Guide I recognize you guys follow.
The market on the forward curve here and most of those.
Assume rate cuts are.
Back loaded in the year.
John Armstrong: Yes.
What sort of annualized basis or annualized pick up.
In terms of either NII or NIM.
John Armstrong: From a given 25 basis point 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 okay. I am sorry, yes.
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 <unk>.
NIM or NII.
In your modeling.
So I'm going to direct you back to our guidance around 3% to 5%. So what we're expecting right. Now in 2024 is roughly 175 basis points that will affect mostly short end of the curve as you get lessened version in the curve and that first increase does start in.
The end of March you don't get much in the first quarter, but you are correct. There are more back loaded on the cuts into the fourth quarter of 2024.
So while im 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.
And 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's not a significant.
Move based on if those cuts don't materialize, we're much more exposed to the longer end.
Impacts the.
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 of that.
Yes, that's correct okay.
Kind of a on a more theoretical question in terms of the business business mix has changed a bit here over the years.
Personalize deposit opportunity the opportunity on the C&I side, which you guys.
Did you see in 2024.
More normally sloped.
Yield curve.
What do you think sort of a normal sort of margin is a more normalized NIM is for valley and the way you built.
The balance sheet here.
Yeah. This is IRA 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 the 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 inappropriate 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 of specialized versus.
The deposits in the branch.
Does the beta is expanding here given the.
John Armstrong: The national businesses.
And will that help you obviously help you maybe to a great degree in the downgrade environment.
Maybe those that may have a bit of a higher beta than some of those national businesses and I think that refers back to the Travis said that it's going to be a bit more neutral when we have some of that curve impacted.
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 that's changed a little bit of the asset Leigh Leigh ability right. So we do have more sensitivity on the downside on the deposit cost of health and when we were running 28% to 29% noninterest bearing deposits as those are now sitting in.
The interest interest bearing deposit so that is going to be a benefit to us, but I think as you mentioned, it's the diversity and the granularity that sits within that deposit book that we're really excited about and what the opportunity is.
As we mentioned earlier on the call I think deposit pricing that they 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.
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 the asset liability side of the business just curious with regard to.
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 is not necessarily linear so we have more.
<unk>.
More of our fixed rate loans repriced in the second half of the year than due in the first half but.
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.
I assume there's probably just minimal cash flows for the upcoming year.
Yes duration securities portfolio has extended to seven years give or take.
We get.
Yes, it's really de Minimis at the $5 billion portfolio.
A couple of hundred million dollars in the year.
Okay.
And then on credit here, you'd just curious get a little more color on the uptick in C&I and CRE in case 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.
They're 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 of that 90 day bucket. The increase in the accruing past dues is on that residential.
Syed and all 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 outlook 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.
Noticing the techs that you guys did refer to an uptick in classified assets just kind of curious where did criticized and classified assets in the quarter here.
Traps youll 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 times 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 repayment, but Travis if there is a different number that I'm not refer.
Yeah, 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 increase.
The increase in criticized and classified loans again, not an impression that we would see additional losses, but just the way the debt service coverage of shake out.
In the fourth quarter. It was a much more normal increase so it was not significant.
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 borrowers.
Power's 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 a 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 less.
We're going and our average loan to value on our real estate portfolio is about 60%.
Of course, all of our asset classes. So there is flexibility we do a lot of business with existing comfort customers. They have the wherewithal.
If it's tight we'll either get additional collateral or pay down or reserves to support any funding below and is an appropriate level.
Yes, 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.
Yes.
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 Perito.
<unk> Your line is open.
Okay.
Hey, good morning, Thanks for taking my questions.
I understand this isn't.
Something you guys guide to but im trying to understand.
Some of the cadence 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.
Just 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 baked 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 on improving somewhat in the second quarter, and then getting more expansion in third and fourth quarter is kind of the way. The budget is built now based on the implied forward curve in terms of expenses and 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 about $20 million of expense saves out related to the headcount reduction that was enacted in June and we think there is another $8 million or so give or take on on an 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 savings.
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 and 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 ROA level. This 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 ninety's 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 and that's 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 twenty-five I mean is it just margin is there other kind of unit economics in some of the specialty businesses that you are growing that will benefit from scale would love some additional color there.
I think there is a lot of operating opportunity for US again, 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 changed.
We saw 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 you go into valley you open up a checking account and one of our branches. It's the exact same platform that you do when you're 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 in not even individual accounts that was done during a core conversion when everyone hated midsize banks. So I think there's a lot of positive.
Aylwin 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.
John Armstrong: Helpful. And then just lastly kind of on the same line of questioning.
You guys had the 5% to 7% loan growth target for 'twenty, four obviously still trying to.
Michael look look at our fourth quarter originations hit with $2 $2 billion that way.
Okay, sorry, Mike Hagan, we're 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 the loan growth as you guys focus more kind of on pricing of customers and holistic kind of customer profitability et cetera. Like 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.
<unk> et cetera that will be coming on it at better kind of prop.
Profit margins than than they were 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 that we have seen an uptick in that C&I pie.
Pipeline in that business is probably 70% of what its high point was 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.
Really just adding to that when you think about.
The compression we've seen in the margin is largely a function as we've 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 brown $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 were adamant that broker market. So.
John Armstrong: So once we do get some stabilization, which we anticipate having 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 are 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 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 lessening of the <unk>.
Version 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 whether 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 SaaS fee for the aesthetic.
Okay. Thank you guys I appreciate taking my questions.
Thanks.
Thank you one moment please.
Our next question comes from the line of John Armstrong.
RBC capital markets. Your line is open great. Thanks, good morning.
Good morning.
Just follow up on that Mike is that the liability shortening 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.
Loaded front end loaded because we were.
Preparing for this when we were putting on knees.
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 great.
And then same topic slide 13, you talked about the CD rate reductions in December.
And then you have some more coming in.
Same 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 will be savings 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're 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 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>.
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 you guys made.
I think from a big picture perspective, there were a couple of variables. One we made a conscious decision to go shorter right on our liability side. So you can sort of extended or kept it the same duration as we were having before but when we started to see some improvement.
The 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.
We 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 FCB and the others and we were really focused on retention of deposits and as a result of that I think we were probably maybe to lean in 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're really competing with that today and the conversations we have with clients and thats assure that we needed to have it necessarily to do that and we're going back re engaging with our clients again.
Distracted I think in the fourth quarter base, just with the core conversion and probably even in the third quarter of even leading up to that core conversion.
For us getting the core conversion done was was important we.
We did an unbelievable.
<unk> E mail complaints so that's it from clients out of an entire client base, there's really nothing so theres a lot of focus on retention of clients through that core conversion.
Once again 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'll get the deposits back to an appropriate data as to what it should look like.
Most importantly, we did 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 lift during the during this year I mean, those are unbelievable numbers.
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.
Guys think we're near the bottom or at the bottom on noninterest 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 because I know that this is a really important topic and when you look at the quarter over quarter cost increase and deposits you will see that we started off at 60 basis points that we had two consecutive quarters at <unk> 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 mainly 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.
John Armstrong: Funding sources.
In noninterest bearing.
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 NIM as 2024 plays out obviously, we need.
Rate cuts.
Capture all of that opportunity.
Okay, Alright fair enough. Thank you guys.
Thanks. Thank you one moment please.
Our.
Question comes from the line of Steven Alexopoulos.
Of JP Morgan Your line is open.
Hey, good morning, everyone.
Hey, Steven.
I wanted 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.
So when I look at the strategic imperatives for 2024, very surprise, a followup could you move the goalpost a bid that improving where we are is not on there is this still a top priority for you and 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.
We were down I think we were at 3325, plus or minus employees. When I took over we're sitting around 3700 today and we're aware.
John Armstrong: 2000, $21 billion back then and $60 billion today, and I think we definitely focus on what the efficiency it looks like you've definitely embedded technology in here.
For me its not something Thats, even caught out as this 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 I mentioned earlier.
John Armstrong: Technology infrastructure that we put into place allows for scalability.
Is something thats important to us to the technology that drag and what the cost is for that isn't going to be nearly what it was before.
Before so definitely not focusing on it is calling it out is this something that I want to let takeaways that hey, it's not a priority for us.
It's just day in day out what we do and I think as 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.
John Armstrong: 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>.
Yes 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 declined $2 million and then from there it should be should be out.
Got it.
Those are really the one time items or infrequent whatever you want to reach further than that but keep in mind.
There was a dual operating expenses and running those those with multiple platforms as well as our best 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.
John Armstrong: 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 of 2000% to 60% this year, but relative to average assets non interest expenses declined and that same periods. So I mean I think it is directly obviously its directly tied to the revenue environment that you described but I mean, we've talked about the head count reductions that we have.
<unk> 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.
John Armstrong: Yes.
I wanted to ask.
You guys called out.
Positive 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.
And some of the profitability metrics as to how we think about engaging with our clients. How we want to direct to 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.
I think certain deposit rates from the exception pricing perspective got it a 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.
John Armstrong: That said Im 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. So im 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 backend of this year is it a <unk>.
126 story before your NIM starts to look more normal I'm just confused why the fed cutting rates given how much youre paying on deposits you guys are one of the higher payers is a more beneficial in the short run.
<unk>.
Yes, I think right. There is the front end curve I think coming down definitely definitely is going to.
Be impactful tests, but it's the long and where we have a lot more that's tied to.
It's definitely going to be a pretty significant 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 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 of that.
Net interest income in the margin as well that said, they're really not ask our forecasting anything's really changed until the tail end of the first quarter and there is that pressure from the day count right in that right off the bat as well.
John Armstrong: Got it.
Thanks for taking my questions.
Thanks.
Thank you one moment please.
Our next question comes from the line of Nick could you rally.
John Armstrong: 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 earlier stabilization in our noninterest bearing deposit balances, but that was the biggest driver.
Net interest income.
Noninterest income.
Interest income.
I missed that sorry about that.
John Armstrong: 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 onetime 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 as the increases in any one category get lost.
But I do think given the lower loan growth that we have swap income won't 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 more fee income as well.
John Armstrong: 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 are you most focused on to drive the next leg of growth for the company.
Sure.
I think a lot of them lined up with 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.
John Armstrong: Thank you.
Thanks.
Thank you one moment please.
Our next question comes from the line of Manny <unk> of Morgan Stanley. Your line is open.
John Armstrong: Hey, good morning.
Can you talk about how youre thinking about deposit betas and deposit mix as rates come down.
Manny <unk>: Is there still a lag and how deposit yields come down as rates come down and do.
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 cut 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.
And 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 too.
Continue to grow noninterest deposits faster than what we actually include in our budget.
Yes.
It's 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.
Also.
What is the cadence of that looked 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 our 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 in the first quarter is a slow quarter as people get their financial statements in place and you start seeing progressively more business as the.
Quarters rollout.
Got it and.
The loan to deposit ratio should stay at about these levels of between.
95% to 105%.
Yes.
Great. Thank you.
Thank you one moment please.
Manny <unk>: Our next question comes from the line of Matthew Breese of Stephens. Your line is open.
Manny <unk>: Good afternoon everybody.
Matt: Hey, Matt.
I had a few questions here with me.
First I was hoping on the NII guide could.
Matt: Could you provide just for context I would love of essentially.
Dynamic it is.
What the guide would be our estimate with the Guy who would be on the road no or minimal rate cut scenario for the year.
It's effectively captured in three years 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.
Yes.
Again, the most exposure we would have had to significantly lower rates on the long end.
So absent that.
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.
Could 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.
We were on the call last time, we looked back at six consecutive months of generally stable NII and margin.
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.
John Armstrong: One thing I would throw out there too we do provide obviously in the deck, what 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 kind of feeds into the commentary provided 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 I think 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 with quite a bit lower lower quarter to quarter like 15% was that driven by the conversion and should we expect that line that need 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.
Okay.
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 to 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.
Yes, 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 we should see her.
Model that back to fed funds.
Yes, I think that's generally right.
John Armstrong: 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 ratios of one four times.
To me it feels a little bit risky given the repricing dynamics.
John Armstrong: 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.
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 a 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 are.
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 before 'twenty, a pure rent regulated and the $1 8 billion of some rent relief.
We passed the stress test and you went through as well.
John Armstrong: Yes, yes, and it's the 420 as pure rent regulated.
One four which is partial 20% or less rent regulated.
John Armstrong: Okay.
I'm being long winded, but this is my last one.
You had mentioned some frustration with overall profitability levels can.
Can you do better defined for us at which level you'd be satisfied profitability wise, maybe as measured by ROA or Roe.
TCE.
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.
For the bank.
<unk>.
They don't want to go against the guidance that Chad is provided but I'm pretty optimistic about where I think we're going to be in 2000, 2024, and we were generating 60% a return on tangible comment at 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.
John Armstrong: Okay I'll leave it there thanks for taking all my questions.
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 for <unk>.
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 for participating you may now disconnect have a great day.