Q1 2024 Valley National Bancorp Earnings Call
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Operator: Welcome to the Valley National Bancorp Earnings Conference Call. At this time, all participants are in listen-only mode.
Welcome to the Valley National Bancorp Earnings Conference call.
Operator: At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
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Operator: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today Travis Lan. Please go ahead.
Travis P. Lan: Good morning, and welcome to Valley's first quarter 2024 earnings conference call. Presenting on behalf of Valley today are CEO Ira Robbins, President Thomas Iadanza, and Chief Financial Officer Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures.
Travis P. Lan: Good morning, and welcome to Valley's first quarter 2024 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 <unk> Dot com when discussing our results we refer.
Travis P. Lan: <unk> 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.
Travis P. Lan: 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 Bank and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on forms 8K, 10Q, and 10K, 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. Thank you, Travis.
Ira D. Robbins: Filings, including those found on forms 8-K, 10-Q, and 10-K for a complete discussion of forward looking statements and the factors that could cause actual results to differ from those statements with that I will turn the call over to IRA Robbins. Thank you Travis during.
Ira D. Robbins: During the 4th quarter of 2024, Valley reported net income of $96 million and earnings per share of $0.18. Excluding non-core items, adjusted net income and adjusted earnings per share were $99,019,000, respectively. The court's results were impacted by an outsized provision for loan losses, which I will discuss shortly. However, on a pre-tax, pre-provision basis, we saw a positive inflection this quarter. The sequential downward trend in net interest income slowed meaningfully despite the lower day count during the quarter.
Ira D. Robbins: During the fourth quarter of 2020 for Valley reported net income of $96 million and earnings per share of <unk> 18.
Ira D. Robbins: Exclusive of noncore items, adjusted net income and adjusted earnings per share were <unk> $99 million and 19, respectively.
Ira D. Robbins: The quarters results were impacted by an outsized provision for loan losses, which I will discuss shortly.
Ira D. Robbins: On a pretax pre provision basis, we saw a positive inflection this quarter the sequential downward trend in net interest income slowed meaningfully despite the lower day count during the quarter.
Ira D. Robbins: This reflects the benefit of asset pricing and our efforts to better control funding costs. The income results were strong, supported by certain unique businesses, including tax credit advisories. Finally, non-interest expenses were extremely well controlled despite the seasonal headwind associated with higher payroll taxes.
Ira D. Robbins: This reflects the benefit of asset pricing and our efforts to better control funding cost.
Ira D. Robbins: Fee income results were strong supported by certain unique businesses, including tax credit advisory.
Ira D. Robbins: Finally, noninterest expenses were extremely well controlled despite the seasonal headwind associated with higher payroll taxes.
Ira D. Robbins: Despite the continuation of the inverted yield curve and other environmental challenges, I am pleased with the stronger pre-tax, pre-provision earnings results this quarter. I'm also pleased with the quarter's balance sheet strength and credit quality performance. On slide four, we outline certain efforts made to curtail loan growth, enhance reserve coverage where needed in the portfolio, and incrementally optimize our funding base. Total loans declined nearly $300 million during the quarter as a result of our proactive efforts to participate out a portion of certain commercial real estate and construction, and the sale of our commercial premium finance business.
Ira D. Robbins: Despite the continuation of the inverted yield curve and other environmental challenges I am pleased with the stronger pre tax pre provision earnings results this quarter.
Ira D. Robbins: I'm also pleased with the quarter's balance sheet strength and credit quality performance.
Ira D. Robbins: On slide four we outlined certain efforts may to curtail loan growth enhanced reserve coverage, where needed in the portfolio and incrementally optimize our funding base.
Ira D. Robbins: Total loans declined nearly $300 million during the quarter as a result of our proactive efforts to participate out a portion of certain commercial real estate and construction loans and the sale of our commercial premium finance business.
Ira D. Robbins: These sale transactions each occurred at or above par and incrementally benefit our commercial real estate concentration. Capital Ratios, and Reserve Levels. Our allowance for credit loss for loans as a percentage of total loans increased five basis points to 0.98% during the quarter. Meanwhile, our past-due and non-accrual loans both declined as compared to December 31, 2023.
Ira D. Robbins: These sale transactions each occurred at or above par and incrementally benefit our commercial real estate concentration.
Ira D. Robbins: Capital ratios and reserve levels.
Ira D. Robbins: Our allowance for credit losses for loans as a percentage of total loans increased five basis points to <unk>, 98% during the quarter.
Ira D. Robbins: Meanwhile, our past due and non accrual loans, both declined as compared to December 31 2023.
Ira D. Robbins: The higher provision and associated reserve coverage reflects internal risk rating migrations, resulting from our continuous monitoring and rigorous stress testing of the commercial loan portfolio.
Ira D. Robbins: During the quarter, an additional 1% of loans transitioned into either our criticized or classified loan buckets.
Ira D. Robbins: While we remain comfortable with the sponsorship collateral support and potential loss content of these loans criticized loans require elevated reserve coverage under seasonal.
Ira D. Robbins: The higher provision and associated reserve coverage reflects internal risk rating migrations resulting from our continuous monitoring and rigorous stress testing of the commercial loan portfolio. During the quarter, an additional 1% of loans transitioned into either our Criticized or Classified Loan Bucket. While we remain comfortable with the sponsorship, collateral, support, and potential loss content of these loans, criticized loans require elevated reserve coverage under CECL. We are comfortable with the current reserve coverage levels, but anticipate that the allowance could trend slightly higher over the next few quarters.
Ira D. Robbins: We are comfortable with the current reserve coverage levels, but anticipate that the allowance could trend slightly higher over the next few quarters.
Ira D. Robbins: Our focus on an expertise in commercial real estate lending has generated strong and stable risk adjusted financial results throughout our history.
Ira D. Robbins: The strength of our commercial real estate underwriting and the consistently industry. The loss content of our portfolio has contributed to significant shareholder value creation through above average tangible book value growth.
Ira D. Robbins: Our strong network of borrowers have banked with valley for decades, and have performed very well in other periods of rising interest rates.
Ira D. Robbins: We remain very confident with our capital allocation and in future credit performance of our commercial real estate portfolio.
Ira D. Robbins: Our focus on and expertise in commercial real estate lending has generated strong and stable risk-adjusted financial results throughout our history. The strength of our commercial real estate underwriting and the consistently industry-leading lost content of our portfolio have contributed to significant shareholder value creation through above-average tangible book value growth. Our strong network of borrowers has banked with Valley for decades and have performed very well in other periods of rising interest rates.
Ira D. Robbins: That said I acknowledged that our perceived concentration in commercial real estate has recently amplified the volatility in our company's valuation.
Ira D. Robbins: This volatility is based purely on perception and is not reflective of our financial results, nor the strength of our credit quality and balance sheet.
Ira D. Robbins: Still we exist to serve our key stakeholders and while I'm proud of our ability to exceed the expectations of our clients communities and employees.
Ira D. Robbins: Knowledge that the volatility experienced by our shareholders is not sustainable.
Ira D. Robbins: Commercial real estate is a wonderful asset class and one in which our differentiated approach continues to create incredible value.
Ira D. Robbins: We remain very confident with our capital allocation and in the future credit performance of our commercial real estate portfolio. That said, I acknowledge that our perceived concentration in commercial real estate has recently amplified the volatility in our company's valuation. This volatility is based purely on perception and is not reflective of our financial results nor the strength of our credit quality and balance sheet.
Ira D. Robbins: We will remain active in this space, but we'll manage our concentration more efficiently going forward.
Ira D. Robbins: Our diversifying C&I initiatives will continue to accelerate and we will further enhance our financial flexibility.
Ira D. Robbins: These efforts are consistent with our established strategic plan and I believe that accelerating them will help to reduce the volatility in our valuation.
Ira D. Robbins: With this in mind, you can see our near and intermediate term expectations for certain balance sheet metrics on slide five.
Ira D. Robbins: Still, we exist to serve our key stakeholders, and while I'm proud of our ability to exceed the expectations of our clients, communities, and employees, I acknowledge that the volatility experienced by our shareholders is not sustainable.
Ira D. Robbins: We expect to have approximately nine 8% tier one common equity.
Ira D. Robbins: 440% commercial real estate to risk based capital.
Ira D. Robbins: An allowance coverage ratio above, 1% and our loan to deposit ratio around 100% by year end 2024.
Ira D. Robbins: Commercial real estate is a wonderful asset class, and one in which our differentiated approach continues to create incredible value. We will remain active in this space, but we'll manage our concentration more efficiently going forward. Our diversifying C&I initiatives will continue to accelerate, and we will further enhance our financial flexibility. These efforts are consistent with our established strategic plan, and I believe that accelerating them will help to reduce the volatility in our evaluation. With this in mind, you can see our near and intermediate term expectations for certain balance sheet metrics on slide five. We expect to have approximately 9.8% of Tier 1 common equity.
Ira D. Robbins: These metrics are consistent with this strategy, which we have discussed previously and our ongoing efforts to further strengthen our balance sheet and enhanced financial flexibility.
Ira D. Robbins: The following slide updates our previously provided guidance.
Ira D. Robbins: The downward revision to our net interest income forecast reflects slower loan growth and a modest funding mix shift related to lower noninterest bearing deposit balances during the first quarter.
Ira D. Robbins: We anticipate that the downward revision in net interest income for the year will be largely offset by lower noninterest expenses relative to our prior guidance.
Ira D. Robbins: All else equal this would leave pretax pre provision income relatively in line with current consensus expectations.
Ira D. Robbins: On slide seven we provide additional commentary on our base case that interest income scenario.
Ira D. Robbins: As well as some considerations related to our exposure to changing interest rates.
Ira D. Robbins: As we have described before our balance sheet is generally neutral to changes in short term interest rates.
Ira D. Robbins: 440% of commercial real estate to risk-based capital, an allowance coverage ratio above 1%, and a loan-to-deposit ratio around 100% by year-end 2024. These metrics are consistent with the strategy which we have discussed previously and our ongoing efforts to further strengthen our balance sheet and enhance financial flexibility. The following slide updates our previously provided guidance. The downward revision to our net interest income forecast reflects slower loan growth and a modest funding mix shift related to lower non-interest bearing deposit balances during the first quarter.
Ira D. Robbins: We are more sensitive to movement in longer and rates, which impacted repricing, a roughly 60% of our loans.
Speaker Change: Before turning the call to Tom I wanted to highlight the underlying franchise value that we continue to create despite the volatility in our valuation.
Ira D. Robbins: Since the end of 2017, we have grown reported tangible book value by 47% versus just 38% for our regional banking peers.
Ira D. Robbins: Including the impact of distributed dividends this increases to 91% versus just 70% respectively.
Ira D. Robbins: This positive variance reflects our ability to enhance our franchise without meaningfully diluting tangible book value and overpriced acquisitions or through our efforts to maximize near term results.
Ira D. Robbins: Customer account growth is another key metric that engages our ability to build and optimize our franchise.
Ira D. Robbins: Since year end 2017, we have more than doubled our number of commercial deposit accounts, which is in direct alignment with our strategic objectives.
Ira D. Robbins: We anticipate that the downward revision in net interest income for the year will be largely offset by lower non-interest expenses relative to our prior guidance. All else equal, this will leave pre-tax, pre-provision income relatively in line with current consensus expectations.
Ira D. Robbins: The ongoing addition of new deposit clients is critical as it supports our future earnings potential and financial consistency.
Ira D. Robbins: This growth has been broad based across geographies and business lines and we continue to work hard at sustaining this momentum.
Ira D. Robbins: On Slide 7, we provide additional commentary on our base case net interest income scenario, as well as some considerations related to our exposure to changing interest rates. As we have described before, our balance sheet is generally neutral to changes in short-term interest rates. We are more sensitive to movement and longer end rates, which impact the repricing of roughly 60% of our... Before turning the call over to Tom, I want to highlight the underlying franchise value that we continue to create despite the volatility in our valuation.
Ira D. Robbins: We also believe there is significant value in the geographic diversity that we have developed on both the asset and liability sides of the balance sheet.
Tom: At the end of 2017, nearly 80% of our commercial loans were concentrated in New York and New Jersey.
Tom: That figure has declined from nearly 50% today as a result of our focus in Florida and other dynamic commercial markets.
Tom: We continue to develop exceptional service oriented banking teams across the country, which are focused on generating and enhancing the valuable commercial relationships that we have targeted.
Tom: This progress has benefited the funding side of our bank as well.
Tom: In 2017, 78% of our deposits were in northeast branches.
Tom: As of the end of the first quarter that number has declined to 45%.
Tom: We have diverse niche funding businesses and a robust branch network across Florida and Alabama.
Ira D. Robbins: Since the end of 2017, we have grown reported tangible book value by 47% versus just 38% for our regional banking peers; including the impact of distributed dividends, this increases to 91% versus just 70%, respectively. This positive variance reflects our ability to enhance our franchise without meaningfully diluting tangible book value through overpriced acquisitions or through other efforts to maximize near-term results. Customer account growth is another key metric that gauges our ability to build and optimize our franchise.
Ira D. Robbins: This diversity helps to insulate our funding base and provides a unique and differentiated opportunities to further reduce our reliance on wholesale funding overtime.
Ira D. Robbins: On last quarter's call I laid out three strategic imperatives for the coming year.
Ira D. Robbins: Our early results indicate solid traction relative to enhancing our cost effective core deposit funding.
Ira D. Robbins: The de emphasis of commercial real estate and more revenue diversity.
Ira D. Robbins: As mentioned, we will continue to accelerate the diversification of our loan portfolio and I have all the confidence that we will continue to produce solid results.
Speaker Change: With that I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results.
Ira D. Robbins: After Mike concludes his remarks, Tom Mike myself, and Mark <unk>, our Chief credit officer will be available for your questions.
Speaker Change: Thank you IRA.
Ira D. Robbins: Slide nine illustrates the quarter's deposit trends total deposits declined slightly due to the intentional runoff of higher cost time deposits, which had matured.
Ira D. Robbins: Since year-end 2017, we have more than doubled our number of commercial deposit accounts, which is in direct alignment with our strategic objectives. The ongoing addition of new deposit clients is critical as it supports our future earnings potential and financial consistency. This growth has been broad-based across geographies and business lines, and we continue to work hard at sustaining this momentum. We also believe there is significant value in the geographic diversity that we have developed on both the asset and liability sides of the balance sheet. At the end of 2017, nearly 80% of our commercial loans were concentrated in New York and New Jersey.
Ira D. Robbins: From a customer deposit perspective. This runoff was primarily offset by growth in interest bearing non maturity deposits within our specialty deposit niches.
Ira D. Robbins: Our ability to tactically reduce deposit pricing in certain product types and categories helped to meaningfully slow the pace of deposit cost increases during the quarter.
Ira D. Robbins: Despite a rotation of approximately $200 million of noninterest deposits into interest bearing deposits. Our total cost of deposits increased a modest three basis points.
Ira D. Robbins: The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business lines.
Ira D. Robbins: Traditional branch deposits declined slightly as a result of the runoff of certain higher cost time deposits.
Ira D. Robbins: That figure has declined to nearly 50% today as a result of our focus on Florida and other dynamic commercial markets. We continue to develop exceptional service-oriented banking teams across the country, which are focused on generating and enhancing the valuable commercial relationships that we have targeted. This progress has benefited the funding side of our bank as well. In 2017, 78% of our deposits were in northeast branches.
Ira D. Robbins: That said, we saw a stable deposit trends in our southeast franchise.
Ira D. Robbins: Our specialty niches increased slightly during the quarter as our online deposits to technology business continue to expand.
Ira D. Robbins: Yeah.
Ira D. Robbins: Slide 11 illustrates the management actions, which reduce loans during the quarter.
Ira D. Robbins: Total allowance declined nearly $300 million, driven primarily by commercial real estate and construction participations out of the back.
Ira D. Robbins: Importantly, these participations were executed with no negative impact to equity.
Ira D. Robbins: We continue to monitor opportunities to further participate out certain loans and to enable certain maturing loans to refinance away from valley.
Ira D. Robbins: As of the end of the first quarter, that number has declined to 45%. We have diverse niche funding businesses and a robust branch network across Florida and Alabama. This diversity helps to insulate our funding base and provides unique and differentiated opportunities to further reduce our reliance on wholesale funding over time. On last quarter's call, I laid out three strategic imperatives for the coming year.
Ira D. Robbins: The sequential reduction in C&I loans was due entirely to the sale of our commercial premium finance business and subsequent maturities in that remaining portfolio.
Ira D. Robbins: We continue to focus our origination efforts on traditional C&I owner occupied real estate and healthcare.
Ira D. Robbins: On slide 12, I would highlight that our loan to values are based on the most recent appraisal received on a property. The average life of these appraisals is approximately two and one half years.
Ira D. Robbins: Our early results indicate solid traction relative to enhancing our cost-effective core deposit funding, the de-emphasis on commercial real estate, and more revenue diversity. As mentioned, we will continue to accelerate the diversification of our loan portfolio, and I have every confidence that we will continue to produce solid results. With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results. After Mike concludes his remarks, Tom, Mike, myself, and Mark Sager, our Chief Credit Officer, will be available for your questions. Thank you, Ira.
Speaker Change: Our debt service coverage ratios are calculated based on the most recent borrower financial information that we have which is typically received at least annually.
Tom: The following two slides provide additional detail on our multifamily and office portfolios.
Tom: We continue to have modest exposure to New York multifamily loans, and highlight that EMEA or a $531 million or roughly 20% of that sub portfolio as more than 50% rent controlled units.
Speaker Change: Our office portfolio remains diverse by geography, and supported by generally diverse cash flows with nearly 65% of our allowance to multi tenant properties.
Ira D. Robbins: With that I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.
Tom: Slide 9 illustrates the Quarter Deposit. Total deposits declined slightly due to the intentional runoff of higher cost time deposits which had matured. From a customer deposit perspective, this runoff is primarily offset by growth in interest-bearing non-maturity deposits within our specialty deposit niche. Additionally, our ability to tactically reduce deposit pricing in certain product types and categories helped to meaningfully slow the pace of deposit cost increases during the quarter. Despite a rotation of approximately $200 million of non-interest deposits into interest-bearing deposits, our total cost of deposits increased by a modest three percent. The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business. Traditional branch deposits declined slightly as a result of the runoff of certain higher-cost time deposits.
Speaker Change: Thank you Tom staying on the <unk> topic for a moment slide 15 illustrates the contractual maturities of our commercial real estate portfolio.
Tom: We also included the LTV DSC are and rate by maturity bucket for your benefit.
Tom: This maturity schedule illustrates the minimal repricing risk of our loans maturing over the next few quarters.
Tom: Slide 16 illustrates valleys recent quarterly net interest income and margin trends.
Tom: The modest sequential declines in both net interest income and net interest margin were primarily the result of one fewer day in the quarter.
Tom: We strategically lowered deposit costs by approximately 40 basis points on nearly $10 billion of deposits, which helped to stabilize net interest income as the quarter progressed.
Tom: This helped to offset the headwinds associated with lower average noninterest bearing deposits during the quarter.
Tom: After shortening our liability duration during the first quarter, we locked in a small amount of long term funding at relatively attractive cost, which will further benefit in net interest income during the second quarter all else equal.
Tom: That said, we saw stable deposit trends in our Southeast franchise. Our specialty niches increased slightly during the quarter as our online deposits and technology business continued to expand. Slide 11 illustrates the management actions that reduced loans during the quarter. Total loans declined nearly $300 million, driven primarily by commercial real estate and construction participations out of the bank. Importantly, these participations were executed with no negative impact on equity.
Tom: Turning to the next slide you can see that noninterest income on an adjusted basis improved meaningfully from the fourth quarter of 2023.
Tom: A portion of this improvement was related to rebounding deposit service charges as some fees were waived round our conversion in the fourth quarter of 2023.
Tom: Beyond this we offset headwinds in swap revenue on commercial loan transactions with improved wealth revenues and a very strong quarter from our tax credit advisory business.
Tom: On that front Dudley ventures had certain tax credit transactions closed during the quarter, which had been delayed from the end of 2023.
Tom: We continue to monitor opportunities to further participate in certain loans and to enable certain maturing loans to refinance away from Valley. The sequential reduction in C&I loans was due entirely to the sale of our commercial premium finance business and subsequent maturities in that remaining portfolio. We continue to focus our origination efforts on traditional C&I, owner-occupied real estate, and healthcare. On slide 12, I would highlight that our loan-to-values are based on the most recent appraisal received on a property. The average life of these appraisals is approximately two and one-half years.
Tom: While demand for our tax credit Advisory services continues to grow we would anticipate that that lease revenues will decline somewhat from this quarter's elevated levels.
Tom: On the following slide you can see that our noninterest expenses were approximately $280 million for the quarter.
Tom: Adjusting for our $7 5 million FDIC special assessment and certain other non core charges noninterest expenses were approximately $267 million on an adjusted basis.
Tom: This represents a 2% decline from the adjusted fourth quarter of 2023, and a mere 1% increase on a year over year basis.
Tom: The quarter's increase in compensation costs was primarily the result of seasonal payroll tax impacts as head count remains generally well controlled with.
Tom: Notable reductions in our technology and consulting expenses as the costs associated with our core conversion in the fourth quarter of 2023 continue to run off.
Tom: Our debt service coverage ratios are calculated based on the most recent borrower financial information that we have, which is typically received at least annually. The following two slides provide additional detail on our multifamily and office portfolio. We continue to have modest exposure to New York multifamily loans and highlight that a mere $531 million, or roughly 20% of that subportfolio, has more than 50% rent-controlled units. Our office portfolio remains diverse by geography and supported by generally diverse cash flows, with nearly 65% of our loans to multi-tenant properties. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's finances. Thank you, Tom.
Michael D. Hagedorn: While revenue pressures have weighed on our efficiency ratio in recent quarters. Our expense base continues to be stable relative to our balance sheet and well below peer levels for the same comparison.
Michael D. Hagedorn: The key pillars on slide 19, not only support our conservative underwriting and strong credit performance, but also our ability to mitigate losses in periods of stress I will discuss this more in a moment.
Michael D. Hagedorn: Slide 20 offers a general comparison of our lending approach as it relationship based regional bank with more transactional oriented institutions.
Michael D. Hagedorn: We have deep market knowledge and bank, well known and active investors, who are strongly aligned with the need to protect and enhance their property values over time.
Michael D. Hagedorn: Our borrowers tend to be more disciplined and value oriented with respect to project selection.
Michael D. Hagedorn: From an underwriting perspective, we generally focus on in place not projected cash flows which provides an added buffer should NOI growth not materialize.
Michael D. Hagedorn: Staying on the CRE topic for a moment, slide 15 illustrates the contractual maturities of our commercial real estate portfolio. We have also included the LTV, DSCR, and rate by maturity bucket for your benefit. This maturity schedule illustrates the minimal repricing risk of our loans maturing over the next few quarters. Slide 16 illustrates Valley's recent quarterly net interest income and margin trend. The modest sequential declines in both net interest income and net interest margin were primarily the result of one fewer day in the quarter.
Michael D. Hagedorn: We hope these pages provide some further context for the credit results illustrated on slides 21 and 'twenty two.
Michael D. Hagedorn: On 21, you can see the continued stability in our non accrual and past due loan buckets.
Michael D. Hagedorn: The bottom charts illustrate our allowance for credit loss coverage relative to loans and past due loans.
Michael D. Hagedorn: As I remember the quarter's increase in allowance was primarily related to quantitative reserves associated with the migration of loans into criticized and classified categories.
Michael D. Hagedorn: We remain confident with the performance and potential loss content of these loans.
Michael D. Hagedorn: We are comfortable with the current position of the allowance, but acknowledge that further real estate stress and elevated interest rates could move our allowance coverage somewhat beyond 1% during the remainder of 2024.
Michael D. Hagedorn: We strategically lowered deposit costs by approximately 40 basis points on nearly $10 billion of deposits, which helped to stabilize net interest income as the quarter progressed. This helped to offset the headwind associated with lower average non-interest-bearing deposits during the quarter. After shortening our liability duration during the first quarter, we locked in a small amount of long-term funding at relatively attractive costs, which will further benefit net interest income during the second quarter, all else equal.
Michael D. Hagedorn: Okay.
Michael D. Hagedorn: Turning to slide 22, net charge offs ticked up during the quarter as a result of a $9 $5 million charge off related to taxi medallion loans.
Michael D. Hagedorn: Commercial real estate charge offs were de Minimis.
Michael D. Hagedorn: We present two important analysis at the bottom of this slide.
Michael D. Hagedorn: On the bottom left we compare loss given default ratios on our commercial real estate and construction loans to peers over a variety of timeframes.
Michael D. Hagedorn: Loss, given default is the calculation of charge offs relative to nonaccrual loans.
Michael D. Hagedorn: This analysis suggest that over time, our nonaccrual loans were significantly less likely to be charged off than our peers, given our loss mitigation techniques.
Michael D. Hagedorn: The most important loss mitigation tool that we have in times of stress is typically the deep resources and liquidity of our wealthy borrower base.
Michael D. Hagedorn: Turning to the next slide, you can see that non-interest income on an adjusted basis improved meaningfully from the fourth quarter of 2023. A portion of this improvement was related to rebounding deposit service charges as some fees were waived around our conversion in the fourth quarter of 2023. Beyond this, we offset headwinds and swap revenue on commercial loan transactions with improved wealth revenues and a very strong quarter from our tax credit advisory business.
Michael D. Hagedorn: On the bottom right, we illustrate our reserve relative to implied years of coverage based on certain loss rates.
Michael D. Hagedorn: While our allowance coverage is below peers on an absolute basis, we believe that relative to potential loss content, we remained consistently better reserved.
Michael D. Hagedorn: For example, our current reserve would cover six years of implied loan losses based on the average net charge off rate between 2001 and 2023.
Michael D. Hagedorn: This is double the relative reserve coverage of our peers.
Michael D. Hagedorn: We remain confident that we are well positioned for a potential deterioration of credit quality across the industry.
Michael D. Hagedorn: Our below peer loss rates relative to total loans and <unk> loans, specifically are illustrated on slide 23.
Michael D. Hagedorn: On that front, Dudley Ventures had certain tax credit transactions closed during the quarter, which had been delayed from the end of 2023. While demand for our tax credit advisory services continues to grow, we would anticipate that Deadly's revenues will decline somewhat from this quarter's elevated levels. On the following slide, you can see that our non-interest expenses were approximately $280 million for the quarter. However, adjusting for our $7.5 million FDIC special assessment and certain other non-core charges, non-interest expenses were approximately $267 million on an adjusted basis.
Michael D. Hagedorn: As we have said historically, our loss rates tend to be roughly 40% of peer levels through the cycle.
Michael D. Hagedorn: The next slide illustrates the sequential increase in our tangible book value and capital ratios Tans.
Michael D. Hagedorn: Tangible book value increased slightly from the fourth quarter of 2023, despite a modest headwind from the OCI impact associated with our available for sale securities portfolio.
Michael D. Hagedorn: Regulatory capital ratios have continued to expand and as I remember <unk> earlier, we anticipate further expansion for the rest of 2024 and beyond.
Speaker Change: With that I'll turn the call back to the operator to begin Q&A. Thank you.
Speaker Change: Thank you.
Speaker Change: At this time, we will conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Michael D. Hagedorn: This represents a 2% decline from the adjusted fourth quarter of 2023 and a mere 1% increase on a year-over-year basis. The quarter's increase in compensation costs was primarily the result of seasonal payroll tax impacts as headcount remains generally well controlled.
Michael D. Hagedorn: To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Michael D. Hagedorn: Our first question comes from Steven Alexopoulos from JP Morgan. Please go ahead.
Michael D. Hagedorn: We saw notable reductions in our technology and consulting expenses as the costs associated with our core conversion in the fourth quarter of 2023 continue to run off. While revenue pressures have weighed on our efficiency ratio in recent quarters, our expense base continues to be stable relative to our balance sheet and well below pure levels for the same comparison. The key pillars on slide 19 not only support our conservative underwriting and strong credit performance but also our ability to mitigate losses in periods of stress. I will discuss this more in a moment.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Good morning.
Speaker Change: I wanted to start.
Michael D. Hagedorn: First on the Creek concentration moving down to $4, 48% of the lower could you give us a sense of your $32 billion of Cree loans in the quarter, including construction.
Speaker Change: Should we expect those to trend for the rest of the year and do you think you could continue to do what you did this quarter exit at par.
Speaker Change: Yes, I think when we look at that Cree concentration, it's really a function of not including the owner occupied loans into that.
Speaker Change: So I think on one of our slides when we give the breakout of the balance sheet, probably gets a bit better on what that starting number it looks like I think we had a really successful quarter in working with bleed into some of the other partners that we've worked with over the years and looking at increased participations and you can see on the loan yield maturities that we have coming coming due there really is not a significant variance versus where are.
Michael D. Hagedorn: Slide 20 offers a general comparison of our lending approach as a relationship-based regional bank with more transactional-oriented institutions. We have deep market knowledge and work with well-known and active investors who are strongly aligned with the need to protect and enhance their property values over time. Our borrowers tend to be more disciplined and value-oriented with respect to project selection. From an underwriting perspective, we generally focus on in-place, not projected, cash flows, which provides an added buffer should NOI growth not materialize.
Michael D. Hagedorn: Current portfolio sits.
Michael D. Hagedorn: Versus where market indications our rates are today, so there really isn't a rate issue.
Michael D. Hagedorn: Which would hinder some of our ability to really offset some of the loans that we have from our participation perspective.
Michael D. Hagedorn: And as you've seen over the years that credit quality has been really really stellar here and as people have gone through and looked at the loans. They tend to agree with that assessment as well.
Michael D. Hagedorn: Okay.
Speaker Change: That's helpful. I am curious iris those stocks off I think it's a little over 30%. This year and you mentioned perception I believe in terms of on the real estate portfolio.
Michael D. Hagedorn: We hope these pages provide some further context for the credit results illustrated on slides 21 and 22. On slide 21, you can see the continued stability in our non-accrual and past-due loan bucket. The bottom charts illustrate our allowance for credit loss coverage relative to loans and past due loans. As Ira mentioned, the quarter's increase in the allowance was primarily related to quantitative reserves associated with the migration of loans into criticized and classified categories. We remain confident with the performance and potential loss content of these loans.
Speaker Change: When you compare yourselves everybody I mean this has all happened in the aftermath of New York community. When you compare your portfolio to peer banks, what do you think the market's missing.
Michael D. Hagedorn: Okay.
Michael D. Hagedorn: Okay.
Michael D. Hagedorn: To acknowledge that there is not an issue in commercial real estate on a macro perspective, I think would be putting my head in the sand I think that said if you really dive into the areas that are really unjust and distress today I think office is an obvious right and that's just not a function of where interest rates are that's behaviors have actually changed.
Michael D. Hagedorn: The rent regulated in New York City is another area of stress and then I think from a third perspective as it's the repricing risk that exists.
Michael D. Hagedorn: Just really isolate those three specific areas and then dive into the underlying details of where valley is on those three specifics on.
Michael D. Hagedorn: We are comfortable with the current position of the allowance but acknowledge that further real estate stress and elevated interest rates could move our allowance coverage somewhat beyond 1% during the remainder of 2024. Turning to slide 22, net charge-offs ticked up during the quarter as a result of a $9.5 million charge-off related to taxing medallion loans. Commercial real estate charge-offs were de minimis.
Michael D. Hagedorn: On the office portfolio, its about $3 $3 billion, but when you look at the specific underlying metrics of those loans. They are very small in size. In addition to that what we tried to do is give you an update even on what those updated debt service coverage ratios are so we're sitting at 168 of a debt service coverage ratio on the office portfolio, which I think is very differentiated.
Michael D. Hagedorn: I would say the larger differentiation on the La office on the office is actually the size. Our office is only $3 million on average I mean, there really is not much stress within those types of offices that we're lending against.
Michael D. Hagedorn: That's something that's probably a little bit differentiated.
Michael D. Hagedorn: The rent regulated is obviously, a little bit differentiated as well.
Michael D. Hagedorn: We present two important analyses at the bottom of this slide. On the bottom left, we compare loss-given default ratios on our commercial real estate and construction loans to peers over a variety of time frames. Loss given default is a calculation of charge-offs relative to non-accrual loans.
Michael D. Hagedorn: As Tom mentioned in his prepared comments, we are only sitting with about $500 million of rent regulated that's north of 50%.
Michael D. Hagedorn: What that composition looks like so once again I think it's a very small portfolio and very manageable as we think about what the risk of that portfolio. It looks like everything's current today.
Michael D. Hagedorn: And that portfolio and then I think the third one that I alluded to was really the rate reset risk and we tried to give a little more granularity in the earnings call as well as in the presentation.
Michael D. Hagedorn: This analysis suggests that over time, our non-accrual loans were significantly less likely to be charged off than it appears, given our loss mitigation techniques. The most important loss mitigation tool that we have in times of stress is typically the deep resources and liquidity of our wealthy borrower base. On the bottom right, we illustrate our reserve relative to implied years of coverage based on certain loss rates. While our allowance coverage is below peers on an absolute basis,
Michael D. Hagedorn: The rate we saw risk is not what it played out in many of our peers here.
Speaker Change: That said look I acknowledge the Cree concentration is pretty significant and on a macro level, we look at the concentration.
Speaker Change: Just have a perspective of what that is at valley. So I'm aware that I acknowledge it I think.
Michael D. Hagedorn: As an organization, we need to begin to reduce what that macro Creek concentration is.
Michael D. Hagedorn: We believe that, relative to potential loss content, we remain consistently better reserved. For example, our current reserve would cover six years of implied loan losses based on the average net charge-off rate between 2001 and 2023. This is double the relative reserve coverage of our peers. We remain confident that we are well positioned for a potential deterioration of credit quality across the industry. Our below-peer loss rates relative to total loans and CRE loans specifically are illustrated on slide 23.
Michael D. Hagedorn: But at Valley.
Michael D. Hagedorn: Pre concentration doesn't mean that you're going to have an absolute loss.
Michael D. Hagedorn: We migrated some loans into.
Michael D. Hagedorn: Classified and criticized loans this specific quarter as we mentioned before the loss history is very very different here at valley as well because alone gets classified as a criticized loan here does not mean youre going to have a loss associated with that we've proven that year over year I think in the third quarter, we had a significant increase in what our classified loans were as well.
Michael D. Hagedorn: And if you look at the results this quarter theres not an uptick in non accrual there is not an uptick in delinquency, yes, we had an uptick in classified a few quarters ago. So.
Michael D. Hagedorn: It's just getting familiar with the granularity of what our portfolio is which takes time for some people. It takes effort as well and that said we have patience here and we're very comfortable that over the long term, we're going to end up in a really good spot.
Michael D. Hagedorn: As we have said historically, our loss rates tend to be roughly 40% of peer levels through the cycle. The next slide illustrates the sequential increase in our tangible book value and capital ratio. Tangible book value increased slightly from the fourth quarter of 2023, despite a modest headwind from the OCI impact associated with our available-for-sale securities portfolio.
Michael D. Hagedorn: Okay.
Speaker Change: That's helpful. If I could just ask one other one to change direction on the expense the updated expense guidance is below low end of the range.
Michael D. Hagedorn: Actions you guys think you've done a lot right over the past few years.
Speaker Change: What is the new range in terms of what Youre thinking for expense growth this year.
Michael D. Hagedorn: I think hopefully lower than where it is today I think we announced on last call.
Michael D. Hagedorn: And that last causing me last year right. When we started to really see some additional pressure associated with the inverted yield curve that we're going to put forth a 5% head count reduction in June of last year.
Michael D. Hagedorn: Regulatory capital ratios have continued to expand, and as Ira mentioned earlier, we anticipate further expansion for the rest of 2024 and beyond. With that, I'll turn the call back to the operator to begin the Q&A. Thank you. Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Michael D. Hagedorn: When you look at the actual numbers. We went from 3912 employees in June of 'twenty. Three we're sitting at 3709 employees today. So we've decreased by five 2% on the employee head count overall, we think there's more opportunity to continue that that overall focus and I think the bigger pieces.
Michael D. Hagedorn: Theme that people underestimate the amount of resources from an internal and external perspective associated with the core conversion that we did at the end of 2023.
Operator: Please stand by while I compile the Q&A roster. Our first question comes from Stephen Alexopoulos from J.P. Morgan. Please go ahead. Hey, good morning, everyone.
Michael D. Hagedorn: A significant amount of expense was associated with that and we continue to really to really begin to recognize some of the benefits of being on one platform and we think that will continue throughout 2024 as well.
Stephen Alexopoulos: Got it alright, thanks for taking my questions.
Stephen Alexopoulos: Morning. What a start! So Ira, first on the Cree concentration, moving down to 440. Could you give us a sense of your $32 billion Cree loan? Where should we expect those to trend for the rest of the year, and do you think you could continue to do what you did this quarter, exit at par? Yeah, I think when we look at that CRE concentration, it's really a function of not including owner-occupied loans into that.
Stephen Alexopoulos: Thanks.
Speaker Change: Thank you <unk>.
Speaker Change: For our next question.
Stephen Alexopoulos: Our next question comes from Matthew Breese from Stephens incorporated please go ahead.
IRA: Hey, good morning, everyone.
Speaker Change: Good morning.
Stephen Alexopoulos: As we think about commercial real estate growth in light of the updated guidance and actions this quarter should we expect.
Stephen Alexopoulos: <unk> run off in that book and if so to what extent or should we expect that loan that loan segments has essentially remained flattish while all the other segments C&I, especially grow around it.
Stephen Alexopoulos: So I think on one of our slides, when we give the break out of the balance sheet, probably gives a bit better idea of what that starting number looks like. I think we had a really successful quarter in working with BLEDA and some of the other partners that we've worked with over the years in looking at increased participation.
Stephen Alexopoulos: Hey, Matt its Tom as you say, we revised our guidance after our total loans to be between zero and two 4% from the 5% to 7% annualized.
Stephen Alexopoulos: We are intentionally managing our real estate portfolio by focusing on our top relationship driven clients, we originated about $750 million in real estate loans in the first quarter, which is down significantly from what we have done in the past few years, we will still be active.
Ira D. Robbins: As you can see on the loan yield maturities that we have coming due, there really is not a significant variance versus where our current portfolio sits versus where market indications or rates are today. So there really isn't a rate issue which would hinder some of our ability to really offset some of the loans that we have from a participation perspective. And as you've seen over the years, credit quality has been really, really stellar here. And as people have gone through and looked at the loans, they tend to agree with that assessment as well. I'm curious, Ira, are those stocks off?
Ira D. Robbins: <unk> involved in real estate, but we will still continue to sell loans.
Ira D. Robbins: Loans that are not relationship driven well, let that mature and leave in the first quarter or about $500 million of loans that matured and exited to other banks and ill point out all at full value to the bank.
IRA: We're not changing our C&I expectations, we've grown that portfolio, 10% on an annual basis.
IRA: Outside of the premium finance sale, we would have been slightly up in the first quarter first quarter is traditionally a slow quarter. We tend to get line utilization Paydowns are owner occupied portfolio in the first quarter grew 6% annualized. So that's a positive event our pipelines in C&I, a very stable when we originated a $1 billion of.
Ira D. Robbins: C&I loans in the first quarter, which is in line with what we have done in the past.
IRA: Got it Okay and then.
IRA: With seasonal it feels like we're all.
Ira D. Robbins: Also think about historical losses and forward looking economic factors.
Ira D. Robbins: I think it's a little over $30, and you mentioned Perception, I terms of the real estate portfolio, you know, when you compare yourselves, everybody, I mean, this all happened in the aftermath of New York. When you compare your pre-portfolio to peer banks, what do you think? I think to acknowledge that there is not an issue in commercial real estate from a macro perspective, I think it would be, putting my head in his hand, I think that said, if you really dive into the areas that are really under stress today, I think office is an obvious choice, and that's just not a function of where interest rates are; that behavior has actually changed.
Ira D. Robbins: And the reserve is supposed to be catered to each institution based on these assumptions, but in the wake of New York community and now the category for Bank classification, it feels like Theres, a third leg to the stool.
Ira D. Robbins: Which is.
Ira D. Robbins: Peter.
Ira D. Robbins: And what they're doing.
Ira D. Robbins: Is it fair to assume with that in mind that longer term beyond what you've outlined for the intermediate term that a lot of your ratios commercial real estate reserve capital needs to migrate to your categories for pure like levels. Despite whatever simple says in terms of your quarter to quarter change.
Ira D. Robbins: The rent regulation in New York City is another area of stress, and then I think from a third perspective, it's the repricing risk that exists, so if you just really isolate those three specific areas and then dive into the underlying details of where Valley is on those three specifics, on the office portfolio, it's about $3.3 billion, but when you look at the specific underlying metrics of those loans, they're very small in size. In addition to that, what we tried to do was give you an update on what those updated debt service coverage ratios are, so we're sitting at 168 of a debt service coverage ratio on the office portfolio, which I think is very differentiated. I would say the larger differentiation between the offices is actually the size.
Ira D. Robbins: In reserving.
Ira D. Robbins: Hey, Matthew this is mark Seger, just as it relates to our model one of the positives as we use a transition matrix model, which is very sensitive to migration in the portfolio.
Ira D. Robbins: We hold an elevated level of reserves against criticized and classified credits. So we get an immediate bump through the migration in our reserve, which shows the appropriateness of that migration not just loss and about two thirds of the increase in our reserve for the quarter was related.
Ira D. Robbins: Two migration within the portfolio.
Ira D. Robbins: I think on a macro basis the amount I mean.
Speaker Change: To your specific question do we have to be aware peer levels are right I think at our size organization and $160 billion. It has a long runway for us to get to a 100 <unk>.
Ira D. Robbins: So to look at where those reserve ratios are and automatically apply that we need to be at those levels.
Ira D. Robbins: Our offices are only $3 million on average, and I mean there really is not much stress within those types of offices that we're lending against, so I think that's something that's probably a little bit differentiated, and on the rent regulated is obviously a little bit differentiated as well, as Tom mentioned in his prepared comments. We're only sitting with about $500 million of rent regulated, that's north of 50% of what that composition looks like. So once again, I think it's a very small portfolio and very manageable as we think about what the risk of that portfolio looks like, everything's current portfolio.
Ira D. Robbins: Just on sort of this third perspective of what <unk> looks like I think would be an incorrect assumption.
Ira D. Robbins: I think the accounts are pretty clear what drives that the see some model and as Mark mentioned, it's going to uptick a little bit because of what we're seeing with the transition and a bit of an increase in some of those classified loans and criticized loans, but I don't think there is in our guidance as we need to be at whatever the 100 and plus banks are.
Ira D. Robbins: I guess I'm more concerned about CRE concentration.
Ira D. Robbins: Because that.
Ira D. Robbins: Those peers operate at a median of 100% concentration the highest <unk> around 180 190.
Ira D. Robbins: And we're a long ways off from that so by the time you get to a 100 you have to have made some significant changes along the way and Im curious if thats.
Ira D. Robbins: And then I think the third one that I alluded to was really the rate reset risk, and we tried to give a little bit more granularity in the earnings call as well as in the presentation. The rate reset risk is not what it's like at many of our peers here. That said, I acknowledge the CRE concentration is pretty significant on a macro level; we look at the concentration, people just have a perspective of what that is at Valley, so I'm aware of that, I acknowledge it, and I think as an organization we need to begin to reduce what that macro CRE concentration is, but at Valley, the CRE concentration doesn't mean that you're going to have an absolute loss.
Ira D. Robbins: The plan here.
Ira D. Robbins: I think obviously going to $100 billion in saying, we're going to have 400% Cree concentration is something that that doesn't make any sense.
Ira D. Robbins: That said, obviously, we have a very long runway, Matt I mean, if you even took a 10% growth rate on our balance sheet today.
Ira D. Robbins: It's over six years before we even get to a $100 billion and Theres a lot thats going to happen at value over the next six ish years, and I think getting the Cree concentration down is something we've talked about for years now of what the strategic focus has really been here, we've instituted C&I business lines.
Ira D. Robbins: On the tech business to our commodities business to all different types of C&I businesses. Many many years ago with a focus on beginning to diversify what that portfolio. It looks like now as Tom mentioned, we're growing C&I, 10% annualized so it's not like we woke up one day and said hey, the Cree concentrations too high we need to begin to establish some of these.
Ira D. Robbins: We migrated some loans into classified and criticized loans this specific quarter. As we mentioned before, the loss history is very, very different here at Valley as well. Because if a loan gets classified as a criticized loan here, it does not mean you're going to have a loss associated with it. We've proven that year over year.
Ira D. Robbins: Foundational C&I businesses, we've been doing it for years and we've actually seen a lot of positive outcomes associated with that C&I business as well. So obviously the Cree cannot be the same level at valley that it's been historically.
Ira D. Robbins: And we've put a lot of good strategic initiatives in place to really begin to drive C&I business here that we've seen the fruits out for many years now and we anticipate continuing to accelerate that.
Ira D. Robbins: I think in the third quarter we had a significant increase in what our classified loans were as well, and if you look at the results this quarter, there's not an uptick in non-accrual, there's not an uptick in delinquency, yet we had an uptick in classified a few quarters ago. I think it's just getting familiar with the granularity of what our portfolio is, which takes time for some people and takes effort as well. That said, we have patience here, and we're very comfortable that, over the long term, we're going to end up in a really good spot. If I could just ask one other person to change direction,
Speaker Change: Last one from me and then I'll hop back into queue.
Ira D. Robbins: Tom you had mentioned undergoing it sounds like fairly extensive stress testing of your commercial real estate book.
Speaker Change: And it shows that over time, you have had better loss content versus peers curious what types of assumptions overlaid in that in those stress tests and at the end of the day, what was the kind of loss content what was the charge offs.
Ira D. Robbins: That stress test.
Speaker Change: Out of them.
Speaker Change: So we don't publish needless to say our specific stress test assumptions, but we do stress occupancy rent per square foot vacancies overall rate and market conditions as part of that that stress testing and then test that against our.
Ira D. Robbins: Fence, D.F. You know, what actions do you guys think you've done a lot, right, over the past few years? What is the new re- what you're? I think it's hopefully lower than where it is today. You know, I think we announced on last call, not last call, excuse me, last year, right when we started to really see some additional pressure associated with the inverted yield curve that we were going to put forth a 5% headcount reduction in June of last year. You know, when you look at the actual numbers, we went from 3,912 employees in June of 23. We're sitting at 3,709 employees today.
Ira D. Robbins: Overall capital to ensure that were remaining.
Ira D. Robbins: Well capitalized organization.
Ira D. Robbins: And then I think one thing I would just add to that is the size of the scope of what we do when it comes to the credit review process and we laid out on slide 19.
Ira D. Robbins: It really value specific credit framework and Thats really led to a lot of the lower loss given defaults that Mike mentioned earlier.
Ira D. Robbins: We manually credit officers looked at over 60% of the commercial real estate portfolio. Just this last quarter. So stress testing for us isn't just what assumptions you're applying to those stress testing, but the scale of what that stress testing is it's not just hey, let's look at a couple of loans that are coming due in the next 12 ish months it's.
Ira D. Robbins: So we've decreased about 5.2% of the employee headcount overall. We think there's more opportunity to continue that overall focus. And I think the bigger piece is, Steve, that people underestimate the amount of resources from an internal and external perspective associated with the core conversion that we did at the end of 2023. A significant amount of expense was associated with that.
Ira D. Robbins: Really deep dives on each of these individual portfolios. So what youre seeing in the migration. This quarter isn't just reflective of loans that are coming due in the next 12 ish months, it's 60% of the entire accrete book that we have.
Speaker Change: I appreciate all the color there. Thank you.
Ira D. Robbins: Thanks.
Speaker Change: Thank you.
Ira D. Robbins: When we Brian next question.
Speaker Change: Our next question comes from.
Frank Joseph Schiraldi: Frank Schiraldi.
Ira D. Robbins: From Piper Sandler. Please go ahead.
Ira D. Robbins: And we continue to really begin to recognize some of the benefits of being on one platform. We think that will continue throughout 2024 as well.
Speaker Change: Hey, guys good morning.
Ira D. Robbins: Just to.
Speaker Change: A follow up.
Ira D. Robbins: And the last one question a little bit just on the I just want to make sure I understand.
Stephen Alexopoulos: Ira, thanks for taking my questions. Thanks. Thank you. We'll move on to our next question. Our next question comes from Matthew Breese from Stevens Incorporated. Please go ahead. Hey, good morning, everyone.
Ira D. Robbins: On slide five.
Ira D. Robbins: The reserve, Mike you talked about being relatively comfortable with where our reserves are in.
Matthew M. Breese: And given.
Matthew M. Breese: Loss rates.
Matthew M. Breese: Actually better reserve compares in many ways, but.
Matthew M. Breese: So I'm just trying to understand when we get to.
Matthew M. Breese: The roughly 110 reserve.
Matthew M. Breese: Morning. You know, as we think about commercial real estate growth in light of the updated guidance and actions this quarter, should we expect active runoff in that book? And if so, to what extent? Or should we expect that loan, that loan segment to, you know, essentially remain flattish while all the other segments, G&I especially, grow around it? Hey Matt, it's Tom.
Matthew M. Breese: Over the next 12 to 24 months.
Matt: So what's the driver there.
Tom: As the commercial real estate book.
Matthew M. Breese: <unk> and re prices.
Tom: Or is that just kind of more.
Tom: As you grow getting getting in line with peers over time.
Matthew M. Breese: Sure.
Matt: I think from a macro perspective, it's probably two things right.
Matthew M. Breese: Obviously, the Cree we've used that we do in the migration associated with that has really benefited us from what the loss given defaults or so.
Tom: As you see, we revised our guidance for our total loans to be between zero and 4% from the 5% to 7% annualized. We are intentionally managing our real estate portfolio by focusing on our top relationship-driven clients. We originated about 750 million in real estate loans in the first quarter, which is down significantly from what we have done in the past few years.
Tom: Potentially there's going to be a bit more migration, what that curve looks like as we go through the rest of the portfolio and I think one of the other drivers is really on the C&I side as we continue to originate more C&I loans, they're going to come at a higher reserve ratio than what the rest of the historical <unk>. So so that's automatically going to end up driving up what that coverage ratio looks like.
Speaker Change: Got you, Okay, and then just wondering.
Tom: The potential to accelerate some of this reduction in concentration you, obviously move some stuff out of Korea at par.
Tom: We will still be active and involved in real estate, but we will still continue to sell loans. The loans that are not relationship-driven, we'll let them mature and leave. In the first quarter, there were about $500 million in loans that matured and were exited to other banks.
Tom: Quarter end.
Tom: Obviously, it seems like there's been some opportunity on the on the commercial side, we've certainly seen commercial teams moving around I'd say given.
Tom: To a greater degree given some of the dislocation in the marketplace, let's say so I'm just curious as you think about that that's something that.
Tom: And I'll point out all that full value to the bank. RC, we're not changing our C&I expectations. We've grown that portfolio 10% on an annual basis outside of the premium finance sale. We would have been slightly up in the first quarter.
Tom: You guys are seeing potential there too.
Tom: May accelerate this through greater.
Tom: Mix shift in the near term.
Speaker Change: I think maybe I'll start and if you don't mind, and then I'll turn it over to Tom, but I think one of the constraints that we've always operated in here is what that tangible book value number is okay.
Tom: First quarter is traditionally a slow quarter. We tend to get line utilization pay downs. Our owner-occupied portfolio in the first quarter grew 6% annualized, so that's a positive event. Our pipelines and C&I are very stable, and we originated a billion dollars of C&I loans in the first quarter, which is in line with what we have done in the past. Got it. Okay. And then, you know... With Cecil, it feels like we are all.
Tom: And it's really been a.
Tom: Focus within the organization to not dilute shareholders to.
Tom: Tangible book value transactions, as we mentioned earlier, whether it be through silly M&A transactions that have very long buybacks or through balance sheet structures. I mean, we see that today and what's happening with some securities books, we see with what's happening with also sales. So I think thats a constraint that we look at to make sure.
Tom: Alternatives are that we have to make sure that that tangible book value and capital really continuing to grow within the organization that said, we were able to execute a lot at par today.
Matthew M. Breese: It's hard to think about historical losses and forward-looking economic factors, and the reserve was supposed to be catered to each institution based on these assumptions. But in the wake of New York community and now the category for bank classification, it feels like there's a third leg to the stool, which is your peer group and what they're doing. Is it fair to assume, with that in mind, that, longer term, beyond what you've outlined for the intermediate term, that a lot of your ratios, commercial real estate, reserve, and capital needs to migrate to your category for peer-like levels, Hey Matthew, this is Mark Sager.
Matthew M. Breese: And.
Mark Sager: Frank you and Youre referencing question regarding.
Mark Sager: Deposit driven commercial teams, we have opportunistically added teams in certain markets, including the southeast.
Mark Sager: No not.
Mark Sager: Okay Alright.
Mark Sager: The big.
Mark Sager: It just seems like Theres a lot of movement I don't know if maybe some of these things end up being too expensive on the front.
Mark Sager: End of things.
Mark Sager: Obviously, you guys reduced your expense guide.
Matthew: Got it.
Mark Sager: So I was just curious or maybe there was a significant pickup.
Mark Sager: Opportunity here just in the near term, we've obviously seen some other press releases from other places.
Mark Sager: Just as it relates to our model, one of the positives is that we use a transition matrix model, which is very sensitive to migration in the portfolio. We hold an elevated level of reserves against criticized and classified credits, so we get an immediate bump through the migration in our reserves, which shows the appropriateness of that migration, not just loss. And about two-thirds of the increase in our reserve for the quarter was related to migration within the portfolio. I think on a macro basis, though, Matt, I mean, you know, to your specific question of, do we have to be at where peer levels are, right?
Matt: So I was just I was just curious about anything in the near term of size.
Speaker Change: Yeah, maybe I misunderstood your question first and I apologize I thought you were going a little bit more on the loan side and I should just defer to time right off the bat.
Mark Sager: I think as we mentioned on the call.
Mark Sager: We're seeing a lot of growth in that southeast market.
Mark Sager: Some of the dislocation that you are seeing up here in the northeast with people coming with teams. They obviously come at a significant expense we've looked at some of them and the marginal cost to bring on some of those deposits. When you combine it with the expense of those teams.
Ira D. Robbins: I think at our size organization, we're only $60 billion. It's a long runway for us to get to $100 billion. So to look at where those reserve ratios are and automatically apply that we need to be at those levels based on sort of this third perspective of what CISA looks like would be an incorrect assumption. You know, I think the accounts are pretty clear about what drives the CISA model.
Mark Sager: Finding much much cheaper alternatives elsewhere, and Thats, where we intend to allocate a lot of our resources.
Speaker Change: Got you, Okay that makes sense I appreciate it.
Ira D. Robbins: Okay.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Ira D. Robbins: Our next question comes from Emily Lee from <unk>. Please go ahead.
Ira D. Robbins: Emily.
Ira D. Robbins: Hello.
Speaker Change: Hey, Chris we can hear you.
Ira D. Robbins: Okay.
Chris: It's Chris.
Ira D. Robbins: In terms of the.
Ira D. Robbins: The capital the nine eight by the end of the year and.
Ira D. Robbins: And as Mark mentioned, you know, it's going to uptick a little bit because of what we're seeing with the transition and a bit of an increase in some of those classified loans and criticized loans. But I don't think there's any guidance because we need to be at whatever the $100 billion plus banks are. I guess I'm more concerned about the CRE concentration because those peers operate at a median of 100% concentration; the highest is M&T, around 180-190. And we're a long ways off from that.
Ira D. Robbins: And 10 plus.
Ira D. Robbins: Plus over the next 12 to 24, how did you get to those numbers.
Ira D. Robbins: I'm just interested to kind of I understand the mechanics of how you would get there, but how did you get I guess more importantly to the 10 10, plus some of your peers are kind of mid teens, even 11.
Speaker Change: Yes, I think overall, Chris we've talked a lot about relative to our peers that our allowance and capital ratios, we justify them being slightly below our peers are understanding that they are going to be higher than where we are today. So I don't know your question is on kind of the immediate term or kind of where we view ourselves in the long term.
Ira D. Robbins: But if you look at that near term expectation column.
Ira D. Robbins: These metrics reflect kind of organic efforts or things on the margin like what we did this quarter in terms of selling off certain commercial real estate loans at par. So theres no significant rash actions that are embedded in the near term expectation column and then it's a continuation of those efforts over time that gets you over to the right hand column, so not sure if.
Matthew M. Breese: So by the time you get to 100, you have to have made some significant changes along the way. And I'm curious if that's part of the plan. I think obviously going to $100 billion and saying we're going to have 400% CRE concentration is something that doesn't make any sense. That said, obviously, we have a very long runway, Matt.
Matt: That's the answer but yes that helps just to follow up on that.
Matthew M. Breese: Sure.
Matthew M. Breese: Would there be any situation, where you would do.
Matthew M. Breese: Credit linked note or some sort of <unk> mitigation to accelerate that you've seen some peers do that with success.
Matthew M. Breese: I would say that all our Wi optimally optimization opportunities are on the table in.
Ira D. Robbins: If you even take a 10% growth rate on our balance sheet today, it's over six years before we even get to $100 billion, and there's a lot that's going to happen at Valley over the next six-ish years. I think getting the CRE concentration down is something we've talked about for years now about what the strategic focus has really been here. We instituted C&I business lines from the tech business to a commodities business to all different types of C&I businesses many, many years ago with a focus on beginning to diversify what that portfolio looks like. As Tom mentioned, we're growing C&I 10% annualized. It's not like we woke up one day and said, hey, the CRE concentration is too high.
Ira D. Robbins: But there are certain portfolios that lend themselves more to that than others, but we have a very diverse balance sheet and we have portfolios like auto and residential that could be good opportunities for transactions like that.
Speaker Change: Okay, Great and then maybe just two housekeeping.
Ira D. Robbins: Do you have maybe I missed it the CRE concentration metric in the first quarter and then also the.
Ira D. Robbins: Quarter on quarter change in the criticized classified as special mention I know you mentioned.
Ira D. Robbins: Below the high level, but any specifics there.
Ira D. Robbins: Yes, the Cree ratio is going to be about 464%. So it should be down about 10% from December 31, Mark on.
Ira D. Robbins: The migration as we mentioned approximately 500 migrated into criticized for the quarter Little granularity on that is proportionately in office, which should not be a surprise with what's going on in the market today.
Speaker Change: Alright, perfect. Thank you.
Ira D. Robbins: Yes.
Speaker Change: Thanks, Chris Thank you.
Speaker Change: For our next question.
Ira D. Robbins: Our next question comes from Jon <unk> from RBC capital markets. Please go ahead.
Ira D. Robbins: We need to begin to establish some of these foundational C&I businesses. We've been doing it for years, and we've actually seen a lot of positive outcomes associated with that C&I business as well. Obviously, the CRE cannot be at the same level at Valley that it has been historically. We've put a lot of good strategic initiatives in place to really begin to drive C&I business here that we've seen the fruits of for many years now, and we anticipate continuing to accelerate that. That's one for me, and then I'll hop back into Q.
Speaker Change: Hey, Thanks, good morning.
Speaker Change: Just a follow up on the follow up on the last.
Ira D. Robbins: And sort of Chris's question are you guys, telling us to expect higher.
Ira D. Robbins: Higher criticized and classified loans each quarter it sounds like Youre doing a deep dive maybe.
Speaker Change: Maybe every quarter, but how do you want us to think about what's ahead.
Ira D. Robbins: Just to prepare for them.
Matthew M. Breese: You know, Tom, you mentioned undergoing, what sounds like, a fairly extensive stress test for your commercial real estate. And it shows that over time, you've had better lost content versus peers. I'm curious, what types of assumptions were overlaid in those stress tests, and at the end of the day, what was the kind of loss content, what was the charge off?
Speaker Change: Okay I'd point to this is mark just pointing to iras.
Speaker Change: <unk> spoke to before we did a special review on the sensitive asset classes and overall portfolio touching a little over 60% of the portfolio in the first quarter.
Matthew M. Breese: With a focus on rents.
Matthew M. Breese: <unk> stabilized office, so while I anticipate because of a high rate environment that we will continue to have some migration throughout the year. We do believe that the first quarter migration was elevated because of the focus of the reviews as a percent of the portfolio that was reviewed.
Tom: that that stress test resulted. So we don't publish, needless to say, our specific stress test assumptions, but we do stress occupancy, rent per square foot, vacancies, overall rate, and market conditions as part of that stress testing, and then test that against our overall capital to ensure that we're remaining a well-capitalized organization. I think one thing I would just add to that is the size of the scope of what we do when it comes to the credit review process.
Speaker Change: That's helpful. Thank you for that.
Tom: Mike.
Speaker Change: Can you go over your margin expectations again, I think I heard you say that you.
Tom: Do you feel like the margin trough and we're going to get a lift in the second quarter, but I just want to make sure I heard that correctly.
Speaker Change: Yes first Brett Thanks for asking the question I was feeling left out this morning.
Tom: Yes.
Speaker Change: I don't believe I said, the word troughs, but.
Tom: Let me go back to the first quarter and then I'll give you the guidance generally the first quarter results were in line with our expectations on a day count basis.
Tom: The modest headwinds as it relates to noninterest income, where really the noninterest bearing deposits and slower loan growth, but those were also offset by some deposit cost reductions that we've spoken about as well and we continue to look at that the guidance being revised slightly down again a function of a.
Tom: We laid out on slide 19 a really value-specific credit framework, and that's really led to a lot of the lower loss-giving defaults that Mike mentioned earlier. We, as credit officers, looked at over 60 percent of the commercial real estate portfolio just this last quarter.
Tom: Starting point with lower noninterest bearing deposits and again the slower loan growth that we talked about especially when you consider the participations that we visited about being in the latter part of the first quarter. So that impact is in the numbers.
Ira D. Robbins: So stress testing for us isn't just what assumptions you're applying to those stress tests but the scale of what that stress testing is. It's not just, hey, let's look at a couple loans that are coming due in the next 12-ish months. It's really deep dives on each of these individual portfolios, so what you're seeing in the migration this quarter isn't just reflective of loans that are coming due in the next 12-ish months. It's 60 percent of the entire creed book that we have.
Ira D. Robbins: In the first quarter as much as it will be in the second quarter.
Ira D. Robbins: And then while we did assume.
Ira D. Robbins: Fewer fed cuts I would assume most people are doing that remember that long end rates are forecasted to be higher relative to where they were at the start off point in 12 31.
Ira D. Robbins: So that on a net basis, the shifting yield curve, whether it's on the higher the short end is a modest benefit to us because we're more exposed on the long end.
Ira D. Robbins: Yes.
Speaker Change: Okay, Alright that makes sense to me.
Ira D. Robbins: And your IRA fees, if I heard you correctly you said.
Matthew M. Breese: I appreciate all the calls today. Thank you. One moment for our next question. Our next question comes from... Frank Schiraldi, from Piper Sandler. Please go ahead. I got it. Good morning.
Frank Joseph Schiraldi: With these guidance changes do you still expect relatively consistent.
Frank Joseph Schiraldi: PNR to what you said before these adjustments is that right.
Matthew M. Breese: Absolutely.
Matthew M. Breese: Okay.
Frank Joseph Schiraldi: Just to follow up on the last line of questioning a little bit, just on the, I just want to make sure I understand. On slide five, the reserve, you know, Mike, you talked about being relatively comfortable with where reserves are, and given, you know, loss rates, you're actually better reserved than peers in many ways, but so just trying to understand when we get to, you know, the roughly 110 reserve over the next 12 to 24 months. So what's the driver there as the commercial real estate book matures and reprices, or is that just kind of more? As you grow up, get in line with peers.
Frank Joseph Schiraldi: For us it's a question I'm trying to figure out what the provision is that.
Frank Joseph Schiraldi: And Thats and Youre, just seeing some modest growth in the reserve.
Frank Joseph Schiraldi: PNR stays the same just the geography on the income statement is different is that right.
Frank Joseph Schiraldi: I think we've tried to give you some guidance as to where those numbers could shake out, but obviously look it's market dependent as Mark said, we've gone through and looked at a lot of the portfolio already that said, we're going to continue to monitor the portfolio into the credit reviews, we believe that that's really been a.
Frank Joseph Schiraldi: A strong point for us and the ability to have the significant reviews that we do as it's driven down to lower loss given default. So it's been part of our hallmark of who we are and actively managing the portfolio not just waiting for something to happen. So we are all over every single loan that we have and we continue to to really be and as market conditions change we'll adjust.
Frank Joseph Schiraldi: Them Accordingly.
Ira D. Robbins: I think from a macro perspective, it's probably two things, right? You know, obviously, the CRE reviews that we do and the migration associated with that have really benefited us from what the loss-given defaults are. So, you know, potentially, there's going to be a bit more migration of what that CRE looks like as we go through the rest of the portfolio. And I think one of the other drivers is really on the C&I side.
Speaker Change: Okay, Alright fair enough. Thank you guys appreciate it.
Speaker Change: Thanks, Thank you.
Speaker Change: One moment for our next question.
Ira D. Robbins: Our next question comes from Manhattan Gaselier.
Morgan Stanley: From Morgan Stanley. Please go ahead.
Speaker Change: Hey, good morning.
Ira D. Robbins: With with all the puts and takes in the loan side that you just discussed.
Ira D. Robbins: Given the fixed rate loan repricing in the 40% of loans being floating rate.
Ira D. Robbins: How should we think about the loan yield expansion from this quarter's levels.
Ira D. Robbins: Three rate cuts scenario.
Ira D. Robbins: Look I think you've seen the pace of loan yield growth has slowed as rates have stabilized generally on the front end. So that immediate benefit has kind of played itself out probably but you do obviously have some tailwind and when we show you I think in the in the definitely show that mature increased side that may be a good kind of guide to help you.
Ira D. Robbins: As we continue to originate more C&I loans, they're going to come at a higher reserve ratio than what the rest of the historical CRE does. So that's automatically going to end up driving up what that coverage ratio looks like. Gotcha, okay. And then, just wondering, you know, about the potential to accelerate some of this reduction in concentration.
Ira D. Robbins: In terms of what's coming off and then where are you putting things back on we originated loans loan yields. This quarter is still in the high sevens sitting on a credit perspective, our Cree origination yield was 780, so theres still some some opportunity to enhance yields there.
Speaker Change: Alright, I appreciate that.
Speaker Change: And then you noted that you purchased this quarter.
Speaker Change: Is there more room to do that and how should we think about the level of on balance sheet liquidity that you want to manage to over the next few quarters.
Frank Joseph Schiraldi: You obviously moved some stuff out of Caridia this quarter, and obviously, it seems like there's been some opportunity on the commercial side. We've certainly seen commercial teams moving around, I'd say, given, to a greater degree, given some of the dislocation in the marketplace, let's say. So, I'm just curious, as you think about that, if that's something that you guys are seeing potential for there to maybe accelerate this through greater mix shift in the near term. I think maybe I'll start, if you don't mind, and then I'll turn it over to Tom.
Tom: Yes, so the Ginnie Mae purchases, obviously, another reserve risk weighted they average about three to four years and the yield on that portfolio on recent purchases I should say had been in the 5% slightly more than 5% range.
Tom: The runoff on the portfolio there is theres really no prepayments. So it's going to be just the stated maturity payoffs brought around $75 million to $90 million a quarter and we would consider continue to add we believe in zero risk weighted genies.
Tom: At probably five to five 5% yields.
Ira D. Robbins: But I think one of the constraints that we've always operated in here is what that tangible book value number is. And it's really been a focus within the organization to not dilute shareholders through tangible book value transactions, as we mentioned earlier, whether it be through silly M&A transactions that have very long buybacks or through balance sheet restructures. I mean, we see that today in what's happening with some securities books.
Tom: Got it so in terms of the.
Ira D. Robbins: On balance sheet liquidity, you need to maintain from here.
Ira D. Robbins: There is room for that to move up or do you think youre at the right level asking context of.
Ira D. Robbins: You also mentioned that the LDR should trend below 100% in 2025. So just wanted to get a sense of what the right level of liquidity is.
Ira D. Robbins: I want to make sure im answering you're referring specifically to <unk>. Your federal reserve availability I think overall, you're probably going to see a little bit more on balance sheet liquidity.
Ira D. Robbins: Not to a significant.
Ira D. Robbins: We see what's happening with sales, too. So I think that's a constraint that we look at to make sure what alternatives we have to make sure that that tangible book value and capital really continue to grow within the organization. You know, that said, we were able to execute a lot at par today.
Ira D. Robbins: Degree, but.
Ira D. Robbins: Getting the loan to deposit ratio down to 100, we will definitely be a little bit of a core deposits coming on and being reinvested in securities as opposed to going into loans, but I don't think you really need to look at a significant shift within what that securities book looks like.
Speaker Change: Got it yeah, that's what I was getting at thank you.
Frank Joseph Schiraldi: Frank, in your reference and question regarding deposit-driven commercial teams, we have opportunistically added teams in certain markets, including the Southeast and the North. Okay, all right. I guess the big thing is, you know, there's a lot of movement. I don't know if maybe some of these things end up being too expensive on the front end of things.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Frank Joseph Schiraldi: Okay.
Frank Joseph Schiraldi: Our next question comes from Jared Shaw from Barclays. Please go ahead.
Speaker Change: Hey, good morning. Thanks.
Frank Joseph Schiraldi: Alright, yes, looking at the at the CRE sales that you did this quarter.
Frank Joseph Schiraldi: Being able to do those at par is great.
Frank Joseph Schiraldi: I guess, that's a little surprising just given where rates are and if there wasn't even a rate mark on there could you give us any detail on the term and yield of the type of loans that were sale or sold and if there was any retained credit.
Frank Joseph Schiraldi: Obviously, you guys have reduced your expenses guy a bit. Yeah, so I was just curious, and maybe there is a significant pickup opportunity here just in the near term. We've obviously seen some other press releases from other places. So I was just curious about anything of the near term of size.
Frank Joseph Schiraldi: Participation on that.
Frank Joseph Schiraldi: Yes, yes, it's Tom here. These were participations for the most part those participation rates range, probably from I think seven 4% and up.
Ira D. Robbins: Yeah, maybe I misunderstood your question at first, and I apologize. I thought you were going a little bit more on the loan side, and I should just defer to Tom right off of that. Look, I think, as we mentioned on the call, you know, we're seeing a lot of growth in that Southeast market. So some of the dislocation that you're seeing up here in the Northeast with people coming with teams, they obviously come at a significant expense.
Ira D. Robbins: Fixed side was seven four to seven five they will all participated out at par we retained a portion as lead bank on those.
Ira D. Robbins: On the floating side, they were mostly prime plus construction allowance and again, we retain a position into us.
Ira D. Robbins: I think that last point is pretty important too because we're preserving the customer relationships and as you heard RSA in the prepared remarks, some increase a very valuable asset class will remain in it and we have a deep pool of high quality commercial real estate borrowers, but there are ways that we can balance the need to manage the balance sheet with preserving and building those customers.
Ira D. Robbins: We've looked at some of them, and the marginal cost to bring in some of those deposits, when you combine it with the expense of those teams, we're finding much, much cheaper alternatives elsewhere, and that's where we intend to allocate a lot of our resources. Gotcha. Okay. No, that makes sense.
Ira D. Robbins: <unk> chips.
Speaker Change: Okay. Thanks, and then following up.
Ira D. Robbins: What's what's the expectation for deposit growth from here.
Ira D. Robbins: And then as we look at some of the promotional.
Frank Joseph Schiraldi: I appreciate it. Thank you. One moment for our next question. Our next question comes from Emily Lee from KBW. Please go ahead. Amelie?
Emily Lee: Products that are that are rolling off where are you seeing those.
Frank Joseph Schiraldi: Yeah.
Emily Lee: Coming on.
Emily Lee: Hello? Hello? Hey, Chris. We can hear you. Okay, yeah, it's Chris. In terms of capital, the 9.8 by the end of the year and 10 plus over the next 12 to 24. How'd you get to those?
Emily Lee: The new product coming in terms of term and price.
Emily Lee: While we've continued to have the noninterest bearing rotation.
Speaker Change: One of the really bright spots has been the growth savings and now which is more than offset what we've lost in noninterest bearing or rotated into noninterest art out of noninterest bearing into other products and the growth in our niche businesses has been very strong as well and may be a harbinger of or an indicator of the future grew.
Chris: I'm just interested in kind of, I understand the mechanics of how you would get there, but how did you get, I guess, more importantly, to the 10 plus. Some of your peers are kind of mid-10, even 11. Yeah, I think, look, overall, Chris, we've talked a lot about, you know, relative to our peers that our allowance and capital ratios are, you know, we've justified them being slightly below where peers are, understanding that they still need to be higher than where we are today.
Chris: And the strength there is just in the first quarter alone on a net basis, we added over 3000 net new deposit accounts.
Chris: So we feel pretty good what I'm, telling you is I think the growth is going to come out of the niche businesses and the continued efforts in our retail branches to grow households, and to the extent that we could see a <unk>.
Chris: Flattening of rotation of noninterest bearing that's only going to help us maybe Jared outlet just just two different pieces said last call. We talked about at least me specifically some of the disappointment I had and where the funding cost headcount within the organization. So we were very proactive in going out and looking at $10 million of different deposit products across.
Chris: So I don't know if your question's about kind of the immediate term or kind of where we view ourselves in the long term. But, you know, if you look at that near-term expectation column, all these metrics reflect kind of organic efforts or, you know, things on the margin, like what we did this quarter in terms of selling off certain commercial real estate loans at par. So, you know, there are no significant rash actions that are embedded in the near-term expectation column. And then it's the continuation of those efforts over time that gets you over to the right-hand column. So I'm not sure if that's the answer, but
Chris: The organization and lowering those from a 40 basis points and that did not happen in the first period, assuming that the first month of the quarter, but it happened throughout the quarter. So we think theres going to be some tailwind associated with that as we continue to think about.
Chris: Deposit costs.
Chris: That said the new originations came on very very strong and deposits for the quarter.
Chris: The cost was only three 3% and is well over $1 billion.
Chris: Net new originations that came in.
Chris: And obviously some of that offset some of the higher cost.
Michael D. Hagedorn: Yep, that helps. Just to follow up on that, would there be any situation where you would like a credit link node or some sort of RWA mitigation to accelerate that? You've seen some peers do that with success.
Chris: Time deposits that Tom that our semi that Mike mentioned that ran off so I think we've done a really good job, bringing in newer deposits into the organization at a much lower cost than with them.
Speaker Change: The marginal cost of some of the current deposits that we have here and we've also been able to be very successful in bringing down some of the cost of deposits that sit within that book right. Now. So we believe that there is a lot of tailwind associated with that.
Chris: I would say that all RWA optimization opportunities are on the table, and there are certain portfolios that lend themselves more to that than others. But we have a very diverse balance sheet, and we have portfolios like auto and residential that could be good opportunities for transactions like that. Okay, great. And then maybe just two pieces of housekeeping. Do you have, maybe I missed it, the CRE concentration metric for the first quarter, and then also the, you know, quarter-on-quarter change in the criticized classified special mention? I know you mentioned a little bit about a high level, but any specifics?
Speaker Change: Great. Thank you.
Chris: Thanks.
Speaker Change: Thank you we'll move to our next question.
Chris: Our next question comes from Steve <unk> from Raymond James. Please go ahead.
Speaker Change: Good morning.
Speaker Change: Good morning on deposits here.
Speaker Change: I'm curious when did you guys reduce deposit rates by 40 basis points in the quarter.
Chris: There were tranches of.
Chris: Deposit classes that we reduced beginning February one and then continuing through parts of March.
Chris: Okay.
Speaker Change: And so just.
Chris: Yeah, the CRE ratio is going to be about 464%, so it should be down about 10% from December 31st. And Mark, yeah, on the migration, as we mentioned, approximately 500 migrated into Criticized for the Quarter, a little granularity on that, disproportionately in office, which should not be a surprise with what's going on in the market today. All right, perfect. Thank you. Thank you, Chris.
Speaker Change: I guess basically the idea is to see how they hold in it.
Chris: If we stay in the current environment.
Chris: Will you continue to press for additional.
Chris: Great.
Chris: Yes.
Speaker Change: And then in terms of on credit here with the deep dive you guys took on the specific portfolios.
Jon Glenn Arfstrom: One moment for our next question. Our next question comes from Jon Arfstrom, from RBC Capital Markets. Please go ahead.
Jon Glenn Arfstrom: Hey, thanks. Just a follow-up on the last answer to Chris's question: are you guys telling us just to expect higher criticized and classified loans each quarter? It sounds like you're doing a deep dive, maybe every quarter.
Jon Glenn Arfstrom: Migration there just curious what is the specific reserve for office and then also along those lines just curious.
Jon Glenn Arfstrom: Are you looking primarily at the specific properties or are you looking at the borrower.
Mark Sager: But how do you want us to think about what's ahead just to prepare us for that? I point to, this is Mark, just pointing to what Ira spoke about earlier. We did a special review of the sensitive asset classes and overall portfolio touching a little over 60% of the portfolio in the first quarter with a focus on rent stabilized and office. So while I anticipate, because of the high rate environment, that we will continue to have some migration throughout the year, we do believe that the first quarter migration was elevated because of the focus of the reviews and the percent of the portfolio that was reviewed. That's helpful; thank you for that. Mike... Can you go over your margin expectations again? I think I heard you say that.
Jon Glenn Arfstrom: Borrowers global cash flows I'm, just kind of curious as to how those global cash flows are holding up these days.
Mike: No. Let me let me address the end of the question, yes, as part of our standard credit process. We look at not only the property that we financed but the overall global cash flow of any of the developers that we do business with to get that overall view to see if not stress in our property.
Mark Sager: <unk> are their stress it is global or vice versa.
Mark Sager: Strength strength in the global cash flow and weakness in property all of those factors go in to the risk rating migration.
Mark Sager: <unk> portfolio.
Speaker Change: We don't publish a separate.
Mark Sager: Office reserve, but as I mentioned earlier, we are substantially higher level of reserves for criticized assets and that there is an elevated level of criticized assets in our office portfolio.
Mark Sager: The only thing I, just want to add to that as many of our customers are in multiple classes of assets not just in a single class.
Michael D. Hagedorn: You feel like the margins shrugged and we're going to get a lift in the second quarter, but I just want to make sure I heard that correctly. First, thanks for asking the question. I was feeling left out this morning, so that's good.
Mark Sager: Right.
Michael D. Hagedorn: <unk> are a lot of those borrowers in the current environment headed towards one.
Speaker Change: Those loans these days.
Michael D. Hagedorn: I don't believe I said the word troughed, but, you know, let me go back to the first quarter and then I'll give you the guidance. So, generally, the first quarter results were, you know, in line with our expectations on a day count basis, and the modest headwinds as it relates to net interest income were really the non-interest bearing deposits and slower loan growth. But those were also offset by some deposit cost reductions that we've spoken about as well, and we continue to look at that.
Speaker Change: Yes, I think youll see the granularity in the portfolio with a $3 million average loan size in that we do look in the individual cases with migrated clearly there was stress and debt service coverage on those assets necessitating the downgrade, but historically are.
Michael D. Hagedorn: Leverage on office assets in our going in coverage was exceptionally strong to long term customers that we have relationships with which we also believe us.
Michael D. Hagedorn: You know, the guidance being revised slightly down is, again, a function of a starting point with lower non-interest-bearing deposits and again, the slower loan growth that we talked about, especially when you consider the participations that we've visited about being in the latter part of the first quarter, so that impact isn't in the numbers in the first quarter as much as it will be in the second quarter. And then, while we did assume fewer Fed cuts, I would assume most people are doing that. Remember that long-end rates are forecasted to be higher relative to where they were as the start-off point in 1231.
Michael D. Hagedorn: Okay, and maybe just one more related to commercial real estate office.
Michael D. Hagedorn: Are you where.
Michael D. Hagedorn: So I would say from it's really more geographically focused so our largest percentage of office is in the Florida, Alabama market and we've seen.
Michael D. Hagedorn: So that on a net basis, the shifting yield curve, whether it's on the high or the short end, is a modest benefit to us because we're more exposed on the long. All right, that makes sense. And you're, Ira, if I heard you correctly, you said... With these guidance changes, you'd still expect relatively consistent PNR compared to what you said before these adjustments, is that right?
Michael D. Hagedorn: Much lower level of migration in that portfolio with the majority of migration.
Michael D. Hagedorn: The northeast and the New Jersey, and New York marketplace, but noting that our our Manhattan exposure is quite granular and quite small.
Ira D. Robbins: So it's just, for us, it's a question of trying to figure out what the provision is. And you're just saying some modest growth in the reserve. PPNR stays the same, just the geography on the income statements is different, is that right?
Michael D. Hagedorn: Okay.
IRA: That and then just.
Ira D. Robbins: No.
Ira D. Robbins: Stepping back from growth here IRA just curious here with.
Ira D. Robbins: The plant to reduce commercial real estate concentrations.
Ira D. Robbins: I think we've tried to give you some guidance as to where those numbers could shake out, but obviously, look, it's market-dependent, as Mark said. We've gone through and looked at a lot of the portfolio already. That said, we're going to continue to monitor the portfolio and do the credit reviews. We believe that that's really been a strong point for us in the ability to have the significant reviews that we do as it's driven down to lower losses given default.
Ira D. Robbins: No.
Ira D. Robbins: It might not be easy to do a deal today, but just curious as to how.
Ira D. Robbins: This shifting.
Ira D. Robbins: Changing your thinking on the M&A front.
Ira D. Robbins: Look I think this is the strategic initiatives and plan that we've outlined for a couple years now. So I think we're just looking at accelerating some of the things that we're doing if there is an M&A opportunity that helps accelerate some of the strategic initiatives. We're definitely something we would look at that said.
Ira D. Robbins: So it's been part of a hallmark of who we are in actively managing the portfolio, not just waiting for something to happen. So we are all over every single loan that we have, and we continue to really be in. As market conditions change, we'll adjust them accordingly. All right. Fair enough.
Ira D. Robbins: The guard rails around tangible book value of our real Timmy salons.
Ira D. Robbins: Obviously, the valuation of that.
Ira D. Robbins: In today's market limits, the ability to do some of that but M&A that really accelerate strategic initiatives is something thats definitely that we are as an organization are open to.
Jon Glenn Arfstrom: Thank you, guys. Thanks. One moment for our next question. Our next question comes from Manan Gosalia, from Morgan Stanley. Please go ahead. Hi, good morning.
Manan Gosalia: Thanks, Thank you.
Manan Gosalia: One moment for our next question.
Manan Gosalia: Our next question goes to <unk>.
Manan Gosalia: With all the put-and-takes on the loan side that you just discussed, and given the fixed rate loan repricing and the 40% of loans being floating rate, how should we think about the loan yield expansion from this quarter's levels under a three-rate cut scenario? Look, I think you've seen the pace of loan yield growth has slowed as rates have stabilized generally on the front end, so that immediate benefit has kind of played itself out, probably.
Manan Gosalia: David <unk> from Wedbush Securities. Please go ahead.
Speaker Change: Hi, Thanks, I wanted to follow up on expenses it looks like we could see a decent reduction here could you talk about what areas you're pulling back on any initiatives that are getting pushed to the back burner.
Manan Gosalia: I think from a macro perspective.
Manan Gosalia: But you do obviously have some tailwind, and when we show you, I think in the deck when we show that maturing CRE slide, that may be a good kind of guide to help you in terms of what's coming off and then where you're putting things back on. We originated loan yields this quarter still in the high sevens, so I think on a CRE perspective, our CRE origination yield was 780, so there's still some opportunity to enhance loan yields there. All right.
Manan Gosalia: Obviously, theres going to be less activity in volume in certain loan classes. So there's probably going to be some continued reduction in those specific areas, but I think a large piece of it goes back to what we talked about last quarter. The core conversion that we had here took significant resources from an internal perspective and from an external perspective, and as we continue to get the <unk>.
Manan Gosalia: <unk> of migrating onto one core platform.
Michael D. Hagedorn: I appreciate that. And then you noted that you purchased Genesee this quarter. Is there more room to do that?
Michael D. Hagedorn: Maybe to give you an example to hopefully make this real prior to conversion core conversion. We ran on three separate GL systems, and we had two different core systems, we close the books this quarter the fastest we've done in the time that I've been at <unk>.
Manan Gosalia: And how should we think about the level of on-balance sheet liquidity that you want to manage to over the next few quarters? So the Ginnie Mae purchases, obviously, you know, they're zero risk weighted. They average about three to four years.
Manan Gosalia: So that's a good example of showing the efficiency in the core conversion and how it has ancillary benefits that kind of spilled through the whole organization.
Michael D. Hagedorn: And the yield on that portfolio on the recent purchases, I should say, has been in the 5%, slightly more than 5% range. The runoff on the portfolio, there's really no prepayment, so it's going to be just the stated maturity payoffs run around $75 to $90 million a quarter. And we would continue to add, we believe, in zero-risk-weighted GINIs at probably 5 to 5.5% yields. Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. He is a licensed financial professional in both the U.S. and Israel.
Michael D. Hagedorn: Yes, I think slowly over time, directionally that makes sense, but I don't think theres any bulk action that's going to occur at any point I mean thats just in general direction, we've trended higher if you look back over the last couple of years and we'll continue to do so.
Michael D. Hagedorn: We have a very stable deposit base is very granular and so we think we're well positioned as it is today, but just directionally too as we grow we will continue to have more cash and securities.
Michael D. Hagedorn: Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA. I want to make sure I'm answering correctly. You're referring specifically to, say, FHLB or Federal Reserve availability? I think overall, you're probably going to see a little bit more on balance sheet liquidity. Not to a significant degree, but part of getting the loan-to-deposit ratio down to 100 will definitely be a little bit of the core deposits coming in and being reinvested in securities as opposed to going into loans. But I don't think you really need to look at a significant shift within what that securities book looks like. Got it. Yeah, that's what I was getting at.
Speaker Change: Thanks very much.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question goes to ban girl linger from Citi. Please go ahead.
Speaker Change: Good afternoon, everyone.
Michael D. Hagedorn: Hi.
Michael D. Hagedorn: Slide 12, and 13 with debt service coverage ratios were really helpful.
Michael D. Hagedorn: A modest migration as to when do we expect is it fair to say that all of those now include 2023 annual or are we still waiting on a little bit I'm just trying to look for the most up to date.
Michael D. Hagedorn: Ratio there.
Michael D. Hagedorn: On a large portion of our portfolio. We do have updated current rent roll information I don't believe a 100% of them, though yes. Clearly include 2023 numbers and we think that.
Michael D. Hagedorn: In all asset classes other than office, we are seeing strength.
Manan Gosalia: Thank you. Thank you. One moment for our next question. Our next question comes from Jared Shaw, from Barclays. Please go ahead. Hey, good morning.
Michael D. Hagedorn: <unk> growth.
Speaker Change: Got you and then another.
Jared Shaw: Thats a multifamily.
Jared Shaw: Down here in the Southeast, Florida, Alabama.
Manan Gosalia: Ken.
Jared Shaw: Amount quarter over quarter any commentary on that.
Jared Shaw: Thanks. Looking at the CRE sales that you did this quarter, being able to do those higher is great. Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. Participation in that story. Yeah, it's Tom here.
Speaker Change: Then we will go back and take a look at the number you mean the debt service coverage came down.
Speaker Change: Yes. It went from basically it also happens to be the same number now I'll go back and take a look at it because it happened to be the same number as the ROE above them. So.
Speaker Change: I'll take a look at it and get back to everyone.
Speaker Change: Okay, and then my last week announced.
Tom: These were participation rates for the most part. Those participation rates range probably from, I think, 7.4% and up. Fixed side was 7.4% to 7.5%. They were all participated at par.
Speaker Change: Been a long call I apologize.
Speaker Change: Pete yourself here, but did you guys give a.
Tom: Monthly or an exit or spot rate.
Speaker Change: On the call.
Speaker Change: We did not give a spot rate you can see in the IP that the total deposit costs went from 31, 3% to $3 six of their up three basis points.
Tom: We retained a portion as lead bank on those. On the floating side, they were mostly prime plus construction loans, and again, we retained a position in those.
Speaker Change: Got it right on the deposit cost.
Tom: I think that last point is pretty important, too, because we're preserving the customer relationships. And as you heard Ira say in the prepared remarks, I mean, Cree is a very valuable asset class. We'll remain in it.
Tom: Okay.
Speaker Change: Alright. Thanks.
Speaker Change: Thank you. Thank you.
Speaker Change: We'll move for our next question.
Tom: We have a deep pool of high-quality commercial real estate borrowers. But there are ways that we can balance the need to manage the balance sheet with preserving and building those customer relationships. OK, thanks. And then follow up.
Tom: Go ahead.
Jared Shaw: What's the expectation for deposit growth from here? And then as we look at some of the promotional... Products that are coming off, where are you seeing those? coming on.
Jared Shaw: The remaining balance we have $52 million left and portfolio thats fully reserved down to current market prices for the charge offs that we experienced this quarter that was also fully reserved for it was one relationship of a customer who had been paying we were in a long term Nick.
Michael D. Hagedorn: Where's the new product coming in terms of term and price? You know, while we've continued to have the non-interfering rotation. One of the really bright spots has been the growth in savings now, which is more than offset by what we've lost in non-interest sparing or rotated into non-interest or out of non-interest sparing into other products. And the growth in our niche businesses has been very strong as well. And maybe a harbinger of or an indicator of future growth and the strength there is. We added over 3000 net new deposits in the first quarter alone. So we feel pretty good.
Michael D. Hagedorn: <unk> kind of hit a standstill.
Speaker Change: Great. Okay, and then just in light of a slower loan growth outlook could you just stack order for us.
Michael D. Hagedorn: Capital deployment priorities and I'm really curious of share repurchases become part of.
Michael D. Hagedorn: Part of the plan here, even with a little bit.
Michael D. Hagedorn: The other thing is understanding your comments on M&A.
Ira D. Robbins: What I'm telling you is that I think growth is gonna come out of the niche businesses and the continued efforts in our retail branches to grow households. And to the extent that we could see a flattening of rotation of non-interest bearing deposits, that's only going to help us. Maybe, Jared, I would add just two different pieces to that.
Jared Shaw: And I look I think from a capital deployment perspective, allocating capital to grow in the <unk> book is probably not going to happen here.
Ira D. Robbins: There is ample opportunity internally just to serve our current <unk> clients.
Ira D. Robbins: So I think thats, probably where more of the focus would end up being but once again, we are seeing strong C&I growth than we have for a couple of years now so allocating capital to those specific segments seems to be a much better return test today from.
Ira D. Robbins: You know, on the last call, we talked about, at least for me specifically, some of the disappointment I had and where the funding costs had gone within the organization. So we were very proactive in going out and looking at $10 million of different deposit products across the organization and lowering those by 40 basis points. And that did not happen in the first period, excuse me, in the first month of the quarter, but it happened throughout the quarter.
Ira D. Robbins: From an M&A perspective, I think once again and if its something thats strategic it makes sense, we would look at it but once again the guardrails are rounding tangible book value with some of that significant to me.
Speaker Change: Got it that's all I had thank you.
Ira D. Robbins: Thanks.
Ira D. Robbins: I am showing no further questions at this time I will now turn it turn it over to IRA Robbins.
Speaker Change: For closing remarks.
Ira D. Robbins: So we think there's going to be some tailwind associated with that as we continue to think about deposit costs. And that said, new originations came on very, very strong in deposits for the quarter. The cost was only 3.23%, and it was well over a billion dollars of net new originations that came in.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Ira D. Robbins: Okay.
Ira D. Robbins: [music].
Jared Shaw: And obviously, some of that offsets some of the higher costs of time deposits that Tom meant, or assume that Mike mentioned that ran off. So I think we've done a really good job bringing in newer deposits into the organization at a much lower cost than the marginal cost of some of the current deposits that we have here. And we've also been able to be very successful in bringing down some of the cost of deposits that sit on the book right now. So we believe that there's a lot of tailwind associated with that.
Ira D. Robbins: Okay.
Ira D. Robbins: Okay.
Jared Shaw: Yes.
Jared Shaw: [music].
Jared Shaw: Okay.
Jared Shaw: Okay.
Jared Shaw: Okay.
Jared Shaw: [music].
Jared Shaw: Yes.
Jared Shaw: Yes.
Jared Shaw: [music].
Jared Shaw: Okay.
Jared Shaw: [music].
Operator: Great, thank you. Thank you. One moment for our next question. Our next question comes from Steve Moss from Raymond James. Please go ahead. Good morning.
Operator: Yeah.
Operator: Yes.
Stephen M. Moss: I'm following up on deposits here. Just, you know, curious, when did you guys reduce deposit rates by 40 base points in the past? There were tranches of deposit classes that we reduced beginning February 1st and then continuing through parts of March. I guess basically the idea is to see how they hold and if we stay in the current rain environment.
Operator: Okay.
Operator: Sure.
Stephen M. Moss: [music].
Stephen M. Moss: Will you continue to press for additional deposit rate cuts? Yes, we manage it weekly. We look at the levels, and we have not seen any significant change in those levels from the groups that we were doing.
Stephen M. Moss: Okay, appreciate that. And then in terms of credit here, with the deep dive you guys took on the specific portfolios, you mentioned that, you know, you analyzed the office portfolio, had migration there, just curious, you know, what is the specific reserve for office? And also along those lines, just curious, you know. Are you looking primarily at the specific properties, or are you looking at the borrower's global cash flows? I'm just kind of curious as to how those global cash flows are holding up these days. No, absolutely not.
Stephen M. Moss: Let me address the end of the question. Yeah, as part of our standard credit process, we look at not only the property that we finance but the overall global cash flow of any of the developers that we do business with to get that overall view, to see if there is stress in our property, or there is stress in this global or vice versa, you know, strength, strength in the global cash flow and weakness and property, all of those factors go into the risk grading in the migration and portfolio.
Stephen M. Moss: We don't publish a separate office reserve, but as I mentioned earlier, we have a substantially higher level of reserves for criticized assets, and there is an elevated level of criticized assets in our office portfolio. The only thing I just want to add to that is that many of our customers are in multiple classes of assets, not just in a single class. Right. And maybe just in terms of the office portfolio, I think it was 158 or 168.
Stephen M. Moss: I forget the debt service card ratio right now, but, like, you know, are a lot of those borrowers in the current environment headed towards one? You know, just kind of curious as to how much capital a borrower might have to put up to kind of right-size those loans these days.
Stephen M. Moss: Again, I think you see the granularity in the portfolio with a $3 million average loan size that we look at in the individual cases with Migrated. Clearly, there was stress in debt service coverage on those assets, necessitating the downgrade. But historically, our leverage on office assets and our going in coverage was exceptionally strong for long-term customers that we have relationships with, which we also believe assist in the overall performance of that portfolio in the long run.
Stephen M. Moss: Steve, we showed the average loan size not only to indicate the granularity and diversity of the portfolio, but in reality, to your last question, and it doesn't apply just to offices, I think across the portfolio, given our average loan size, when a borrower does need to bring additional cash reserves or equity into a deal, you know, these are low average loan sizes that require less in terms of absolute dollars to right-size things.
Stephen M. Moss: And I think that's a benefit and a component of, you know, loss mitigation and credit management. Okay, and maybe just one more related to commercial real estate and offices: are you seeing the migration, is it in your larger loans these days? Or is it, you know, is it across the board?
Stephen M. Moss: So I would say it's really more geographically focused. So our largest percentage of office space is in the Florida and Alabama market. And we've seen a much lower level of migration in that portfolio, with the majority of migration in the Northeast, in the New Jersey and New York marketplace. But noting that our Manhattan exposure is quite granular and quite small in the, Okay, I appreciate that. And then just, you know, Stepping back from things here, Ira, just curious about the plan to reduce commercial real estate concentrations. It might not be easy to do a deal today, but just curious as to how this shift is changing your thinking on M&A.
Stephen M. Moss: Look, I think this is the strategic initiatives and plan that we've outlined for a couple years now. So I think we're just looking at accelerating some of the things that we're doing. If there's an M&A opportunity that helps accelerate some of the strategic initiatives, it's definitely something we would look at. That said, the guardrails around tangible book value are real to me.
Ira D. Robbins: So obviously, the valuation in today's market limits the ability to do some of that. But M&A that really accelerates strategic initiatives is something that we as an organization are open to. Okay, great. I appreciate all the color.
Stephen M. Moss: One moment for our next question. Our next question goes to... David Tarverini, from Wedbysh Securities, please go ahead. Hi, thanks.
Stephen M. Moss: [music].
David Tarverini: I wanted to follow up on expenses. It looks like we could see a decent reduction here. Could you talk about what areas you're pulling back on and any initiatives that are getting pushed to the back burner? I think from a macro perspective, there will be less activity and volume in certain loan classes, so there's probably going to be some continued reduction in those specific areas. But I think a large part of it goes back to what we talked about last quarter. The core conversion that we had here required significant resources from an internal perspective and from an external perspective.
Ira D. Robbins: And as we continue to get the benefits of migrating onto one core platform, we do believe that there's going to be some savings from that. Definitely, you know, not to the degree I think that we saw the contraction from last year to now. But that said, you know, we do think that there's opportunity on the expense side of the book. Maybe to give you an example to hopefully make this real, prior to core conversion, we ran on three separate GL systems, and we had two different cores.
Ira D. Robbins: We closed the books this quarter the fastest we've done in the time that I've been at Valley, so that's a good example of showing the efficiency of the core conversion and how it has ancillary benefits that kind of spill through the whole organization. Thanks for that. And I also want to follow up on the question on liquidity. I guess, to put a finer point on it, cash insecurities as a percent of assets were 11%.
Ira D. Robbins: Should we expect that 11% to kind of trend higher here over time? Yeah, I think slowly over time, directionally, that makes sense. But I don't think there's any, you know, bulk action that's going to occur at any point. I mean, that's just the general direction.
David Tarverini: We've trended higher if you look back over the last couple of years, and we'll continue to do so. You know, we have a very stable deposit base, very granular. And so, we think we're well positioned as it is today. But just directionally, as we grow, we will continue to have more cash and security. Thanks very much.
David Tarverini: Thank you. One moment for our next question. Our next question goes to Ben Gerlinger from Citi. Please go ahead. Hey, good afternoon, everyone.
Ben Gerlinger: Hi. Slides 12 and 13, the debt service coverage ratios, were really helpful. Notice that a modest migration is one to be expected. Is it fair to say that all of those now include? Are we still waiting for a little bit? I'm just trying to look for the most up-to-date type ratio there.
Ben Gerlinger: On a large portion of our portfolio, we do have updated current rent roll information. I don't believe 100% of them, though, yet they clearly include 2023 numbers that show in all asset classes other than office we've seen strength in NOI growth. Gotcha. And then I noticed some multifamily down here in the southeast of Florida, in Alabama.
Ben Gerlinger: Came down a decent amount quarter over quarter. Commentary on that. Ben, we'll go back and take a look at the number. Do you mean the debt service coverage came down? It also happened to be the same number, so I'll go back and take a look at it because it happened to be the same number as the row above, and so I'll take a look at it and get back to everyone. And then last week...
Ben Gerlinger: I know it's been a long call, and I apologize if you're going to repeat yourself, but did you guys give a monthly or an exorbitant spot rate on deposit? We did not give a spot rate, but you can see in the IP that the total deposit cost went from 3.13% to 3.16%, so they're up three bases. A lot of the departments are changing. Yeah, okay, thank you.
Ben Gerlinger: [music].
Ben Gerlinger: Thank you. One moment for our next question. Our next question comes from Matthew Breese of Stevens, Inc. Please go ahead.
Matthew M. Breese: Hey, I had just two quick follow-ups. The first one was just on the tax and medallion charge. What happened there?
Matthew M. Breese: Was that part of the credit review? It just seems like a fairly big charge given how far away we are from the height of the tax medallion days and what's the remaining balance on that portfolio? The remaining balance, we have $52 million left in the portfolio. That's fully reserved down to current market prices. For the charge-off that we experienced this quarter, that was also fully reserved for. It was one relationship of a customer who had been paying. We were in a long-term negotiation and kind of hit a standstill. Subsequent to the charge-off, we have entered into a forbearance agreement, and that loan is continued to be paid.
Matthew M. Breese: Great, okay. And then, you know, just in light of a slower loan growth outlook, could you just stack the order for us? Capital Deployment Priorities.
Matthew M. Breese: And I'm really curious if share repurchases become part of the plan here, even if they are just a little bit. The other thing is understanding your comments on M&A. Would FDIC-assisted deals be something you look at should they arise?
Matthew M. Breese: That's all I had. Thank you. I think from a capital deployment perspective, allocating capital to grow the CREE book is probably not going to happen here. There is ample opportunity internally just to serve our current CREE clients, so I think that's probably where more of the focus would end up being. But once again, we are seeing strong C&I growth, and we have for a couple of years now, so allocating capital to those specific segments seems to be a much better return to From an M&A perspective, I think once again, if it's something that's strategic and makes sense, we would look at it, but once again, the guardrails around intangible book value are some of that significant.
Matthew M. Breese: Got it. That's all I had. Thank you. I am showing no further questions at this time. I will now turn it over to Ira Robbins for foreclosure remarks. Thank you. I just want to thank everyone for taking the time to listen to us today, and I look forward to speaking to you next quarter. Have a nice day. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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