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spk00: Good day, and thank you for standing by. Welcome to the second quarter 2024 Valley National Bank Corp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Travis Land. Please go ahead.
spk01: Good morning, and welcome to Valley's second quarter 2024 earnings conference call. Presenting on behalf of Valley Today are CEO Ira Robbins, President Tom Iadanza, and Chief Financial Officer Mike Hagenhorne. 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. Additionally, I would like to highlight slide two of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found in 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.
spk06: Thank you, Travis. During the second quarter of 2024, Valley reported net income of $70 million and diluted earnings per share of 13 cents. The sequential reduction in net income was the result of stable pre-tax, pre-provision net revenue supported by the positive inflection in net interest income and the elevated loan loss provision. While this provision is outside our normal range, we believe that this quarter will represent the relative peak in our provisioning. Last quarter, I outlined the planned acceleration of our strategic initiatives aimed at normalizing certain balance sheet metrics which are outliers to peers. I am extremely pleased with the significant progress that we have quickly made relative to each of our stated balance sheet goals. Importantly, we have begun to execute on these initiatives without diminishing our future earnings capacity. In fact, we believe that the further strengthening of our balance sheet will drive stability in our performance and relative value in the market. Our progress is illustrated in detail in slide four. By the end of the second quarter, both our CREE concentration and allowance coverage ratios have already reached the year-end expectations that we laid out just three months ago. By limiting our investor CREE and multifamily originations and reclassifying certain healthcare loans to the owner-occupied bucket, we were able to reduce our commercial real estate concentration ratio to our full-year 2024 target of around 440%. With the backdrop of strong credit performance and stable past due and non-accrual loan metrics during the quarter, our reserve coverage expanded to our near-term targeted level of above 1%. We now anticipate reaching our intermediate term expectation of around 1.10% by the end of 2024. To be clear, there is no change to our belief that a coverage ratio of about 1.10% is appropriate for our risk profile given our analysis of the portfolio and current backdrop. This quarter's elevated provision in the context of strong credit performance was the result of our conservative decision to place less value on personal guarantees as a mitigating factor in our internal loan risk ratings. This shift drove additional loan downgrades into our criticized and classified buckets, which each carry higher reserve requirements under our methodology. our criticized and classified loans continue to perform and remain current with regards to payment activity. While this conservative approach to personal guarantees is reasonable given the current market environment, we continue to believe personal guarantees are useful in influencing borrower behavior and in cases of stress. These guarantees have proven very useful in limiting charge-offs and enhancing recoveries throughout our history. For this reason, We anticipate that in practice, personal guarantees will continue to be valuable in minimizing the lost content of our portfolio going forward. Turning to capital, our risk-based ratios improved meaningfully during the quarter despite strong non-CRE balance sheet growth and only modest retained earnings. This growth was primarily the result of a synthetic risk transfer which we executed during the quarter. This transaction reduced the risk-weighted assets associated with our indirect auto loan business by approximately $1 billion. We remain very comfortable with our regulatory capital levels and the significant expansion we have generated on both a quarter-over-quarter and year-over-year basis. Slide six lays out our expectations for the remainder of 2024. We anticipate low single-digit annualized loan growth for the rest of the year. Consistent with this quarter's strong results, Future loan growth will likely be tilted towards C&I and owner-occupied CRE as new investor CRE originations remain well-controlled. We anticipate that this growth and the continued repricing of existing assets will support up to 3% growth in net interest income on a quarterly basis for the rest of the year. Non-interest income should recover from current levels as capital markets activity picks up and we continue to expand our treasury management capabilities. Non-interest expense remains well controlled, though we will see a full quarter's impact to the premium expense associated with our risk trade in the third and fourth quarters. Our tax rate is likely to come in between 25 and 26% for the rest of the year. From a credit perspective, net charge-offs are likely to remain around current levels for the rest of the year. However, I will reiterate that we are confident our provision has peaked and that a level between the first and second quarter's provision is a more reasonable quarterly expectation for the remainder of the year. These expectations combined with our loan growth outlook implies we will end the year with an ACL to loan ratio of around 1.10%. Before turning the call over to Tom, I wanted to highlight the underlying franchise value that we continue to create at Valley. Since the end of 2017, we have grown reportable tangible book value by 47% versus 36% for our regional banking peers. Including the impact of distributed dividends, this increases to 93% growth versus 70% respectively. This variance reflects our ability to enhance our franchise value without meaningfully diluting tangible book value in 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 value. Commercial deposit account growth remains strong during the quarter. and our stable deposit levels on a quarterly average balance indicates significant stability despite some late quarter movement that temporary impacted spot balances at the end of the quarter. Average balances in July have rebounded, which further underpins our confidence that net interest income growth will continue. We also believe that there is significant value in the geographic diversity that we have developed on both the asset and liability side of the balance sheet. At the end of 2017, Nearly 80% of our commercial loans were concentrated in New York and New Jersey. That figure has declined to 50% today as a result of our focus in 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 valuable commercial relationships that we have targeted. Meanwhile, at the end of 2017, 78% of our deposits were in Northeast branches. As of the end of the second quarter, that number has declined to just 43%. We have diverse funding niche businesses and a robust branch network across Florida and Alabama. This diversity helps to inflate our funding base and provides unique and differentiated opportunities to reduce our reliance on wholesale funding over time. In conclusion, I am extremely pleased with the progress that we have already made towards achieving our stated balance sheet goals. We continue to work hard to further position ourselves for growth and high performance as the environment normalizes. I am confident that given what we know, our provision has already peaked. With continued net interest income momentum, fee normalization, and expense control, we expect that our earnings will expand throughout the rest of the year and set us up for continued improvement in 2025. 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.
spk03: Thank you, Ira. Slide 9 illustrates the quarter's deposit trends. Total deposits increased $1 billion compared to the first quarter, largely due to higher levels of indirect deposits. Meanwhile, customer balances, including on the non-interest-bearing side, were generally stable throughout the quarter. This stability enabled us to largely hold the line for the third consecutive quarter from a pricing perspective. The next slide provides more detail on a composition of our deposit portfolio by delivery channel and business line. Growth trends in our specialty commercial verticals and private banking business were strong during the quarter and partially mitigated late quarter runoff in branch deposits. Average deposit balances in July are running higher than second quarter levels as customer activity has rebounded from a brief quarter end dip. While we do not typically reference deposit team additions as they occur, we recently received approval to open a new branch office in Beverly Hills, California. This location will be overseen by experienced in-market leadership and will supplement the delivery of our financial products and services to our existing customer base. We are also planning a new branch opening in Staten Island, which is contiguous to our existing Metro New York footprint. We have over 2,000 customers in this market already and are extremely excited about the market leadership that we have attracted to accelerate our business development efforts. Both initiatives will enhance our name recognition in our markets and are expected to contribute to future deposit growth. In addition to growing deposits through our specialty commercial vertical, which I previously mentioned, We believe selective branch expansion supported by experienced in-market leaders is an attractive option to grow core deposits at a reasonable all-in cost, and we anticipate a few additional opportunities to come to fruition. Slide 11 illustrates the drivers of loan growth during the quarter. Total loans increased almost $400 million, driven by roughly 16% annualized CNI growth. Our focus on CNI has been a strategic imperative as we work to further diversify our balance sheet. This quarter's growth came across multiple business lines and geographies, and while future growth may be lumpy, there are significant opportunities for longer-term growth in this asset class. On the commercial real estate side, we saw a meaningful shift from investor real estate to owner-occupied real estate during the quarter. While the majority of this transition was the result of the reclassification of approximately $1 billion of healthcare loans, we continued to benefit from this strategic de-emphasis of investor real estate originations. This focus will continue to result in lower real estate concentration going forward. Slide 12 provides additional detail on the composition of our commercial real estate portfolio by property type and geography. In general, the commercial real estate markets and borrower performance across our footprint remain healthy. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.
spk02: Thank you, Tom. Staying on the CRE topic for a moment, slide 15 illustrates the contractual maturities of our commercial real estate portfolio. We have included the LTV, DSCR, and rate by maturity bucket for your benefit. This maturity schedule illustrates the minimal near-term repricing risk that exists in our portfolio. Slide 16 highlights the significant positive inflection in both net interest income and net interest margin this quarter. This strong performance was the result of both interest income growth and interest expense reductions relative to the first quarter of the year. We forecast continued net interest income growth as a result of modest balance sheet growth and the ongoing tailwind associated with asset yield expansion. On the funding side, we have benefited from targeted deposit cost reductions that were implemented over the last few quarters. Average non-interest deposits increased modestly during the quarter, and despite a brief dip at the quarter end, we are seeing additional growth in average non-interest balances already in the third quarter. Turning to the next slide, you can see that non-interest income on an adjusted basis declined compared to the first quarter of 2024. Roughly 75% of the net decline in fee income was related to the anticipated normalization of tax credit advisory revenues from the first quarter's elevated level. Beyond this, we were impacted by a negative valuation adjustment on certain fintech investments, which was partially offset by stronger swap fees, insurance commissions, and bank-owned life insurance income. We continue to drive growth in our capital markets, wealth management, and treasury services channels. These factors are likely to drive the anticipated growth in fee income for the rest of the year. On the following slide, you can see that our non-interest expenses were approximately $278 million for the quarter. Adjusting for our $1.4 million FDIC special assessment and certain other non-core charges, non-interest expenses were approximately $270 million on an adjusted basis. This represents a very modest increase from both the first quarter of 2024 and the second quarter of 2023. This was primarily the result of costs related to the credit risk transfer that we executed and higher traditional FDIC assessment expense. We continue to focus on headcount optimization and technology efficiencies to combat the revenue pressure that has occurred. As a reminder, our non-interest expense for the rest of the year will include roughly $6 million of premium costs related to our risk transfer transaction. In slide 19, you can see the continued and notable stability in our non-accrual and past due loan categories. Despite the impact of higher rates and isolated stress in the office segment, our borrowers continue to generally perform well. At the bottom left, you can see the lower historical loss content of our portfolio, which plays out consistently across cycles. We remain confident in our reserve coverage relative to our loss content, as illustrated in the charts on the bottom right. The next slide illustrates the trend in allowance coverage, charge-offs, and provision. Our allowance coverage ratio continues to expand towards the intermediate term target, and you heard Ira describe the drivers of this expansion during the second quarter. To reiterate, we expect that the allowance-to-loan loss ratio will reach a level of around 1.10% based on current market dynamics and our knowledge of the portfolio. This expectation implies that our provision has peaked and will likely trend lower over the next few quarters. The overwhelming majority of our loan portfolio continues to perform extremely well. Roughly 85% of the quarter's net charge-offs were the result of a single commercial real estate and single CNI credit. The CNI credit was largely covered by pre-existing specific reserve. As Ira indicated, given the current market environment, we do anticipate that net charge-offs will remain close to current levels for the remainder of the year. The next slide illustrates the sequential increase in our tangible book value and capital ratios. The quarter's elevated provision and modest expansion headwind from the OCI impact associated with our available for sale securities portfolio weighed on tangible book value growth for the quarter. That said, we are extremely pleased with the significant growth in our risk-based capital ratios relative to both the prior quarter and the year-ago period. We are very proud of our ability to strengthen our balance sheet and enhance financial flexibility in shareholder-friendly ways. With that, I'll turn the call back to the operator to begin Q&A. Thank you.
spk00: Thank you. As a reminder, If you would like to ask a question, please press star one one on your telephone. As well, we ask that you wait for your name and company to be announced before you proceed with your question. And our first question for today comes from Frank Chiraldi of Piper Sandler. Your line is open. Good morning.
spk05: I just wanted to ask, Ira, you mentioned the 110 reserve to loan ratio and Justin Capposian, Essentially, I guess you're just getting there early here, but in terms of a continued mix shift towards CNI I would think that would still tend to put additional pressure on that ratio so sounds like you're pretty comfortable with the 110 but just kind of curious if you can walk through. Justin Capposian, The thinking there is the idea that criticize and classified begin to moderate here as an offset just curious your thoughts.
spk09: Hey, Frank, this is Mark Sager. I think on the criticized classified front, if you see our migration this quarter was lower than prior quarter and very much associated with what Ira mentioned, deemphasizing a personal guarantee in our decisioning on internal risk grading. I want to make it clear, though, we think that loans with a guarantee will ultimately have materially better outcomes for the organization, and they continue to be very important in our really relationship-based model within the organization. To your point about CNI, you're correct in the sense that CNI does traditionally carry a higher level of provisioning than CREE, and that's going to be a portion of the build. However, in the environment that we're in right now with continued higher interest rates, there is likely to be continued modest migration in our CREE portfolio into of criticized categories.
spk05: Okay. But just one, so you're still comfortable even in that, with that next shift towards CNI in the reserves to loan ratio at about 110. You don't see a need for that to move higher in the near term?
spk09: No. The 110 is a continuation of our build, and we're comfortable with that level.
spk05: Okay. And then just as a follow-up, You know, you obviously worked on Cree in part through this reclassification, and I imagine that's something you guys have been more active on pursuing. Just curious if there's continued efforts here that could potentially drive more to come, and any updated thoughts about now that you're at kind of your year-end level, I guess, for concentrations on Cree, your target. Any updated thoughts on where you could be by the end of or what you're targeting by the end of 2025 in terms of concentration? Thanks.
spk06: Yeah, I think we were pretty specific, you know, last quarter sort of where we thought from an intermediate basis and getting below 400 was pretty important to us. Obviously, accelerating it, if possible, is something that we're looking at doing. But keeping in mind, we want to make sure we – keep in mind the earnings profile of the organization. And as we look to different alternatives, making sure that they're in a shareholder-friendly manner and we're not denigrating a future earnings profile. So it really is a balance for us as we continue to move forward. We're really excited about the ability to accelerate some of those initiatives, but we have to keep in mind some of the economics associated with different alternatives as well.
spk05: Okay. And then just on the reclassification, is that Was that like a specific sort of project to move that along? Is that largely completed? Or could we see another bucket of that next quarter?
spk09: That was a specific project that we put together specifically related to skilled nursing segment of the portfolio. And that was essentially completed in the second quarter.
spk05: Great. Okay. Thank you.
spk00: Thank you. Thank you. One moment for the next question. And our next question will be coming from Stephen Alexopoulos of JP Morgan. Your line is open.
spk13: Hi, everybody.
spk00: How are you?
spk13: I want to start, Ira, on the net interest income outlook, the 1.5 to 3%. I assume that's unannualized growth, but I want to confirm that. And then I want to ask if we get two rate cuts, where do you think you end up in the range?
spk01: Yeah, Steven, this is Travis. So you're correct. That is unannualized growth that we're showing on a quarterly basis going forward. Our forward guidance assumes two rate cuts consistent with what the implied curve was at 630. So that's factored in there. And then I think within that range, you could also, you know, static rates are captured in that range as well as there's just not much impact or change to our NII guidance, you know, dependent on the amount of rate cuts here in the near term. Got it. Okay. That's helpful.
spk13: And then on slide 15, the commercial real estate, that slide is very helpful. The $1.1 billion of commercial real estate that matured and was retained, did you guys, can you walk us through, did you need to make concessions there? Did these move into an extension period? Or were these full refinance where the borrower put in more equity and these are new commercial real estate loans?
spk09: So on the retained side, all of those loans were repriced at current market rates and sized appropriately to our standards. You'll note we have the modified other of $2 million. That really represents a modified structure, historic TDR-type relationship. The $1 million was all at market terms.
spk13: Okay, Mark, because I guess we're hearing some borrowers are just, you know, looking for a one-year extension, if you will, not necessarily refinancing the loan. Were any of these that nature?
spk09: Yes. Yes, Stephen, absolutely. The duration of some of these transactions were shorter than five-year renewals. However, all of them were done, again, at current market rates and with normalized amortizations. guy.
spk13: So they would need to put full equity in to get that extension, basically.
spk09: Sometimes yes, sometimes no. Yeah, depending on where the loan stands at maturity. Okay.
spk06: So the equity level would have needed to be normal, but obviously based on the original loan to value, many of the borrowers didn't even need to put in equity. Got it. Okay.
spk13: And then final for me on a the RWA benefit and the strategy on the auto loans this quarter. Are you guys looking at other use of synthetic instruments? Do we expect more of this in the second half, or is it done?
spk01: Yes, Stephen, this is Travis. I mean, we always kind of analyze what's out there and available. I mean, I think you see more of these risk transfers being done in the industry. It's not unique to Valley necessarily. I think the auto portfolio was the low-hanging fruit, to be honest, but we continue to analyze other opportunities in other asset classes as well. So I think, again, not just for Valley, but for the rest of the industry, you'll see these being used to generate capital efficiency on a go-forward basis. Got it.
spk13: Okay. Thanks for taking my questions. Thanks, Stephen.
spk00: Okay. One moment while we prepare for the next question. And the next question will be coming from Matthew Brees of Stevens. Hey, good morning.
spk10: Thank you. Good morning, everybody. I think you hinted at this, but I was hoping to get your thoughts on either selling commercial real estate loans or securitizing loans to accelerate and lower that CRE concentration. How likely is that type of outcome? And if you do end up going that route, what would you be willing to tell us in terms of earnings or tangible book value impacts that you'd be willing to absorb to achieve those goals faster?
spk06: So I think you highlighted the appropriate guardrails, Matt, right? I think we've done a good job for a long period of time prioritizing growth and tangible book value and denigrating that tangible book value is something that's important to us and really what that threshold is. And once again, you know, maintaining an earnings profile that's really set to continue to grow based on where we're seeing the balance sheet as well as the net interest margin becomes important to us. So it is a toggle as to how we think about the acceleration. That said, we do think there continue to be a lot of opportunities as to how we can reposition the balance sheet a little bit quicker when not denigrating what that earnings profile is. So there are opportunities, and we continue to weigh them, and we will execute on them when we think it makes good sense, not just from a balance sheet mix perspective, but also from an earnings profile perspective. Okay.
spk10: And I know you all over that past handful of quarters have taken a much more hands-on approach to deposit costs. They were only up two basis points quarter to quarter. Can we see deposit costs fall next quarter and have interest-bearing liabilities peak for the cycle?
spk02: Yeah, it's a good question. And I think our results for the quarter kind of speak for themselves and we're strong. When you look at total deposits increased a billion dollars and you look at the cost makeup of those deposits, Total deposit costs, as we mentioned earlier, we're only up two basis points. But in that category of total deposits, brokered costs were flat at 505 for both quarters. And customer costs actually declined a basis point. And when you look inside of that customer portion of it, you know, we raised $1.3 billion of customer deposits at a cost of 324. So I think it kind of speaks for itself that, uh, you know, the cost reductions that we did, um, along with our ability to generate from our various sources that we've built over the years, uh, was very strong. And you see that in the numbers this quarter.
spk10: Okay. And then, you know, you're not the only bank that is de-emphasizing commercial real estate and, and working towards more CNI loan growth. Um, are you seeing any, um, you know, deterioration in underwriting of commercial loans or seeing some loan covenants being given away or tighter spreads. I'd love some commentary on that.
spk03: Hey, Matt, it's Tom. Now, our underwriting in our C&I portfolio on the originations, I bet it's similar terms and credit metrics that we've underwritten to in the past. You know, we've always said we're not going to sacrifice credit quality for quick growth. And we've been growing CNI for the last six years at around 10% annualized. And this quarter, it's at 16% annualized. And it's coming primarily from our specialty niches where we have experience and a reputation in the market, as well as in our Florida region, which is still experiencing solid growth.
spk10: Got it. Okay. Last one for me. You know, you have 100, I think 115 million of subjects. reaching its reset date next year. Any plans there paid off, or should we expect some sort of preemptive ways to get ahead of it?
spk01: Matt, we always monitor debt capital markets. I mean, I think we've kind of issued sub-debt every 18 months, obviously with some of the dynamics in the industry last year, right, that the sub-debt market and debt capital markets in general have been a little bit slower. Seeing some strengthening today, but I think on a regular basis, sub-debt will be kind of a part of the capital stack. And we're always monitoring, you know, shareholder-friendly ways to enhance the balance sheet.
spk10: I'll leave it there. Thanks for taking my questions. Thanks, Matt.
spk00: Thank you. The next question will be coming from Manna Gosalia of Morgan Stanley. The line is open.
spk07: Hi, good morning. Morning. I wanted to follow up on the reserve question. Can you talk about what drove the decision to accelerate the reserve bill this quarter? And specifically, what does that mean for 2025? Are there any specific reserves embedded in that that could drive a reserve bleed next year if charge-offs came through? Or do you expect to stay in that 1.1% range for the foreseeable future?
spk09: So we, there are some specific reserves in there, but we foresee staying within, uh, the 1.1 ratio on a go forward. And we're very comfortable at that level manner.
spk07: Great. Um, and then, um, in terms of, uh, the charge off this quarter, if you could speak to, uh, you know, the couple of, uh, credits, uh, you know, are there any, is any read across to the rest of the portfolio? And, you know, as I look at the forward NCO guide, I think the midpoint of that range is pretty much in line with the second quarter. It's a little bit higher than the prior quarter, so I just wanted to check if, you know, does that come from planned actions to reduce concentration? Is there anything you're seeing in the portfolio, or is it just conservatism? Thanks.
spk09: So as in the remarks by Ira, again, two credits really drove the level of charge-offs that we see this quarter. One of them on the Cree side was an office building. I point to the granularity that we have in our office portfolio with a 3.3 average loan. This loan was a larger CREE loan, just north of $30 million. I would note that in addition to the granularity, we have a very small number of larger loans. We only have six office loans that are over $50 million. One of them is our headquarters. And of those six, we just have one as classified. So we continue to monitor the office portfolio on a regular basis, updating metrics on all of our office loans north of 10 million. And the migration in the portfolio, throughout this year has been disproportionate to office, although in the second quarter that has moderated in the office portfolio.
spk07: Got it. And in terms of the forward NCOs, does that slightly higher level on NCOs come from reduced concentration or reducing concentration of the CRE book, or is it just some conservators have been better than that?
spk09: It is more CREE-focused on what we're looking at, potential charge-offs, customers that are on our radar that have potential for rollover risk in the future, which could deteriorate debt service coverage on a go-forward basis. So we continue to keep those on our radar and note that they may or may not lead to future charge-offs down the road.
spk07: Got it. Thank you.
spk00: Thank you. One moment for the next question. And our next question will be coming from Steve McGrady of the, I'm sorry, KBW. Your line is open.
spk04: Great. Thanks. A lot of discussion from some of your competitors this quarter and last quarter on just about portfolio reviews in terms of provisioning and reserve build outlooks. I'm interested in kind of what you've done not only this quarter but in the last couple of quarters to give a deeper look into some of the CRE book to get to that peak provision comment. Thanks.
spk09: So, if you recall from our first quarter call, we looked at the vast majority of the portfolio through the end of the first quarter with updated information on all those customers. The migration this quarter, again, as mentioned, was related to our view of the benefit of a personal guarantee within risk rating and really de-emphasizing that on a go-forward basis. Our review was proactive and mostly completed in the first quarter, and we've essentially gone through the vast majority of our exposure to date.
spk06: I think one of the things that I would add to it is this isn't just internally Valley looking at it. We've engaged with third parties to come in and assess the portfolio as well, just to make sure that our view is aligned with the outside view as well.
spk04: Great, thank you. And then just to follow up, could you provide the criticized classified late quarter and also this quarter? I don't know if I saw it in the deck.
spk01: Thanks. Yeah, it'll come out in the queue. We have migration of around 350 million this quarter, which is down from 600 million in the prior quarter. And more details on that will be in the queue. All right, thanks, Chris.
spk00: Thank you. One moment for the next question. And our next question will be coming from Steve Moss of Raymond James. Your line is open.
spk04: Good morning. Morning, Steve. Starting on the liquidity build here, you know, you guys added broker deposits and investment securities. Kind of curious, you know, how much higher do you expect to take the investment securities portfolio and maybe continue to add broker deposits?
spk01: I think in general there will be a growth tailwind on the securities portfolio, but this quarter was certainly more outsized than what you've seen. Look, I think part of the reason for that is we have this additional cost associated with the risk transfer trade, so a small, modest leverage strategy to help offset the cost there was on our mind. It's done in a capital-efficient way. We're buying Ginnie Mae Securities with zero risk weights. So that's kind of important to what we're doing here. So I think with overtime, it migrates higher, but I don't think there will be any rash actions, candidly, on the securities portfolio.
spk04: Okay. Appreciate that. And then on, going back to total capital here, you guys are 12.2% as of, as a quarter end. Just curious, you know, do you have any short or intermediate term targets as to where you want that to go?
spk06: I think from a macro basis, you know, we're definitely pretty pleased with where the regulatory capital ratios are. You know, we did give some guidance as to where we think the CET1 number needs to get to, and we're still focused on making sure from a longer-term perspective that we get to over 10% on that number.
spk04: Okay. Appreciate that. And then in terms of the commercial real estate that repriced this quarter, maybe just going back to that, kind of curious, what is your view of full market rate or fair market rate for commercial real estate repricing these days?
spk03: Yeah, it's Tom, Steve. It really depends on the asset class and segment, the metrics, your loan-to-value, debt service coverage, and such. You know, we have spreads in those classes as high as 400 basis points, probably as low, no lower than 250 basis points.
spk06: It really depends on the asset class duration and metrics. And I think on a macro basis, the average spread that we put was about 350. So we think that's probably indicative. And I think, you know, as we alluded to earlier, you know, these were done at market terms when it comes to what the loans to value coverage should look like, the debt service coverage ratio, as well as what those spreads should look like.
spk04: Okay. I appreciate that. And maybe just kind of circling back to the de-emphasis here of the personal guarantee, you know, was that done kind of just curious as to the rationalization there, was it, you know, regulatory driven or is it just that you're seeing, you know, customer borrower cash flows deteriorate here and, you know, what's the dynamic there to make that change here?
spk09: And this is Mark. We really took that option to have a conservative look at portfolio while historically The performance that we have and what we're seeing to date for loans with the guarantee versus those without is clearly stronger. We focused our risk ratings on an unadjusted primary source of repayment and so really hyper-focused on debt service coverage as being a primary driver of our ratings.
spk04: Okay, great. I really appreciate all the answers. Thank you. Thank you.
spk00: Thank you. One moment for the next question. Next question is actually from John Oshram of RBC Capital Markets. Your line is open.
spk08: Thanks. Good morning. You hear me okay?
spk00: Yeah, definitely.
spk08: Okay. Maybe for Mark or Tom back on slide 15, And that upper left box, it seems like a good outcome with only 2 million modified. Curious if that outcome was surprising at all to you. And when you look at the cadence of what's coming, do you expect similar type outcomes over the next few quarters than what you just experienced this past quarter?
spk09: I think not a surprise for us who live with a portfolio in a forward-looking way. We point to our conservative underwriting, our initial sizing of loans, so that by time of maturity, we see Reduced principal amount through amortization, improved NOI on the majority of asset classes outside of office and rent-stabilized multifamily. We're seeing strong metrics in retail, industrial, and market rate multifamily in our primary markets. So NOI growth coupled with prudent sizing at origination on these loans, we're not so surprised by the good results that we're seeing in the refinancing side.
spk06: Maybe, John, just one thing I wanted to add to that. I think when you look at the bottom of that chart, we talk about the borrower contractual rate there. And I know that's been a big issue for many within the industry is there's been a significant increase in what that – rate is for many of these borrowers as they readjust. For us, you're looking at a rate, obviously, for what's coming due in third quarter of 24 at 763. So there really isn't a huge adjustment for many of the borrowers. And you can see what that looks like as we continue to move forward. So I think one of the common issues for many of our peers out there is they have to reset these borrowers to higher rates. And what that does to the underlying debt service coverage ratio really isn't as significant for us.
spk08: Okay. Yeah, that's a good point. Maybe for Mike or Travis, maybe an obvious answer, but the higher end and the lower end of the quarterly NII growth, anything you would call out for us to think about in terms of how you get to the higher end or the lower end on that guide?
spk01: Now, we just know there's a diversity of opinion maybe on the outcome for interest rates, and there's only a slight impact on our NII at the end of the day, but... There's nothing material. I mean, also the other factor would obviously be giving ourselves a range of growth. We gave you growth guidance of low single digits, and so that can mean a couple different things, and that would be factored in there as well.
spk08: Okay. And then just last one, you guys talked earlier about the CNI growth maybe being more lumpy or erratic. Can you talk a little bit about the pipelines there and what it feels like it's going to be commercial-driven loan growth and not CRAs? So just help us understand what the pipeline looks like. Thank you.
spk03: Okay, John. It's Tom. pipeline actually increased 30% quarter over quarter. And the pipeline is very stable, growing. We're seeing a lot of it coming out of those relationship specialty national businesses, as well as our Florida region, steady in the Northeast, but a higher percent growth on both what we originate in the past quarter and what our pipeline's looking at going forward. So we expect to maintain the guidance of what we put out in that low single digits for the second half of the year, driven primarily by C&I. Okay. Thanks, guys.
spk00: Thank you. One moment for the next question. And our next question will be coming from Jared Shaw. Your line is open.
spk12: Hey, good morning. Thanks. Maybe just going back to the criticized and classified, what would the growth have been without the reclassification of personal guarantee?
spk11: Hey, Jared.
spk09: This is Mark. I don't have the breakout specifically, but the majority of the migration this quarter was related to our approach on personal guarantees.
spk12: Okay. All right. That's good. Thanks. And then just sort of following up on Chris's question, have you seen weaker performance than expected maybe on some of the loans that have gone non-performing with personal guarantees? Was that part of the driver of that change?
spk09: No, absolutely not. Again, this is just a conservative approach to risk rating and specific provisioning. What we've seen to date is consistent with our historic record that those loans with guarantees do have more positive outcomes, and it continues to be an important part of our credit structure and will continue to be on a go-forward basis.
spk12: Okay. Thanks for that. Now, shifting to the deposits, I think Tom had said that July averages were trending higher. Was that trending higher than the average second quarter or the end of period second quarter or both maybe on the deposit side?
spk01: Yeah, it's relative. We made the statement relative to the average for the second quarter. And from a customer perspective, that would be for the end of period as well. So customer deposits on an average basis in July are slightly higher than the end of quarter.
spk12: Okay. And then just finally for me, when you look at the the delta and the rates that you're getting on your customer deposits versus your broker deposits. Um, and then I just, you know, it's checking what your, you know, what your specials are at sort of four 50. Why not, um, pay up a little bit more on the customer side? Uh, cause it feels, I don't know. It seems like you'd be able to get something still cheaper than, than the brokerage side. Is there a reason that you're leaning in more on the brokerage side here versus paying up a little bit more on, on core customer account?
spk06: It's obviously a conversation we have a lot internally with regard to our deposit pricing committees. I think a lot of it has to do on what potential migration looks like from a relationship client perspective. Keep in mind, many of these clients have been here for a very long time. They have sizable deposits with us. And if they see a higher rate, many of them want that higher rate as well. I think the other piece is the broker have a shorter term duration. and the ability to think about where maybe market interest rates are going and to keep short on the curve is probably a positive for us.
spk12: Okay. Thanks for that.
spk00: Appreciate the questions. Thanks.
spk06: I want to thank everyone for joining us today and for the interest in Valley, and we look forward to talking to you next quarter. Thank you.
spk00: Thank you all for joining today's conference. You all may disconnect.
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