Good day, and thank you for standing by. Welcome to the Valley National Bancorp Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Travis Lan, Head of Investor Relations. Travis, the floor is yours.

Good morning and welcome to Valley's first quarter 2023 earnings conference call. Presenting on behalf of Valley today are CEO, Ira Robbins; President, Tom 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. Additionally, I would like to highlight slide two of our earnings presentation and remind you that the comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and the factors that could cause actual results to differ from those statements. With that, I'll turn the call over to Ira Robbins.

Thank you, Travis. And welcome to those of you on the call. This morning, I will discuss Valley's response to recent events. And then we'll have time to provide insight on the quarter's loan and deposit results. Mike will then discuss the financial results in more detail. In the first quarter of 2023, Valley reported net income of $147 million, earnings per share of $0.28, and an annualized ROA of 0.98%. Exclusive of non-core items, adjusted net income, EPS and ROA were $155 million, $0.30, and 1.03% respectively. This quarter's financial performance was negatively impacted by seasonal factors related to net interest income and operating expenses. Net interest margin compression was partially related to our conservative liquidity build and other operating leverage headwinds. That said, I'm extremely proud of the strength exhibited by our balance sheet in this recent period of stress. To be clear, we entered the turmoil from a position of balance sheet and capital strength. Our extremely diverse and granular deposit base contributed to our structurally low uninsured deposit balances and supported our funding stability during the quarter. Our business niches and geographic footprint have positioned us well to benefit from recent disruptions. In the last three weeks in March, we opened over 7,000 new deposit accounts, which represented a full quarter's worth of account acquisitions in normal times. These accounts continued to fund, and new customer flows remained strong. From a capital perspective, we continue to benefit from our modest securities portfolio and associated OCI impact. These characteristics, as well as our strong underwriting track record, have clearly differentiated Valley during this period of stress. As always, during the recent bank failure crisis, our teams were proactive, consistent, and direct in their client communications. This high touch approach further differentiates our organization and is indicative of the premier service-oriented culture that we have built. We are also set apart as one of the top risk managers in the entire banking space. External stakeholders tend to focus on our track record of strong credit quality, but we are equally proud of the other components of our Enterprise Risk culture. For example, our interest rate risk and liquidity risk management positively differentiated Valley during the crisis. As a result of our strong risk management approach and confidence in our balance sheet, we were able to bid on the former Silicon Valley Bank. We structured a sophisticated and thoughtful proposal that was strategically and financially compelling for Valley. While our disciplined bid came up just short in the end, we are prepared and positioned to explore future opportunities that may emerge. Valley fills the void in the current banking landscape today, as there are only a handful of commercial banks our size in the entire country. The niche of client we serve is strong, and our opportunities will only expand exponentially as the banking industry further evolves. Over the last 95 years, our organization has successfully navigated a variety of diverse crises. While we remain confident in our risk management approach, strategic vision, and collective path forward, we are laser-focused on diversity and granularity on both sides of the balance sheet and will not sacrifice the high credit standards, which have set us apart throughout our history. We continue to provide industry-leading service and expertise to assist our clients and communities in achieving their financial goals. We believe that this long-term approach will drive shareholder value over time. With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results.

Thank you, Ira. Slide five illustrates our stable deposit balances for the quarter. We are very pleased with the performance of our deposit base over the last few months. Recent experiences following the closures of Silicon Valley and Signature were generally contained to a few larger corporate relationships, which we have been actively managing as rates increased. Our Technology Banking business performed extremely well during the crisis and experienced only a modest decline in total balances. This team contributed to a significant amount of the new account openings that Ira mentioned earlier. The combination of runoff and lower cost customer balances, and the continued utilization of higher cost, fully FDIC-insured indirect deposits drove costs higher during the quarter. In general, betas remained in line with our projected path for the year. Slide six highlights the diversity of our deposit portfolio. Roughly two-thirds of our deposits come from our stable branch network. Just less than 20% of our deposits are from specialized verticals like our online channel, international, technology, private banking, and cannabis segments. The diversity of available sources of funding continues to provide significant opportunity for Valley to capitalize on disruption across the industry. Our uninsured deposit exposure compares favorably to peers, and we continue to utilize a variety of tools to reduce this further. Most importantly, our robust cash and available liquidity provide significant coverage in excess of our uninsured balances. Slide seven further illustrates the diversity and granularity of our deposit base. Our commercial deposits are spread across our extensive geographic footprint and a variety of industries. This diversity has been critical in defending our deposit base and should continue to provide discrete growth opportunities going forward. You can also see some statistics on the depth and breadth of our client base. We have over 600,000 deposit customers with an average tenure beyond 10 years. Our granular deposit base has an average account size below $60,000. Turning to the loan portfolio on slide eight. You can see an overview of the portfolio's growth and composition. While quarterly originations continue to decline, net loan growth remains elevated as payoff activity is depressed. Our portfolio is extremely diverse across geographies and asset classes, and both origination and portfolio yields continue to increase. Slide nine illustrates the diversity of our commercial real estate portfolio by collateral type and geography. As a reminder, we have an extremely granular loan portfolio with an average loan size of roughly $5 million. From a metric perspective, our weighted average loan-to-value is 58%, and our weighted average debt service coverage is approximately 1.8 times. We believe these metrics compare favorably to peers as we have consistently and conservatively underwritten to higher cap rates. Our experience with recent refinancing activity has been positive given the existing cushion we had baked into past underwriting. Slide 10 provides additional detail on our modest and granular office portfolio. Our office portfolio, including healthcare office, comprises a modest 11% of commercial real estate. This includes approximately $600 million of owner-occupied office. Our portfolio is geographically diverse with only immaterial exposure to Manhattan. The credit metrics on this portfolio are extremely strong, and we have not experienced any losses in our recent history. Importantly, the portfolio is largely multi-tenant with a very small average loan size of $2.2 million. We understand the concerns over office collateral in general, but believe our portfolio is positioned to perform well. We have utilized slide 11 at various times in the past. We believe this illustrates the ultimate manifestation of our strong and consistent credit culture. In both ordinary times and in periods of stress, Valley's credit losses have been well below industry levels. We anticipate this will continue going forward. With that, I will turn the call over to Mike Hagedorn to provide additional insight on the quarter's financials.

Thank you, Tom. Slide 12 illustrates Valley's recent quarterly net interest income and margin trends. Net interest income declined approximately $30 million from the linked quarter. We estimate that $8.5 million of the reduction was related to the combined impacts of the lower day count in the quarter, and the drag of excess liquidity added in March. The remaining pressure is the result of continued deposit mix shift into higher cost products and increasing deposit costs reflecting competitive dynamics. Our fully tax equivalent net interest margin declined 41 basis points to 3.16% from the fourth quarter of 2022. Approximately 16 basis points of the sequential reduction was associated with the day count and the drag of excess liquidity in March. The remaining compression is largely the result of higher costs associated with incremental funding. As you saw on slide five, cumulative deposit beta increased to 41% in the quarter from 34% in the fourth quarter. While asset yields are expected to reprice higher, the funding cost dynamic will likely result in net interest margin continuing to decline throughout the year, absent the impacts of day count and excess liquidity. We anticipate that our 2023 net interest income growth will now be closer to 10% to 12% from the 16% to 18% range provided previously. Moving to slide 13. We generated $54.3 million of non-interest income for the quarter, as compared to $52.8 million in the fourth quarter. This sequential growth was primarily the result of higher capital markets revenue and other income, which offset seasonally lower income from wealth, trust, and insurance. On slide 14, you can see that our non-interest expenses were approximately $272 million for the quarter or approximately $264 million on an adjusted basis. The increase in adjusted expenses from the fourth quarter was largely related to seasonally elevated payroll taxes expenses and the higher FDIC assessment. Other categories were well controlled and declined modestly from the fourth quarter. As a result of seasonal factors associated with day count and elevated payroll taxes, our first quarter efficiency ratio traditionally represents the high watermark for the year. We're not currently revising our guided growth rate for non-interest expenses. However, our revised net interest income growth guidance will negatively impact our efficiency ratio expectations. While efficiency will improve throughout the year, we believe a full-year estimate around 50% is more reasonable. Turning to slide 15, you can see our asset quality trends for the last five quarters. The first quarter's 2023 elevated net charge-offs were the result of the further write-down of a C&I loan discussed last quarter and a single development project. These credits were each substantially reserved for and proactively addressed. Underlying credit metrics remain strong. Our allowance for credit losses declined to 0.95% of loans from 1.03% in the fourth quarter. The sequential decline was largely the result of substantial preexisting specific reserves associated with the quarter's charge-offs. As a reminder, our allowance coverage ratio of 0.95% is still higher than our Day 1 CECL ratio of 0.89%. As a percent of nonaccrual loans, the allowance for loan losses increased to 181% at March 31, 2023, from 170% at December 31, 2022. In response to recent environmental turmoil, we added disclosure around our securities portfolio on page 16. In aggregate, securities represent a modest 8% of our total assets. Our portfolio is conservatively managed for ongoing liquidity and is not a profitability tool. On slide 17, you can see that tangible book value increased approximately 2.6% for the quarter. This was the result of our retained earnings and a modest improvement in the OCI impact associated with our available-for-sale securities portfolio. Tangible common equity to tangible assets declined to 6.82% during the quarter. The sequential reduction is primarily the result of excess liquidity held at March 31. If our cash position had remained stable from December 31, 2022, our tangible common equity ratio would have been approximately 7.38%. Our risk-based capital ratios were relatively stable during the quarter. As you can see, given our modest securities portfolio, OCI would only have a minor impact on our regulatory ratios, all else equal. With that, I'll turn the call back to the operator to begin Q&A. Thank you.

Thank you. At this time we will conduct a question-and-answer session. Our first question comes from Steve Moss with Raymond James. Steve the floor is yours.

Good morning. Maybe just starting off with loan growth here. You saw strong loan growth in the quarter. Just kind of curious as to how you're thinking about the dynamic there and loan pricing as well.

Yes. Hey, Steve, it’s Tom Iadanza. Yes, as you saw, we had a 50% annualized growth. I just want to point out how balanced, diverse, and granular our portfolio was; we're still averaging below $10 million in our CRE portfolio originations and about $1 million in our C&I originations. It's balanced by region, it's balanced by type, it’s balanced in a very diverse way by size, as I've mentioned. We previously gave a range of 7% to 9% for the year. We think we'll be at the high end or slightly above that range at the end of 2023. We have a very strong customer base, a very loyal customer base. 70% of our business comes from that customer base. It's relationship-driven, and it's priced in a relationship way. We are opportunistically raising spreads wherever we can across the board.

Okay. And so in terms of raising spreads, just kind of curious, if you're raising spreads relative to whatever index, how are you guys thinking about that? It seems still pretty tight marginal funding costs around 5% these days? Or just kind of any help you can give with that dynamic.

Yes, sure. Keep in mind, with the diversity of the types of loans we do, the spreads will vary. We have a very active profitability model, which we use. Again, it's relationship-driven. The spreads will vary based on the risk and type of loans, so it's really hard to give you a figure on that spread. But I will tell you, on average, spreads have probably gone up over 50 basis points.

And then maybe just one for me on credit. You did have an increase in delinquencies here in C&I and CRE in the 30-day, 90-day buckets. Kind of curious if you could give some color around those projects and how you guys are thinking about reserve ratio going forward?

Yes, Steve, I think you're referring to the performing nonaccruals or performing accruals; there that bucket slightly picked up. Our nonaccruals went down to 50 basis points from 57. That performing accrual went slightly up, but that's a function of one customer that's fully secured by cash or in the Valley of life insurance at about $21 million. You take that out, that bucket also declined. That's the process of getting both current.

Okay. That’s helpful. I appreciate all the color here and I’ll step back. Thanks.

Thanks, Steve.

Our next call comes from Frank Schiraldi with Piper Sandler. Frank, the floor is yours.

Can you talk a little bit about the opportunity to fund that growth, talk about where your brokered balances are now on the deposit side? I mean, it seems like brokered seems like a reasonable alternative in this environment for funding. But are you limited in the room there in terms of bringing that higher? Or how do you think about funding in general here?

Maybe let me start just with how we think about funding overall. And then I think, Tom, obviously, will speak to some of the demands from a loan growth perspective and what that is. But I think it's probably incorrect to think every incremental dollar of funding cost comes in here at 5%. During the quarter, we raised over $600 million, which I would deem as core funding, non-specific broker, and the cost of that was a blended 2.50%. We have a very strong funding vehicle across the entire organization, basically the diversity and granularity that we have. When you think about some of the incremental funding costs, allow that to attributable to the 14.7% annualized loan growth that obviously impacts the data. And as Tom referenced, we anticipate that really declining a little bit, which will impact the plug that we need when it comes to some of the wholesale funding in the environment today.

Just to add to that, Frank, as I mentioned, 70% of our new business comes from our existing customer base. We have consistently supported them in all economic cycles at all times. We will continue to do that. We are experiencing a decline in our originations, as you've seen on probably slide eight, if I recall. But more importantly, our pipeline of approved to be closed loans is down 30% since Q4. So we are seeing that reduction in loan demand. And as part of that, our customers are choosing not to move forward on our projects and reducing that pull-through of our work in-process piece. And one other component, when you look at the deposit side, if you go back three years, we didn't have the niches and deposits, our verticals that we have today. So there's $8.5 billion of deposits that came from some of those specialty programs that we referenced to that slide.

In terms of the verticals, you mentioned technology deposits, which still represent a relatively small portion of the overall picture. Tom, you noted that they were down slightly, but also mentioned opportunities in that area. I would like to know more about the potential for account openings, particularly with some of the names associated with Silicon Valley. What is the near-term potential to drive both loan and deposit growth there? Additionally, on the technology side, have those deposit balances increased compared to previous levels? Could you provide more clarification on that?

I think it's something we've been focused on. Having a diverse and granular deposit base that we have is something we've been commenting on and driving across the entire organization for the last five years. As Tom mentioned, that $8.5 billion that we're referencing on slide six, zero of that existed five years ago, right? The average cost of that is 2.17% today. So I think we've done a very good job of being able to originate alternative deposit growth based on different initiatives that we've initiated over the last few years, which I think is now coming to fruition. And I think one of the things that you don't see here, though, is some of the off-balance sheet platforms that we've been able to create as well. We had about $1 billion, $1.9 billion moved from our balance sheet into treasury accounts still on our platform since October 1 of last year. Historically, those would have been deposits that would have left the balance sheet. At some point, as the inverted curve begins to change, there's obviously an expectation that those will rotate back into deposits on the bank. So we feel really good about the position we've been, all the work we've done over the last five years in creating not just diversity from an on-balance sheet perspective, but diversity from an off-balance sheet perspective. Those deposits that you see on slide six, 8.5. There is still significant opportunity for continued growth in that. And I think during the quarter, we saw about 15% growth in the cannabis business, and we continue to see expansion of technology accounts across the entire platform. The technology bucket is a little bit interesting. There are obviously some chunkier deposits in there. And some of those deposits have to flow based on unique activities within those individual clients. One of the clients, a very large percentage of that actually went public. And as a result of that, we lost some of those deposits during the quarter. So it is a very, very sticky deposit base. Over 60% of the technology deposits are noninterest-bearing, here in Valley, which I think is different from a lot of other organizations as well. So we are really excited about the continued opportunities for growth in these segments.

Can you clarify whether the 31% uninsured deposit figure mentioned on slide six includes the fully collateralized deposits, or is that 4.6% uninsured?

Yes, they are.

Our next question is coming from David Bishop with Hovde Group. David, you have the floor.

Yes, good morning. The earnings release notes that some of the short-term funding that you guys added during the quarter has rolled off. Just curious, how much has already been paid down or redeemed since the quarter ends?

This is Mike. As you can see from the earnings release, at the peak, and I'm talking about from 3.9 to 3.31. At the peak during that time, it was in excess of $6 billion. And as we sit today, our cash and cash equivalents at the Federal Reserve or any other cash balance is at $1.5 billion. So it has remarkably come down. And just to be clear about this, this was done specifically for an abundance of caution given the environment that existed post March 9.

Got it. And then in terms of the disclosures regarding the deposits, I'm curious, but did a lot of customers take advantage of sort of the SEDARs IVF system? Just curious what you saw in terms of flows there?

Yes. So prior to March 9, we had just a little over $200 million in that program, whether that be reciprocal or one ways. The reciprocal balance as we sit today is $1.4 billion. And if you put the one-way in there, it's $1.6 billion. So there has been usage, but I would say probably not as much as you would think. Once again, it goes back to Ira's comments about the resiliency and the opportunities that we have in those various verticals to make that difference up.

David, it's Tom again. Just as an example, we were proactive in discussing various sectors to secure customer deposits. However, some of our largest commercial deposit customers chose not to place their full confidence and trust in Valley.

Got it. And then one final question. I think you noted in the preamble, payoffs were down to zero this quarter. Just curious what they were this quarter versus last?

Yes. I don't believe they have changed much over the past few quarters, especially considering that the higher interest rates have not led to any refinancing activity. So they have remained stable over the last two or three quarters.

Great. Thank you.

Thanks, David.

Our next question comes from Manan Gosalia of Morgan Stanley. Manan, please go ahead with your question.

Hi, good morning.

Good morning.

I wanted to follow-up on the last question where you mentioned that cash balances are back down to $1.5 billion or so. Based on that, I guess, how should we think about the NIM trajectory embedded within your guidance? So you noted that 16 basis points of the decline in NIM was related to day count and excess liquidity. So is a good starting point for the second quarter, about 3.30 or so in NIM? And then how should we think about the decline in NIM that you saw last quarter, the core decline of about 25 basis points? Should we expect that to slow as we go through the year?

This is Mike. I'll take the first stab at this. First, I want to point out that the $1.5 billion that we have in excess liquidity on the balance sheet as we sit today, I think the bias clearly for that will be for that to go lower as we see the crisis, at least the immediate impact of the crisis, abate. In my prepared remarks, as you rightly pointed out, the 16 basis points against the margin would put it at 3.32% for the quarter. But I think it's important, as you look forward, March liquidity adjusted margin was only 3.25%. So we're already starting to see some of that compression. And essentially, that compression is coming from two places. One, a continued rotation out of non-interest-bearing and interest-bearing accounts, as Tom and Ira both alluded to. Our mix of clients tend to be savvy, very liquid customers, and so they can take advantage of the fact that they don't need to hold as much as noninterest-bearing. And then the second reason is the inverted curve is causing increased deposit competition, especially on the short end of the curve, and also we're competing against government securities with our clients as well. Some of the more savvy ones are moving into treasuries. The good news on that side is they're still staying within the Valley family to do that. So in a different interest rate environment, we expect some of those deposits or those securities to rotate back into deposits.

Got it. As you think about the mix of NIB and IB deposit balances, how should we think about that going into year-end?

Yes. Right now, we expect the trough. I can't tell you what quarter I think it's going to happen in, but we expect the trough to be somewhere in the mid-20s. So we do expect continued rotation.

And maybe just a quick follow-up there. In terms of the maturity of CDs on your books, I recall that you were putting on longer-dated CDs a while back. How should we think about the maturities coming up over the next couple of quarters or so?

No, we have not been issuing longer-dated CDs in the past year. We did offer some specials in 2022 that were around 18 months at the longest, and you will see all of that mature in the latter half of this year and early 2024.

Got it. Very helpful. Thank you.

Yes. Thanks.

Our next question comes from Tim Switzer with KBW. Tim, you have the floor.

Hey, thank you. I'm on for Mike Perito. Could you talk about your various deposit niches? You have a very good pie on all of that, and across the various industries and categories you have. And which ones do you think could be the strongest over the rest of the year and possibly as we enter into 2024?

I think obviously, in there, we mentioned a bunch of them, and that diversity has really afforded us that. So it's not just specialized niches that are focused on one individual slide or individual pie, excuse me, but it's a lot of individual pie there that really comprise that. As you think about the technology slide just in itself with the pie there, obviously, there's been a significant amount of disruption in the industry associated with that. We opened up over 7,000 accounts in the last three weeks of the first quarter. Another metric is we opened up 4,500 business accounts in the fourth quarter, you can see in the first quarter of 2023. And that's equal to what we would have done in six months back in 2022. So there's been a significant amount of activity across the entire footprint of Valley. And I think there's an opportunity to continue to expand in some of the specialized spaces. When we were able to grow $600 million of deposits in the first quarter at a blended rate of $250 million, it does reflect the overall diversity. I think the funding cost on an incremental blend basis will come down a little bit, as we think about slowing loan growth. So I think a 41% deposit beta on a cumulative basis where we are today, based on having loan growth at the levels we have, really reflects a lot of organic deposit growth; that's a little bit hard to see when you try to measure it versus a lot of our peers that haven't generated the same type of loan growth that we have. So we do believe that that data will continue to perform, and we'll probably improve on a relative basis as the loan growth really subsides a little bit.

Okay. And on the loan growth, my guess is not just given you still kind of maintain guidance there. But have you heard from customers any signs of slowing investment or loan demand? Just out there with the uncertainty, I'm wondering if people are starting to become a little bit more cautious what your discussions are like?

Yes. As we mentioned earlier, customers have definitely slowed down in their desire to start projects. They are choosing to wait and see what happens to the interest rate market over the next 12 to 24 months. This has resulted in a 30% reduction in our closed pipeline. Much of this is due to the customers' choices rather than any actions on our part. We're not observing any decline in credit quality; instead, we're noticing a cautious wait-and-see approach from the customers.

Okay. And has the environment caused you guys to tighten your lending standards at all?

Yes. Again, we're very conservative in our underwriting standards to begin with, but we look to tighten, especially in certain buckets of our portfolio. So we consistently do that throughout every cycle.

Okay, that’s all from me. Thank you.

Thanks, Tim.

Our next question comes from Matthew Breese with Stephens. Matthew, go ahead with your question.

Good morning, everybody.

Good morning, Matt.

I know in past quarters, we've discussed the outlook for deposit betas through cycle and in the past, you provided somewhat of a range. At this stage, is it safe to say that the cumulative deposit beta will end up being closer to the higher end, 40% to 50%. Is that kind of how you see this all playing out?

Yes. This is Mike. We clearly think that the through-the-cycle cumulative deposit beta will be around 50%.

One of the things I think, Matt, is, obviously, we've been banking for a long time, just like what you've seen, you go back to sort of prior environments and seeing what happens. Is that obviously, betas in different environments are really a function of what the alternative external variables are as well. And right now, we're in an inverted curve. That inverted curve obviously puts pressure on betas until the inversion changes. So as Mike mentioned, Travis mentioned, and I'm sure a lot of others are seeing today. Most of our competition today isn't peer banks that are sitting around the corner. Most of the competition sits in the treasury today based on where they are. So that deposit beta is going to stay elevated, I believe, as long as we're in this inverted curve. But once we get back to sort of a normalized curve in a normalized environment, I think the deposit betas will really come back down.

This is Mike, again. You can see that in our public disclosure that the cost of deposits was around 1.96% for the quarter. But for the month of March, it was 2.14%, and we're originating new core deposits around 2.50%. So the blended rate will come down, but the beta is definitely going to go up, as I said earlier, due to the competition that we're seeing in the marketplace for deposits, especially post March 9.

And how have deposit flows gone post quarter end? Has the mix shift continued? And are balances up or down, ex-brokered?

Yes. The shift has actually been pretty good. A couple of really good examples of that would be in our tech business. As Ira pointed out early on, 10% of our tech deposits were gone. Only half of those, however, were made up of one customer unrelated to the crisis, and they're only at a 5% reduction in March. So we feel pretty good about where that is relative to the overall industry. Another bright spot would be that our branch deposits, even when you consider the fact that people are making tax payments, held in very well in a post March 9 environment. So the flows haven't slowed; the flows are still good. We opened, as an example, I think I mentioned this in my prepared remarks, 7,000 new accounts just in the month of March. So the flows have been good. But obviously, we have 15% growth in loans, you're going to have a higher percentage of that being funded by broker just because of the sheer number of those balance sheet increases.

Have you seen any customers or hiring opportunities stemming from Signature and the dislocation of some of the other nearby banks?

Hey, Matt. It's Tom. We're always going to be opportunistic to add teams of people as long as it follows our relationship-driven strategy and our credit standards. So the short answer to that is yes, we do see opportunities.

And then last one for me. Just on new commercial real estate loans, either those involved in a transaction or resetting into a new kind of five or seven-year fixed rate. What is the ultimate change in value, particularly on commercial real estate office that you're seeing appraisals come in at, particularly for loans that are pre-COVID?

Sure. We are seeing across the board increasing cap rates, as you would expect, more so in the office and retail industry than we have seen in multifamily and industrial. We're not major office players, especially in Manhattan; we have $260 million of Manhattan office. The NOIs are down, so we would expect that's going to drive the values more so than the cap rates that have increased to drive those values. But we have not seen any material deterioration. As a matter of fact, we only have one office loan on nonaccrual, that's $315,000.

Yes. I think one of the things to really look at, Matt, is what our Day 1 underwriting was. As an example, multifamily for us, the cap rates were 5.42%, right? And when you look at sort of where the environment is in on that, it sort of reflects how we underwrote Day 1. So I think some of the change that others are seeing based on changes in interest rates and cap rates, really are going to have less of an impact on us. And I think maybe just going back to your question that Tim might have asked, sort of what are our clients doing? We're very fortunate to have a strong, knowledgeable client base that has been in the business for a very long time. And they're really the first line of defense here. I was with a client the other day; they actually walked away from a $3 million deposit that they had on a project because they thought the economics just didn't work out now and there were other opportunities that were going to happen. So our client base didn't just get into the real estate market three, four, or five years ago; they've been in for a very long time. They are very astute, and I think there's going to be a lot of ability for us to help support them as they continue to look at opportunities that are going to come about in this economic environment.

Yes. And Matt, just a final point on this. Our average loan-to-value ratio on our real estate portfolio is 58%, while on our office portfolio, it stands at 54%. This indicates a significant buffer in our previous underwriting standards, as Ira had mentioned.

Great. I appreciate it. That’s all I had. Thanks for taking my questions.

Thanks, Matt.

Our next question comes from Jon Arfstrom with RBC Capital Markets. Jon, go ahead.

Alright. Good morning. Mike, I was writing kind of fast. Can you go over the efficiency ratio guide again, and what you're thinking on overall expense growth?

Sure. So as a reminder, if you were to go back to the first quarter of '22, you would also see an efficiency ratio that started with the 53 to the left of the decimal place. So for us to be at 53 in the first quarter, based on the seasonality of some of our expenses, that being the largest portion of it being the various payroll taxes associated with compensation-related expenses, it's not unusual. I also want to point out the second thing that is a large impact on the expense side, which is the increase in FDIC assessment rates that increased, that 2 basis point annual increase in rate, that drove a $2.3 million increase in our expenses as well. So when you back those out, as we've said in the past, our long-term goal is to have a below 50% efficiency ratio. When you back those out and you consider the NIM compression that we've talked about previously, it seems reasonable to think that the bias right now might be slightly over 50% for the remainder of '23.

Okay. So you're saying for the remainder of '23, from here?

Yes. So what I'm saying is 53 is seasonally high, and I think that something over 50 wouldn't be that terribly. I'm not talking about 53, by the way; we're talking 50, 51, 52.

Okay. And how about the fee piece of the equation? Any drivers or anything to call out in terms of your expectations there?

Yes, two things I think are really important. One, I hope it doesn't get lost in everything else that's going on; our fee income was actually pretty good in the first quarter. It was up over the fourth quarter. And when you look at the drivers of that, the swap and the FX business, the FX business came to us from Leumi and we're selling the Valley legacy customer base into that. Those were strong. And then the one negative that's in there, that will come back, is there is some seasonality to have Dudley recognizes their revenue, and we expect that to come back in the second quarter. So I feel pretty good about fee income.

And Ira, you brought up a bit on SBB, and you talked about how you're open to opportunities that would have been a bigger deal, but what might make sense for you guys? And are you seeing any more or less in the way of opportunities to do something strategic?

I would say I think there's going to be a lot of opportunities available to us. And I think already it’s a function of the granularity and diversity that we have today within our balance sheet. We've identified a couple of more strategic initiatives for the last three, four years. One of them was focused on diversity. One of them was focused on continuing to build specialized business lines across the organization to reduce some of the concentration increase; to help expand some of the alternative funding sources, as well as continuing to identify alternative noninterest income sources. So I do believe there's going to be opportunities out there for us. That said, for us, it really has to align from a strategic perspective. And I think that's really critical. We have a lot of internal and organic opportunities that are really tremendous to us, and it will be incremental for us to really go ahead and look at something else. So I do think there's going to be other opportunities. I think we'll be able to look at them. But I think we'll be very disciplined, sort of like we were on the SBB there. It has to make both strategic sense for us, as well as economic sense for us. One of the things that I've been focused on for the last five years is making sure that our tangible book value grows. And I think sometimes I'm very, very proud of when you think on a relative basis, we've done much better than our peers in tangible book value growth over the last five years. So that's something that sort of remains top of mind to me.

Yes, okay. Alright. Thank you. I appreciate it.

I'd like to thank everyone for taking the time to join us today, and we look forward to talking to you next quarter.

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