Thank you for standing by, and welcome to the Q4 2023 Valley National Bancorp Earnings Conference Call. Please be advised that today's call is being recorded. I would like to turn the call over to your host, Mr. Travis Lan. Please begin.

Good morning, and welcome to Valley's fourth 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 2 of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and the factors that could cause actual results to differ from those statements. With that, I will turn the call over to Ira Robbins.

Thank you, Travis. In the fourth quarter of 2023, Valley reported net income of $72 million and earnings per share of $0.13 exclusive of non-core items, including the one-time special FDIC assessment tied to the year's bank failures. Adjusted net income and EPS were $116 million and $0.22 respectively. While I'm pleased with the quarter's balance sheet trends, I'm disappointed with the earnings and profitability metrics, which I will discuss shortly. On the positive side, we made progress enhancing C&I growth while curtailing commercial real-estate originations. This enabled us to both accrete organic capital and reduce funding needs. On the deposit side, we added a remarkable 14,000 net-new consumer households and 8,000 net-new commercial deposit relationships during the year. This represents 4.5% growth in consumer households and 10.5% growth in commercial relationships from the same period a year ago. The ongoing addition of new deposit clients is critical as it directly relates to Valley's franchise value and our future earnings potential. Our new customer growth was broad-based across all of our geographies and I might add was undertaken against the backdrop of a difficult external environment when mid-sized banks like Valley were often front-page news. During the quarter, our new relationships helped to generate strong customer deposit inflows, which enabled us to significantly reduce our reliance on broker deposits. While customer deposit inflows were exceptional, the organization-wide focus on ensuring a successful core conversion in October likely led us to take our eyes off the ball relative to deposit pricing. There is no doubt that this negatively impacted net interest income during the quarter and in a few minutes, Mike will illustrate some of the subsequent efforts that we've undertaken to manage these deposit costs going forward. From a strategic perspective, we are refocusing on holistic customer profitability and will return to pricing deposits in consideration of balance and return as opposed to just balance. The quarter was also impacted by a few additional factors worth calling out. First, waived service charges and proactive efforts taken to supplement customer support both associated with our core conversion weighed on quarterly earnings by an estimated amount equaling approximately $0.01 per share. These efforts were enacted out of an abundance of caution to ensure that our customer experience smoothly transitioned to our new system. I'm pleased with the customer response to our core conversion, but acknowledge that some of the excess support costs will persist in the first quarter as well. Secondly, our provision was partially elevated as a result of a loan charge-off in our commercial premium finance business. The after-tax impact of the associated provision was approximately $0.01 per share as well. This business line has approximately $275 million in outstanding balances and we have an agreement in place to sell this business and a portion of the outstanding loans, at what is expected to be a modest premium during the first quarter of 2024. While this quarter's earnings are not satisfactory, I continue to believe that our strategic progress over the last few years positions us well in the evolving banking landscape. The financial consistency that we have achieved in support of the strategic evolution is evident in our tangible book-value growth results. Our stated tangible book-value has increased 52% since 2018, which is more than double our proxy peers at 25%. Our value creation as measured by tangible book-value plus the dividends we have paid out totaled 90% since 2018, or more than 1.7 times our proxy peer median of 53%. From a balance sheet perspective, we have successfully transformed and diversified our funding base. At the end of 2017, approximately 92% of our deposits were held in our branch network. By utilizing technology to expand our delivery channels and establishing new growth-oriented deposit verticals, we have reduced our reliance on branch deposits to just 65% today. From a geographic perspective, 78% of our total deposits were in the Northeast branches in 2017. Today that number is down to just 45% of total deposits. Our focus on geographic diversity and holistic relationship banking has benefited the asset side of our business as well. In 2017, 78% of our total loan portfolio was in New Jersey and New York. That composition has declined to just 55% today. In 2014, we entered Florida with the acquisition of First United Bank, which had just over $1 billion in loans. Through additional strategic acquisitions and targeted organic efforts in this dynamic growth-oriented market, our Florida loan portfolio has expanded beyond $12 billion. There continues to be significant diverse commercial growth opportunities available to us in Florida and across our entire footprint. The proactive evolution of our technology infrastructure is a less tangible but equally significant achievement for our organization. We have recruited and developed a strong pool of technology talent which has helped us to modernize our infrastructure and positions us to be on the leading edge of further advancements in the banking space. Our technology adoption has allowed us to scale the franchise with limited net headcount growth. Since 2018, we have nearly doubled our asset base from $32 billion to $61 billion with a mere 17% increase in headcount. Our recent core conversion aligned technology across our company and provides additional capabilities, which we look forward to leveraging for our clients. As we move past the conversion, we anticipate that further efficiencies will also emerge. We have also focused on enhancing a more uniform data infrastructure, which allows us to react quickly and purposefully to changing market dynamics. An internal AI working group has been established to help us determine appropriate potential use cases and to begin to execute on related opportunities. I now want to pivot to our strategic imperatives for the coming year. While none of these are new initiatives for Valley, we continue to believe that they will drive shareholder value over the long term. First, we need to continue to drive core deposits to the bank. We have an incredible service-oriented branch network across our dynamic geographic footprint. We'll generate more consumer and commercial activity out of these locations in 2024. As the curve increasingly normalizes, we will further leverage the existing specialty niches that we have established and will build on our momentum from the second half of 2023. Secondly, we will continue to de-emphasize investor commercial real-estate lending in favor of C&I and owner-occupied CRE. We have restructured our commercial banking organization to better align expertise and experience with opportunities in our markets and business lines. Our enhanced treasury management capabilities and product offerings will support expanded wallet share among our customer base and help us to acquire new customers on the commercial side. We have also adjusted our incentive programs in support of our deposit-gathering and lending goals, which will drive further strategic alignment across the entire organization. Finally, we will continue to grow our differentiated non-interest income businesses to diversify our revenue base. Through organic and acquisitive efforts, we have developed a robust suite of fee income products and service offerings for our growing customer base. The recent enhancements of our treasury management offering will help to offset certain capital markets headwinds associated with lower swap-related revenues in 2024. The industry challenges of the past year confirmed to me that we have undertaken the right long-term strategy and I'm pleased with our ability to navigate this difficult year. 2024 will be about accelerating our progress towards achieving our strategic initiatives and improving our performance as we continue to mature. As we execute on these initiatives, I want to reiterate that we continue to prioritize tangible book-value growth. We believe that consistent growth in tangible book-value will drive shareholder value over time and we continue to expect to outperform our peers on this metric. With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results.

Thank you, Ira. On Slide 6, you can see the quarter's deposit trends. Direct customer deposits increased approximately $1.6 billion to largely offset the significant $2.3 billion reduction in indirect deposits. The meaningful reduction in our reliance on wholesale deposits was a key highlight of the quarter. We generated strong growth in our interest-bearing transaction accounts and we're pleased by the slowdown in non-interest deposit runoff. That said, we acknowledge that competitive interest-rate pricing was one of the tools used to support our generation efforts during the quarter. Still, the pace of deposit cost increases slowed. In a moment Michael will outline efforts which we have undertaken to control interest expense on a go-forward basis. The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business line. Traditional branch deposits increased approximately $600 million during the quarter. This growth was spread across our geographic footprint. Our specialty niches increased approximately $1 billion as well with key contributions from our online delivery channel and technology deposit team. Turning to the next slide, you can see the continued diversity and granularity of our deposit base. No single commercial industry accounts for more than 7% of our deposits. Our government portfolio remains diversified across our footprint and is fully collateralized relative to state collateral requirements. Slide 9 provides an overview of our loan growth and portfolio composition. At the top-left, you can see proactive growth slowed down throughout 2023. Ultimately, we achieved the lower end of the 7% to 9% growth target that we had laid out at the start of the year. Annualized loan growth slowed consistently as the year progressed, illustrating our ability to be responsive to changing market dynamics. The following slide breaks down our commercial real-estate portfolio by collateral type and geography. As a reminder, we have an extremely granular loan portfolio, which is well-diversified by collateral type and geography. Our debt service coverage and loan-to-value metrics remain very attractive. We continue to closely monitor pools of maturing and resetting loans and believe that our borrowers are well-positioned to absorb the pass-through of higher rates. This reflects consistent underwriting discipline at conservative cap rates and significant stress-testing efforts at origination. The next two slides provide additional details around our multifamily and office portfolios. From a multifamily perspective, our $8.8 billion portfolio includes $2 billion of co-op loans with an extremely low loan-to-value. Exclusive of our co-op portfolio, our Manhattan multifamily exposure is a mere $600 million, which you can see in the last column of the table. The remainder of the portfolio is well-diversified across our footprint with low average loan sizes at attractive loan-to-value and debt service coverage ratio metrics. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.

Thank you, Tom. Slide 13 illustrates Valley's recent quarterly net interest income and margin trends. While end-of-period noninterest-bearing deposits stabilized, the decline in noninterest deposits on an average basis weighed on quarterly net interest income by approximately $4 million. Throughout the quarter, we replaced maturing direct and indirect CDs with relatively high-yielding interest-bearing transaction accounts and promotional retail CDs, which was the cost of our significant customer deposit growth during the quarter. The right side of this page outlines efforts that have been undertaken to more precisely manage our funding costs on a go-forward basis. We have cut back the high-yield savings rate in our online channel, but remain competitive. We have also significantly reduced our one-year CD rate which will help to mitigate the repricing issue that we faced during the recent quarter. Finally, we are working with our relationship bankers to ensure that deposit rates are reasonable in the context of holistic customer profitability. In the few quarters following the industry's challenges in March, we priced deposit products to ensure that direct customer balances rebounded. As we continue to move past these challenges, we will price products with a more even consideration of balances and profitability. Turning to the next slide, you can see that non-interest income on an adjusted basis was generally stable from the third quarter of 2023. Deposit service charges declined sequentially as we waived certain transactional fees around the time of our core conversion. Other than this, growth trends were relatively strong for the quarter, despite the headwind of swap revenues. On the following slide, you can see that our non-interest expenses were approximately $340 million for the quarter. Adjusting for our $50 million FDIC special assessment and certain other non-recurring litigation and merger charges, non-interest expenses were approximately $273 million on an adjusted basis. Compensation costs continue to be very well-controlled. The sequential expense increase was primarily due to higher traditional FDIC assessment costs, consulting costs, occupancy and advertising expenses, and the seasonal uptick in other business development expenses. A portion of the quarter's expense increase was associated with certain consulting and customer support initiatives associated with our core system conversion in October. While the customer experience associated with our conversion has been extremely positive, some of these costs will have a tail into the first quarter. As you know, the first quarter also has traditional seasonal headwinds associated with payroll taxes. We are very pleased with our ability to proactively control headcount and associated compensation expenses throughout 2023. We expect that 2024 will be a more normal year in terms of expense trajectory and as you will see shortly, we anticipate mid-single-digit expense growth in the coming year. Slide 16 illustrates our asset quality trends for the last five quarters. While non-accrual loans ticked up somewhat during the quarter, they remained relatively flat on a year-over-year basis. Net charge-offs were $17 million during the quarter and included approximately $5 million associated with our commercial premium finance business, which is under an agreement to sell during the first quarter of the year. As a result of our higher provision, our allowance for credit losses for loans increased one basis point during the quarter to 0.93% of total loans. The next slide illustrates the sequential increase in our tangible book-value and capital ratios. Tangible book-value increased nearly 2% from the third quarter of 2023 and benefited from a reduction in the OCI impact associated with our available-for-sale securities portfolio. We are pleased that during the year, we were able to support our strong loan growth and organically accrete regulatory capital. Based on our expected loan growth in 2024, we would anticipate this trend to continue. We lay out our expectations for the coming year on Slide 18. We anticipate generating mid-single-digit loan growth with a focus on C&I and non-investor commercial real-estate in 2024. Based on consensus interest-rate expectations for 2024, we would anticipate net interest income growth between 3% and 5%. Non-interest income should grow between 5% and 7% on an annual basis as headwinds in our swap business are more than offset by continued scale in our wealth, insurance and tax advisory businesses as well as our recently enhanced treasury management capabilities. Noninterest expenses should grow approximately in line with revenue; higher FDIC costs and inflationary pressures are offset by savings from our core conversion and the continued benefits of our previously announced expense initiatives. Factoring this guidance together, we expect 2024 EPS to come in just slightly lower than the existing 2024 consensus estimates of $1.08. With that, I'll turn the call back over to the operator to begin Q&A. Thank you.

Our first question comes from Frank Schiraldi of Piper Sandler. Your line is open. Pardon me, Frank, your line is open.

Sorry. Just on the NII guide. I recognize you guys follow the market and the forward curve here, and most of those assumed rate cuts are back-loaded in the year. What sort of annualized pickup do you get, in terms of either NII or NIM, from a given 25 basis point move—what's the assumption?

So, I want to make sure I understand the question. You want to know what just the impact would be of a single 25 basis point increase or cut?

Yes, basically, as you get three or four cuts. I'm just trying to get a sense of what 25 basis points does on average for the NIM or NII in your modeling.

So, I'm going to direct you back to our guidance around 3% to 5%. Right now in 2024 we're expecting roughly 175 basis points of impact. That will affect most of the short end of the curve as you get less inversion in the curve. That first increase does start at the end of March, so you don't get much in the first quarter. You are correct that the cuts are more back-loaded into the fourth quarter of 2024. While I'm not prepared to answer exactly what a single 25 basis point cut would do because it will depend upon the mix of funding sources at that time, for the full year we're expecting a 3.5% increase in NII and that should drive a slightly higher NIM year over year. Conceptually, we're relatively neutral to the short end of the curve, so there is not a significant move if those cuts don't materialize. We're much more exposed to the longer end as it impacts the benefit that we'll get as our fixed-rate loans mature and reprice.

Okay. So, I guess over the full curve, you're still liability sensitive, but more neutral to the front end?

Yes, that's correct.

Okay. And just kind of a theoretical question. The business mix has changed a bit here over the years with the specialized deposit opportunity and the opportunity on the C&I side, which you guys continue to see in 2024 in a more normal yield curve. What do you think a normalized NIM is for Valley given how you've built the balance sheet?

Yes, this is Ira. I think it's a lot higher. Being in an inverted curve for three years has been a real challenge for us given the stance we take to be relatively neutral. That said, as the curve normalizes, we do anticipate significant margin expansion. We've done a good job shifting commercial growth within the organization. We've been running roughly a 10% CAGR on C&I growth for an extended period. The diversification of the funding base really will help us as the curve gets more normal and we can return to appropriate deposit pricing across the organization.

Okay. Great. And then, on the specialized deposits coming on board in the quarter—the growth there and thinking through the betas on your deposit book, specialized versus branch deposits—are the betas expanding given the national businesses and would that help you in a down-rate environment?

Those national businesses do have a bit higher beta in some cases. The mix shift out of non-interest-bearing deposits has changed the asset-liability profile, so we do have more sensitivity on the downside for deposit costs. Historically we were running 28% to 29% non-interest-bearing deposits; those balances are now sitting in interest-bearing deposits. That will be a benefit, but what really excites us is the diversity and granularity within the deposit book. As I mentioned earlier, deposit pricing got a little bit away from us as we focused on the core conversion. I do believe it's an easy fix. We will refocus and ensure 2024 gets back to results you would expect from us.

Okay. Great. I appreciate the color. Thanks.

Thank you. One moment please. Our next question comes from the line of Steve Moss of Raymond James. Your line is open.

Good morning. Just following up on the asset liability side of the business. Just curious with regard to how much of your fixed-rate loans and securities reprice in 2024?

Steve, we've talked in the past—we have about $20 billion of fixed-rate loans. It's not linear; more of our fixed-rate loans reprice in the second half of the year than in the first half. In total, between $3 billion and $4 billion would reprice this year, and again that's relatively back-loaded.

Okay. And on the securities side, I'm assuming there's probably minimal cash flows for the upcoming year?

Yes, the duration of the securities portfolio is extended to about seven years, give or take. The cash flows are de minimis—it's a $5 billion portfolio, so a couple hundred million dollars in the year.

Okay. And then on credit, curious to get more color on the uptick in C&I and CRE. It sounds like some of it was the premium finance charge-off this quarter, but what are the loan types in the uptick and any incremental color?

Hi Steve, it's Tom. There was an uptick in non-accrual primarily in the CRE business; $20 million to $10 million and that has since been repaid. When you look at our performing past dues you'll see a decline on the commercial side and very little, if any, in the 90-day bucket. The increase in accruing past dues on the residential side is from our jumbo on-balance-sheet portfolio where the average loan-to-value is 58%. We don't expect any loss. Historically, over a 15-year period, our real estate portfolio has run about 35% of charge-offs against our peer banks. We expect that trend to continue. We're seeing improvement across the board; our metrics remain solid, especially on the commercial side.

Okay. And you referred to an uptick in criticized and classified assets in the quarter—where did criticized and classified assets move in the quarter?

Travis has the number, but the uptick came from a forward review of loans, especially those repricing and resetting. There was a migration in the third quarter into special mention categories where they might have fallen to or right at a one-time set debt service coverage threshold. I want to remind everyone that loans we repriced during 2023 and that repricing in 2024 resulted in no modifications of contractual repayment terms. Travis, the specific number you're referring to.

I don't have the exact number in front of me, but that third-quarter stress-test process Tom referenced resulted in a more significant increase in criticized and classified loans. Not an impression that we'd see additional losses, but the way debt service coverage shook out. In the fourth quarter it was a much more normal increase, so it was not as significant.

And this is Mike. The net increase would have been primarily in special mention credits, not the more extreme ratings.

Okay. Got it. And maybe following up to that point: as you're seeing some borrowers get close on debt service coverage ratios, what's the process? Are borrowers paying down loans? What are you seeing and what potential NPA formations could you see in 2024?

We haven't modified any terms for borrowers repricing over the past year. Our underwriting standards are conservative; we underwrite to current cash flow, not future cash flow. Leverage tends to be lower going in; average loan-to-value in our real estate portfolio is about 60% across asset classes. There is flexibility and many customers are existing relationships with capacity. If it's tight, we either require additional collateral, a paydown, or a reserve to support funding at an appropriate level. Refinance activity, especially multifamily, picked up in the fourth quarter and allowed us to exit non-core loans.

Okay. Great. Thank you very much for all the color.

Thank you.

Thank you. One moment please. Our next question comes from the line of Michael Perito of KBW. Your line is open.

Hi, good morning. Thanks for taking my questions. I understand this isn't something you strictly guide to, but I'm trying to understand some of the cadence of profitability around NIM and expense rationalization. Are you willing to qualitatively talk about how you're thinking in the current budget about the return and ROE profile as you exit '24? It feels like the first half might be depressed; any indications around cadence relative to the guide?

Mike, your perspective is accurate. In the first quarter there are headwinds on the expense side—payroll taxes—and on the NII side given the limited change projected for the industry environment. We anticipate relatively stable margin in Q1, improving somewhat in Q2, and more expansion in Q3 and Q4 based on the implied forward curve. On expenses, there was a $7 million pickup in Q1 last year related to payroll taxes, so you may see something similar. On an annualized basis, we have $20 million of expense savings related to headcount reductions enacted in June. We think there's another roughly $8 million of annualized savings from further personnel actions taken in Q1. As we get into Q2 and beyond, there should be savings related to the core conversion and elimination of elevated costs tied to customer support. So Q1 will have some seasonal expense headwind, then generally stable thereafter. Blending this together, at the midpoint of our range you get to $1.04–$1.05 EPS, which puts you at an ROA similar to what we've achieved this year but improving as the year goes on.

Yes. So maybe in the 90s on ROA on the exit. If revenue and expense grow dollar-for-dollar that's not going to materially improve operating leverage. What's your confidence that in '25 and beyond you can get back into positive operating leverage—what gives you confidence? Is it margin, or unit economics in specialty businesses that scale?

There is a lot of opportunity. From the net interest income side, being in an inverted curve is impactful. The core conversion is an understated lever for scalability. We moved every client to a new core platform and put on 261 different APIs to shape the client experience. The platform is consistent across channels—branch and digital—and that infrastructure is scalable; we're not paying per account to a core provider. From a scalability perspective the technology base is designed to drive outsized growth. We put on household growth during a core conversion when the market environment was difficult. There is positive tailwind on both expense and revenue as we scale.

Helpful. Lastly on loan growth: as you focus on pricing customers and holistic profitability, should we assume incremental loan growth will come on at better margins than in 2023, or is there a lag?

You should expect spreads on new loans to continue to widen. For context, we've seen an uptick in the C&I pipeline; that business is about 70% of its high point and represents 65% of our total portfolio. It's across old business lines, especially healthcare and fund banking. We're starting to see improvement and spreads are holding.

Adding to that, some compression we've experienced is largely a function of mix shift and repricing. The new value margin is around 350 to 360 basis points, reflecting our pricing approach and profitability focus. New loans we've placed have been able to bring on equal funding from a client perspective rather than relying on broker market funds. The new originations in the quarter came on at spreads around 3.50.

Helpful. And just to clarify: can you repeat the rate assumptions baked into the NII guide around Fed funds? And Travis, you said on the short end cuts don't have huge impact—2024 is more about the long end and the back book. Is that right?

That's correct. While we haven't laid out a specific Fed timeline, the first expected cut we assume is 25 basis points and cuts accelerate as the year goes on. The biggest benefit to us is less inversion in the curve and a reduction in short-term interest rates. Hence why we shortened liability duration this quarter and shifted funding mix away from FHLB and higher-cost maturing CDs into transaction accounts and money market to prepare for potential Fed cuts.

Okay, thank you. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open.

Hi. Thanks, good morning. On the liability shortening—is that largely complete for you at this point?

It's largely complete. There is another material piece in the first quarter still to come, as we loaded some duration front-end earlier preparing for this environment. After the first quarter it tails off a bit.

Okay, good. On Slide 13 you talked about CD rate reductions in December and more coming in maturing liabilities in Q1. What was the reaction on CD repricing and are these maturing liabilities deposits or other funding that can reprice?

The customer impact is yet to be fully seen, but we don't expect it to be extreme. The majority of the impact will be CDs that roll. Remember in 2023 we put on several CD specials, notably around a 13-month duration, and now those are rolling at 12 months. Historically we retain 70% to 80% of the CDs when they roll, so we expect some retention.

Okay. Ira, it feels like deposit pricing pressure was a little more than you expected. It also looks like perhaps we are near the bottom of the margin. Discuss the trade-off decision—you mentioned deposit growth versus promotional pricing to bring in new accounts. Can you talk about that trade-off?

A couple of variables: we made a conscious decision to shorten liability duration, which negatively impacted interest expense this quarter but should benefit us in 2024. Macro events made this a challenging year—Signature, SVB, and others—and we were focused on retention of deposits. In some cases, we may have been too lenient on rate requests. A lot of money moved to Treasuries early and we were competing with that. We were also distracted by the core conversion which required focus on customer retention through the conversion. That said, the core conversion was very successful; we retained and grew customers through it. Deposit pricing got away from us a bit, but it's fixable and we're re-engaging with clients now. Overall, I'm not overly concerned given the franchise progress.

Yes, fair enough. One more: does the NII guidance imply a decent step-up—about $140 million incremental from the run rate in Q4? Do you think we're near the bottom or at the bottom on NII?

We're certainly getting close. If you look at quarter-over-quarter deposit cost increases, we started the cycle at 60 basis points, had two consecutive quarters at 49, and then third and fourth quarter only 19 basis points. We feel better about the direction of NIM given stabilization in non-interest-bearing accounts; non-interest-bearing rotation declined from 36% when we closed Leumi to about 23% today, and now in December we started to see stabilization. Combined with deceleration in deposit cost increases, we expect additional NIM increases as 2024 plays out, although rate cuts would help capture the full opportunity.

Okay, good. Thanks, guys.

Thank you. Our next question comes from the line of Steven Alexopoulos of JPMorgan. Your line is open.

Hi, good morning. Ira, when you took over as CEO, improving the efficiency ratio was a top priority. I know it was a rough year given rates and NIM pressure. I'm surprised improving the efficiency ratio isn't explicitly listed as a strategic imperative for 2024. Is this still a top priority and should we expect improvement this year?

Yes. The efficiency ratio contraction is largely a function of the revenue environment. Structurally, improving efficiency is core to what we do—it's not absent from our priorities. We've managed headcount tightly: we were about 3,325 employees at one point and around 3,700 today while assets grew from $21 billion to $61 billion. The technology infrastructure we put in place allows for scalability and will reduce incremental per-unit costs. So while it's not labeled as a separate strategic imperative, it's embedded in operations and remains a priority. As NIM recovers, you'll see the efficiency ratio improve.

Okay. On expenses related to the system conversion, how much was that in Q4, what's expected in Q1, and when does it come out in Q2?

In operating expenses there was $5 million associated with the core conversion in Q4. In Q1 we anticipate around $3 million, so a decline of about $2 million, and then it should largely be out after that.

Those were one-time or infrequent items, and keep in mind we ran dual operating expenses on multiple platforms during the conversion. Once we get past this, those duplicate costs will be eliminated.

To add, if you look back a year, efficiency was 50% in Q4 '22 and 60% this year. Relative to average assets, non-interest expenses actually declined in that same period; the change is revenue-driven. Structurally we've done a good job controlling what we can.

Okay. You called out that deposit pricing got away from you due to the system conversion. What's the connection between the two?

We have many relationship clients and internal models for pricing deposits. The focus for frontline staff was on reaching out to clients and retaining them during the conversion and explaining the new systems. That focus likely distracted from enforcing pricing guidelines and exceptions; some deposit rates from exception pricing got out of hand. We will re-engage with clients and reinstate appropriate pricing quickly.

Got it. One last thing: you said the NIM should expand once the curve normalizes—how long are we talking? If we get a positively sloped curve toward the back half of this year, is it a 2026 story before NIMs look more normal? Also, wouldn't Fed cuts be more beneficial given how much you're paying on deposits?

The front end coming down is beneficial to us, but it's the long end where we have more exposure. We expect positive impact on NII and margin once the curve normalizes, but not much change in Q1; most impacts begin at the tail end of Q1 and into later quarters. Day counts and seasonality also create some short-term effects. So the benefits will come through over 2024 as the curve normalizes.

Got it. Thanks for taking my questions.

Thank you. Our next question comes from the line of Nick Cucharale with Hovde Group. Your line is open.

Good morning, everyone. Question on the non-interest income outlook—what are the primary drivers of the 5% to 7% year-over-year growth, and are you expecting swap activity to revert closer to the first half of 2023 as opposed to the back half?

The biggest driver of our revenue outlook is stabilization in non-interest-bearing deposit balances, but for non-interest income specifically, there's a combination of factors. In 2023 we had some one-time revenue recognition events that won't repeat. Swap income will be challenged with lower loan growth but will be replaced over time by FX, wealth management, insurance, tax advisory, and treasury management revenue as we scale. We feel good about the breadth of fee revenue sources.

Okay. And now that the core conversion is complete, what investments are you most focused on to drive the next leg of growth?

Investments line up with the strategic imperatives: growth in C&I and specialty niche businesses and enhancements to technology. Much of the foundational infrastructure is already in place; we're focused on enhancements and product capabilities to support commercial growth and treasury management.

Thank you.

Thank you. Our next question comes from the line of Manan Gosalia of Morgan Stanley. Your line is open.

Hi, good morning. Can you talk about how you're thinking about deposit betas and deposit mix as rates come down? Is there still a lag in how deposit yields come down? Do non-interest-bearing deposits start to rebound once we get to a certain level in rates? How are you thinking about deposit costs through the first cuts versus subsequent cuts?

Manan, there is some lag on the way down. Our model assumes around a 35% beta on the way down; to date the cycle showed about 57% on the way up. For non-interest-bearing deposits, our forecast assumes stability at around 23% of total deposits but there is a terminal point where you do build some of that back up as rates fall. Strategically, as we expand C&I and treasury management, we expect to grow non-interest deposits faster than what we include in the conservative budget. So while our formal forecast is conservative, strategic initiatives could accelerate non-interest deposit growth.

On the loan growth guide of 5% to 7%, I know that includes shifting away from investor CRE. What are the drivers and cadence—more back-end loaded? Is the guide based on customer discussions and high confidence that loan growth will accelerate?

Yes, it's based on confidence from customer conversations and the pipeline we've seen build in Q4 and into January. Originations in Q4 were $2.2 billion up from $1.8 billion in Q3. The pipeline has a large C&I contribution now—about 65%—so we are seeing activity. Typically Q1 is slower as people prepare financial statements and activity builds through the year.

Got it. And the loan-to-deposit ratio should stay around 95% to 105%?

Yes.

Great. Thank you.

Thank you. Our next question comes from the line of Matthew Breese of Stephens. Your line is open.

Good afternoon, everybody. On the NII guide, could you provide context on how dynamic it is—what the guide would be under a no or minimal rate cut scenario?

That is effectively captured in the 3% to 5% range we provided. If rates stayed flat, we think there would still be upside in NII and margin from our current levels. The biggest exposure would be significantly lower rates on the long end; absent that, most other interest rate scenarios would align with our guide.

You mentioned NIM started to show some stabilization—can you provide detail on monthly NIM through Q4 and whether stabilization already started?

November was the low point on a monthly basis. When we looked back previously, we had six months of relatively stable NII and margin. Some factors in Q4, like shortening liabilities, provided a bit of pressure. Loan origination yields bottomed in November and bounced in December. New deposit origination costs declined throughout the quarter: October was the high point, November lower, and December even lower. New deposit origination costs declined 11 basis points in the quarter while loan origination yields declined eight basis points, which supports our commentary on spreads. November was the low point; December was better—November about four or five basis points lower than December.

I noticed service charges on deposit accounts were down about 15% quarter over quarter. Was that driven by the conversion and should we expect that line to revert to its normal level of around $10.5 million?

Yes. For about a month around the conversion we waived certain transactional fees. The decline was about $1.5 million to $2 million, which explains the sequential drop. Otherwise that line would have been flat. We put on a lot of deposits in Q4 and that should drive deposit service charges going forward, supplemented by treasury management revenue.

On the average balance sheet cash balances—interest with bank deposits—was down 90 basis points quarter to quarter to 4.6%. That's a Fed funds proxy—what drove yields down so substantially in cash categories?

We go through an accrual process to estimate cash payments received from the Fed and actual payments can move around, so yields may not directly align with interest on overnight reserves. There can be credits that go in and out, which creates variance.

Okay. On page 11 you show multifamily details—some geographies have weighted average debt service coverage ratios below 1.4x, which feels risky given repricing. Are those DSCs at origination or current? And do you know existing loan yields on this book versus updated yields?

The weighted average debt service coverage ratios are current, based on recent rent rolls. We update that and loan-to-value regularly. I don't have the loan yield in front of me, but when we look at repricing we haven't had to modify terms on repricing loans and our forward look where we assess each loan that reprices in the next 12 months expects similar results.

Matt, to provide more context: we have $420 million of fully rent-regulated loans which are the lowest-yielding segment and yield about 4.6%. We have another roughly $1.4 billion with partial rent regulation exposure and that bucket yields about 5.45%. Broadly, multifamily yields are closer to that 5.45% number in total.

Do those buckets—the $420 million pure rent-regulated and the partial rent-regulated—pass the stress testing you ran?

Yes. The $420 million is pure rent-regulated; the partial exposure is about $1.4 billion and those performed under our stress tests.

One last one: you mentioned frustration with profitability—what targets would satisfy you, maybe measured by ROA or ROTC? When can you get back to a 1% ROA?

I don't want to contradict our guidance, but I'm optimistic about 2024. We were generating roughly 60% return on tangible common equity at the end of last year. That's an appropriate level to target and I believe we should get back there.

Okay. Thanks for taking my questions.

I'm showing no further questions at this time. I will turn the call back over to Ira Robbins for any closing remarks.

I just want to say thank you for dialing in today, and we look forward to talking to you next quarter.

This does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.