Earnings Call Transcript
VALLEY NATIONAL BANCORP (VLY)
Earnings Call Transcript - VLY Q1 2024
Operator, Operator
Welcome to the Valley National Bancorp Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Travis Lan. Please go ahead.
Travis Lan, Moderator
Good morning, and welcome to Valley's First Quarter 2024 Earnings Conference Call. Presenting on behalf of Valley today are CEO, Ira Robbins; President, Tom 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'll turn the call over to Ira Robbins.
Ira Robbins, CEO
Thank you, Travis. During the fourth quarter of 2024, Valley reported net income of $96 million and earnings per share of $0.18. Exclusive of noncore items, adjusted net income and adjusted earnings per share were $99 million and $0.19, respectively. The quarter's results were impacted by an outsized provision for loan losses, which I will discuss shortly. On a pretax pre-provision basis, we saw a positive inflection this quarter. The sequential downward trend in net interest income slowed meaningfully despite the lower day count during the quarter. This reflects the benefit of asset pricing and our efforts to better control funding costs. Fee income results were strong, supported by certain unique businesses, including tax credit advisory. Finally, noninterest expenses were extremely well controlled despite the seasonal headwind associated with higher payroll taxes. Despite the continuation of the inverted yield curve and other environmental challenges, I am pleased with the stronger pretax pre-provision earnings results this quarter. I'm also pleased with the quarter's balance sheet strength and credit quality performance. On Slide 4, we outlined certain efforts made to curtail loan growth, enhance reserve coverage where needed in the portfolio, and incrementally optimize our funding base. Total loans declined nearly $300 million during the quarter as a result of our proactive efforts to participate out a portion of certain commercial real estate and construction loans and the sale of our commercial premium finance business. These sales transactions each occurred at or above par and incrementally benefited our commercial real estate concentration, capital ratios, and reserve levels. Our allowance for credit losses for loans as a percentage of total loans increased 5 basis points to 0.98% during the quarter. Meanwhile, our past due and nonaccrual loans both declined as compared to December 31, 2023. The higher provision and associated reserve coverage reflects internal risk rating migrations resulting from our continuous monitoring and rigorous stress testing of the commercial loan portfolio. During the quarter, an additional 1% of loans transitioned into either our criticized or classified loan buckets. While we remain comfortable with the sponsorship, collateral, support, and potential loss content of these loans, criticized loans require elevated reserve coverage under CECL. We are comfortable with the current reserve coverage levels but anticipate that the allowance could trend slightly higher over the next few quarters. Our focus on and expertise in commercial real estate lending has generated strong and stable risk-adjusted financial results throughout our history. The strength of our commercial real estate underwriting and the consistent industry loss content of our portfolio has contributed to significant shareholder value creation through above-average tangible book value growth. Our strong network of borrowers has banked with Valley for decades and has performed very well in other periods of rising interest rates. We remain very confident with our capital allocation and the future credit performance of our commercial real estate portfolio. That said, I acknowledge that our perceived concentration in commercial real estate has recently amplified the volatility in our company's valuation. This volatility is based purely on perception and is not reflective of our financial results nor the strength of our credit quality and balance sheet. Still, we exist to serve our key stakeholders. And while I'm proud of our ability to exceed the expectations of our clients, communities, and employees, I acknowledge that the volatility experienced by our shareholders is not sustainable. Commercial real estate is a wonderful asset class, and one in which our differentiated approach continues to create incredible value. We will remain active in the space, but we'll manage our concentration more efficiently going forward. Our diversifying C&I initiatives will continue to accelerate, and we will further enhance our financial flexibility. These efforts are consistent with our established strategic plan, and I believe that accelerating them will help to reduce the volatility in our valuation. With this in mind, you can see our near- and intermediate-term expectations for certain balance sheet metrics on Slide 5. We expect to have approximately 9.8% Tier 1 common equity, 440% commercial real estate or risk-based capital and allowance coverage ratio above 1% and a loan-to-deposit ratio around 100% by year-end 2024. These metrics are consistent with the strategy we have discussed previously and our ongoing efforts to further strengthen our balance sheet and enhance financial flexibility. The following slide updates our previously provided guidance. The downward revision to our net interest income forecast reflects slower loan growth and a modest funding mix shift related to lower noninterest-bearing deposit balances during the first quarter. We anticipate that the downward revision in net interest income for the year will be largely offset by lower noninterest expenses relative to our prior guidance. All else equal, this will lead pretax pre-provision income to be relatively in line with current consensus expectations. On Slide 7, we provide additional commentary on our base case net interest income scenario as well as some considerations related to our exposure to changing interest rates. As we have described before, our balance sheet is generally neutral to changes in short-term interest rates. We are more sensitive to movement in longer rates, which impacted the repricing of roughly 60% of our loans. Before turning the call to Tom, I want to highlight the underlying franchise value that we continue to create despite the volatility in our valuation. Since the end of 2017, we have grown reported tangible book value by 47% versus just 38% for our regional banking peers. Including the impact of distributed dividends, this increases to 91% versus just 70%, respectively. This positive variance reflects our ability to enhance our franchise without meaningfully diluting tangible book value and 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. Since year-end 2017, we have more than doubled our number of commercial deposit accounts, which is in direct alignment with our strategic objectives. The ongoing addition of new deposit clients is critical as it supports our future earnings potential and financial consistency. This growth has been broad-based across geographies and business lines, and we continue to work hard at sustaining this momentum. We also believe there is significant value in the geographic diversity that we have developed on both the asset and liability 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 nearly 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 the valuable commercial relationships that we have targeted. This progress has benefited the funding side of our bank as well. In 2017, 78% of our deposits were in Northeast branches. As of the end of the first quarter, that number has declined to 45%. We have diverse niche funding businesses and a robust branch network across Florida and Alabama. This diversity helps to insulate our funding base and provides unique and differentiated opportunities to further reduce our reliance on wholesale funding over time. On last quarter's call, I laid out three strategic imperatives for the coming year. Our early results indicate solid traction relative to enhancing our cost-effective core deposit funding, the deemphasis of commercial real estate, and more revenue diversity. As mentioned, we will continue to accelerate the diversification of our loan portfolio, and I have all the confidence that we will continue to produce solid results. 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 Saeger, our Chief Credit Officer, will be available for your questions.
Thomas Iadanza, President
Thank you, Ira. Slide 9 illustrates the quarter's deposit trends. Total deposits declined slightly due to the intentional runoff of higher cost time deposits, which had matured. From a customer deposit perspective, this runoff is primarily offset by growth in interest-bearing nonmatured deposits within our specialty deposit niches. Our ability to tactically reduce deposit pricing in certain product types and categories helped to meaningfully slow the pace of deposit cost increases during the quarter. Despite a rotation of approximately $200 million of noninterest deposits into interest-bearing deposits, our total cost of deposits increased a modest 3 basis points. The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business line. Traditional branch deposits declined slightly as a result of the runoff of certain higher-cost time deposits. That said, we saw stable deposit trends in our Southeast franchise. Our specialty niches increased slightly during the quarter as our online deposits and technology business continued to expand. Slide 11 illustrates the management actions, which resulted in reduced loans during the quarter. Total loans declined nearly $300 million, driven primarily by commercial real estate and construction participations out of the bank. Importantly, these participations were executed with no negative impact to equity. We continue to monitor opportunities to further participate out certain loans and to enable certain maturing loans to refinance away from Valley. The sequential reduction in C&I loans was due entirely to the sale of our commercial premium finance business and subsequent maturities in that remaining portfolio. We continue to focus our origination efforts on traditional C&I, owner-occupied real estate, and health care.
Michael Hagedorn, CFO
Thank you, Tom. Staying on the CRE topic for a moment, Slide 15 illustrates the contractual maturities of our commercial real estate portfolio. We also included the LTV, DSCR, and rate by maturity bucket for your benefit. This maturity schedule illustrates the minimal repricing risk of our loans maturing over the next few quarters. Slide 16 illustrates Valley's recent quarterly net interest income and margin trends. The modest sequential declines in both net interest income and net interest margin were primarily the result of one fewer day in the quarter. We strategically lowered deposit costs by approximately 40 basis points on nearly $10 billion of deposits, which helped to stabilize net interest income as the quarter progressed. This helped to offset the headwind associated with lower average noninterest-bearing deposits during the quarter. After shortening our liability duration during the first quarter, we locked in a small amount of long-term funding at relatively attractive costs, which will further benefit net interest income during the second quarter, all else being equal. Turning to the next slide, you can see that noninterest income on an adjusted basis improved meaningfully from the fourth quarter of 2023. A portion of this improvement was related to rebounding deposit service charges as some fees were waived around our conversion in the fourth quarter of 2023. Beyond this, we offset headwinds in swap revenue on commercial loan transactions with improved wealth revenues and a very strong quarter from our tax credit advisory business. On that front, Dudley Ventures had certain tax credit transactions closed during the quarter, which had been delayed from the end of 2023. While demand for our tax credit advisory services continues to grow, we would anticipate that dead lease revenues will decline somewhat from this quarter's elevated levels. On the following slide, you can see that our noninterest expenses were approximately $280 million for the quarter. Adjusting for our $7.5 million FDIC special assessment and certain other noncore charges, noninterest expenses were approximately $267 million on an adjusted basis. This represents a 2% decline from the adjusted fourth quarter of 2023 and a near 1% increase on a year-over-year basis. The quarter's increase in compensation costs was primarily the result of seasonal payroll tax impacts as headcount remains generally well controlled. We saw notable reductions in our technology and consulting expenses as the costs associated with our core conversion in the fourth quarter of 2023 continued to run off. While revenue pressures have weighed on our efficiency ratio in recent quarters, our expense base continues to be stable relative to our balance sheet and well below peer levels for the same comparison. The key pillars on Slide 19 not only support our conservative underwriting and strong credit performance but also our ability to mitigate losses in periods of stress. I will discuss this more in a moment. Slide 20 offers a general comparison of our lending approach as a relationship-based regional bank with more transactional-oriented institutions. We have deep market knowledge and bank well-known and active investors who are strongly aligned with the need to protect and enhance their property values over time. Our borrowers tend to be more disciplined and value-oriented with respect to project selection. From an underwriting perspective, we generally focus on in-place, not projected cash flows, which provides an added buffer should NOI growth not materialize. We hope these pages provide some further context for the credit results illustrated on Slides 21 and 22. On 21, you can see the continued stability in our nonaccrual and past due loan buckets. The bottom charts illustrate our allowance for credit loss coverage relative to loans and past due loans. As Ira mentioned, the quarter's increase in allowance was primarily related to quantitative reserves associated with the migration of loans into criticized and classified categories. We remain confident with the performance and potential loss content of these loans. We are comfortable with the current position of the allowance, but acknowledge that further real estate stress and elevated interest rates could move our allowance coverage somewhat beyond 1% during the remainder of 2024. Turning to Slide 22. Net charge-offs ticked up during the quarter as a result of a $9.5 million charge-off related to taxi medallion loans. Commercial real estate charge-offs were minimal. We present two important analyses at the bottom of this slide. On the bottom left, we compare loss given default ratios on our commercial real estate and construction loans to peers over a variety of time frames. Loss given default is the calculation of charge-offs relative to nonaccrual loans. This analysis suggests that over time, our nonaccrual loans were significantly less likely to be charged off than our peers given our loss mitigation techniques. The most important loss mitigation tool that we have in times of stress is typically the deep resources and liquidity of our wealthy borrower base. On the bottom right, we illustrate our reserve relative to implied years of coverage based on certain loss rates. While our allowance coverage is below peers on an absolute basis, we believe that relative to potential loss content, we remain consistently better reserved. For example, our current reserve would cover six years of implied loan losses based on the average net charge-off rate between 2001 and 2023. This is double the relative reserve coverage of our peers. We remain confident that we are well-positioned for a potential deterioration of credit quality across the industry. Our below peer loss rates relative to total loans and CRE loans specifically are illustrated on Slide 23. As we have said historically, our loss rates tend to be roughly 40% of peer levels through the cycle. The next slide illustrates the sequential increase in our tangible book value and capital ratios. Tangible book value increased slightly from the fourth quarter of 2023 despite a modest headwind from the OCI impact associated with our available-for-sale securities portfolio. Regulatory capital ratios have continued to expand, and as Ira mentioned earlier, we anticipate further expansion for the rest of 2024 and beyond. With that, I'll turn the call back to the operator to begin Q&A. Thank you.
Operator, Operator
Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Steven Alexopoulos from JPMorgan.
Steven Alexopoulos, Analyst
I want to start. So Ira, first on the CRE concentration moving down to 440%. Could you give us a sense of your $32 billion of CRE loans in the quarter, including construction? Where should we expect those to trend for the rest of the year? And do you think you could continue to do what you did this quarter exit at par?
Ira Robbins, CEO
Yes. I think when we look at that CRE concentration, it's really a function of not including the owner-occupied loans into that. So I think on one of our slides, when we give the breakout of the balance sheet, it probably gives a bit better of what that starting number looks like. I think we had a really successful quarter in working with partners that we work with over the years and looking at increased participations. As you can see on the loan yield maturities that we have coming due, there really is not a significant variance versus where our current portfolio sits versus where market indications or rates are today. So there really isn't a rate issue that would hinder some of our ability to offset some of the loans that we have from a participation perspective. And as you've seen over the years, the credit quality has been really stellar here. And as people have gone through and looked at the loans, they tend to agree with that assessment as well.
Steven Alexopoulos, Analyst
Okay. That's helpful. I'm curious Ira, stock is off. I think it's a little over 30% this year. And you mentioned perception, I believe, in terms of your real estate portfolio. When you compare yourselves, I mean, this is what happened in the aftermath of New York Community, would you compare your pre-portfolio to peer banks, what do you think the market is missing?
Ira Robbins, CEO
I think to acknowledge that there is not an issue in commercial real estate on a macro perspective would be putting my head in the sand. That said, if you really dive into the areas that are really under stress today, I think office is an obvious one, right? And that's just not a function of where interest rates or behaviors have changed. The rent regulated in New York City is another area of stress. And then I think from a third perspective is the repricing risk that exists. So if you just isolate those three specific areas and then dive into the underlying details of where Valley is on those three specifics. On the office portfolio, it's about $3.3 billion. When you look at the specific underlying metrics of those loans, they're very small in size. In addition to that, what we tried to do is give you an update on what those updated debt service coverage ratios are. We're sitting at 168 of a debt service coverage ratio on the office portfolio, which I think is very differentiated. I would say the larger differentiation on the office is actually the size. Our office is only $3 million on average. I mean there really is not much stress within those types of offices that we're lending against. I think that's something that's probably a little bit differentiated. And on the rent regulated, we're only sitting with about $500 million of rent-controlled units, which represent 50% of what that composition looks like. So once again, I think it's a very small portfolio, and it's very manageable as we think about what the risk of that portfolio looks like. Everything is current today in that portfolio. And I think the third one that I alluded to was really the rate reset risk.
Steven Alexopoulos, Analyst
Okay. That's helpful. If I could just ask one other one on change direction. On the expense, the updated expense guide just as below the low end of the range. What actions do you think you've done a lot right over the past few years? And what is the new range in terms of what you're thinking for expense growth this year?
Ira Robbins, CEO
I think it's hopefully lower than where it is today. I think we announced on last call, when we started to really see some additional pressure associated with the inverted yield curve, that we're going to put forth a 5% headcount reduction in June of last year. When you look at the actual numbers, we went from 3,912 employees in June of '23. We're sitting at 3,709 employees today. So we've decreased by 5.2% on the employee headcount overall. We think there's more opportunity to continue that overall focus. And I think the bigger piece is, Steve, that people underestimate the amount of resources from an internal and external perspective associated with the core conversion that we did at the end of 2023. A significant amount of expense was associated with that, and we continue to recognize some of the benefits of being on one platform. We think that will continue throughout 2024 as well.
Operator, Operator
Thank you. We'll move to our next question. Our next question comes from Matthew Breese from Stephens Inc.
Matthew Breese, Analyst
As we think about commercial real estate growth in light of the updated guidance and actions this quarter, should we expect active runoff in that book? And if so, to what extent? Or should we expect that loan segment to essentially remain flattish while all the other segments, especially C&I, grow around it?
Thomas Iadanza, President
Matt, it's Tom. As you see, we revised our guidance for our total loans to be between 0% and 4% from the 5% to 7% annualized. We are intentionally managing our real estate portfolio by focusing on our top relationship-driven clients. We originated about $750 million in real estate loans in the first quarter, which is down significantly from what we have done in the past few years. We will still be active and involved in real estate, but we will still continue to sell loans. The loans that are not relationship-driven will mature and exit. In the first quarter, there were about $500 million of loans that matured and exited to other banks, and I'll point out all that full value to the bank. Our C&I expectations are not changing. We've grown that portfolio 10% on an annual basis. Outside of the premium finance sale, we would have been slightly up in the first quarter. The first quarter is traditionally a slow quarter. We tend to get line utilization paydowns. Our owner-occupied portfolio in the first quarter grew 6% annualized, which is a positive event. Our pipelines and C&I are very stable, and we originated $1 billion of C&I loans in the first quarter, which is in line with what we have done in the past.
Matthew Breese, Analyst
Got it. Okay. And then with CECL, it feels like we were all taught to think about historical losses and forward-looking economic factors. And the reserve was supposed to be catered to each institution based on these assumptions. But in the wake of newer community and now the category for bank classification, it feels like there's a third leg to the stool, which is your peer group and what they're doing. Is it fair to assume with that in mind that longer term, beyond what you've outlined for the intermediate term, that a lot of your ratios, particularly in commercial real estate reserves, need to migrate to your peer category for levels despite whatever CECL says in terms of your quarter-to-quarter change in reserving?
Mark Saeger, Chief Credit Officer
Matthew, this is Mark Saeger. Just as it relates to our model, one of the positives is we use a transition matrix model, which is very sensitive to migration in the portfolio. We hold an elevated level of reserves against criticized and classified credits. So we get an immediate bump through the migration in our reserve, which shows the appropriateness of that migration, not just loss. And about two-thirds of the increase in our reserve for the quarter was related to migration within the portfolio.
Ira Robbins, CEO
I think on a macro basis, though, Matt, I mean to your specific question, do we have to be at where peer levels are? I think at our size of the organization, only $60 billion, it's a long runway for us to get to $100 billion. So to look at where those reserve ratios are and automatically imply that we need to be at those levels based on this third perspective of what CECL looks like, I think would be an incorrect assumption. I think the accounts are pretty clear what drives the CECL model. And as Mark mentioned, it's going to uptick a little bit because of what we're seeing with the transition and a bit of an increase in some of those classified and criticized loans. But I don't think there's guidance that we need to be at whatever the $100-million-plus banks are.
Matthew Breese, Analyst
I guess I'm more concerned about the CRE concentration because those peers operate at a median of 100% concentration, the highest of M&T around $180 million, $190 million, and we're a long way off from that. So by the time you get to $100 million, you have to make some significant changes along the way. And I'm curious if that's part of the plan here.
Ira Robbins, CEO
I think obviously, going to $100 billion and saying we're going to have a 400% CRE concentration is something that will not make any sense. That said, we have a very long runway, Matt. I mean, if you took a 10% growth rate on our balance sheet today, it's over six years before we even get to $100 billion. And there's a lot that is going to happen at Valley over the next six years. And I think getting the CRE concentration down is something we've talked about for years now as part of the strategic focus. We've instituted C&I business lines from the tech business to a commodities business to various types of C&I businesses many years ago, with a focus on beginning to diversify what that portfolio looks like. As Tom mentioned, we're growing C&I 10% annualized. It's not like we woke up one day and said, 'Hey, the CRE concentration is too high. We need to establish some of these foundational C&I businesses.' We've been doing it for years and seen a lot of positive outcomes from that C&I business as well, and we anticipate continuing to accelerate that.
Matthew Breese, Analyst
Last one for me and then I'll hop back in the queue. Tom, you mentioned undergoing fairly extensive stress tests for your commercial real estate book. And it shows that over time, you've had better loss content versus peers. I'm curious what types of assumptions were overlaid in these stress tests? And at the end of the day, what was the kind of loss content? What was the charge-offs that stress has resulted in?
Thomas Iadanza, President
We don't publish our specific stress test assumptions, but we do stress occupancy, rent per square foot, vacancies, overall rate and market conditions as part of that stress testing and then test that against our overall capital to ensure that we're remaining a well-capitalized organization.
Ira Robbins, CEO
Matt, one thing I would just add is the scope of what we do when it comes to the credit review process. We laid out on Slide 19, a value-specific credit framework that has led to a lot of the lower loss given defaults. We have manual credit officers looking at over 60% of the commercial real estate portfolio just this last quarter. So stress testing for us isn't just about what assumptions you're applying; it's about the scale of the stress testing. It's not just reviewing a couple of loans coming due in the next 12 months. It's deep dives on each of these individual portfolios. So what you're seeing in the migration this quarter isn't just reflective of loans coming due in the next few months; it's 60% of the entire CRE book we have.
Operator, Operator
Thank you. Our next question comes from Frank Schiraldi from Piper Sandler.
Frank Schiraldi, Analyst
Just to follow up on the last line of question a little bit. I just want to make sure I understand on Slide 5, the reserve. Mike, you talked about being relatively comfortable with where reserves are, and given loss rates, you've actually better reserved than peers in many ways. But just trying to understand, when we get to the roughly 110 reserve over the next 12 to 24 months, what's the driver there? Is it as the commercial real estate book matures and reprices, or is that just kind of more as you grow getting in line with peers over time?
Michael Hagedorn, CFO
I think from a macro perspective, it's probably driven by two things, right? Obviously, the CRE reviews we do and the related migration have really benefited us from what the loss given defaults are. So potentially, there's going to be a bit more migration in what CRE looks like as we go through the rest of the portfolio. And I think one of the other drivers is really on the C&I side as we continue to originate more C&I loans. They're going to come at a higher reserve ratio than what the rest of the historical CRE does. So that's automatically going to drive up what that coverage ratio looks like.
Frank Schiraldi, Analyst
Got you. Okay. And then just wondering about the potential to accelerate some of this reduction in concentration. You moved some stuff out of CRE at par this quarter. And it seems like there's been some opportunity on the commercial side. We've certainly seen commercial teams moving around, given some of the dislocation in the marketplace. So I'm just curious, as you think about that, if there's potential there to maybe accelerate this through greater mix shift in the near term.
Ira Robbins, CEO
One of the constraints that we've always operated under is the tangible book value number. It's really been a focus within the organization to avoid diluting shareholders through tangible book value transactions, whether through acquisitions or balance sheet restructures. So I think that's a constraint we consider when looking at alternatives and making sure that tangible book value and capital continue to grow within the organization. That said, we were able to execute a lot at par today.
Thomas Iadanza, President
In reference to commercial teams, we have opportunistically added teams in certain markets, including the Southeast and the North.
Frank Schiraldi, Analyst
Okay, all right. It just seems like there's a lot of movement. I don't know if maybe some of these things end up being too expensive on the front end. Obviously, you guys reduced your expense guide a bit. I'm just curious if there was a significant pickup opportunity here just in the near term. We've seen other press releases from other places. So, I was just curious about any near-term size.
Ira Robbins, CEO
As we mentioned on the call, we're seeing a lot of growth in that Southeast market. Some of the dislocations you're seeing in the Northeast with people coming with teams come at a significant expense. We've looked at some of them, and the marginal cost to bring on deposits is high. When combined with the expense of those teams, we're finding much cheaper alternatives elsewhere and that's where we intend to allocate resources.
Operator, Operator
Our next question comes from Emily Lee from KBW.
Christopher O'Connell, Analyst
Yes. It's Chris. In terms of the capital, Ira, the $9.8 million by the end of the year and $10 million plus over the next 12 to 24. How do you get to those numbers? I'm just interested in understanding the mechanics of how you would get there. But how did you get, I guess, more importantly to the $10 million plus some of your peers are kind of mid-teens, even $11 million?
Ira Robbins, CEO
Overall, Chris, we've discussed how our allowance and capital ratios justify being slightly below where peers are, understanding that they still need to be higher than where we are today. I'm not sure if your question is about the immediate term or where we view ourselves long-term. The near-term expectation column reflects kind of organic efforts or things on the margin, like what we did this quarter in terms of selling off certain commercial real estate loans at par. So there are no significant rash actions embedded in the near-term expectation column, and then it's a continuation of those efforts over time that gets you over to the right-hand column.
Christopher O'Connell, Analyst
Yes, that helps. Just a follow-up on that. Would there be any situation where you would do a credit-linked note or some sort of RWA mitigation to accelerate that? You've seen some peers do that with success.
Ira Robbins, CEO
All RWA optimization opportunities are on the table. Certain portfolios lend themselves more to that than others; we have a diverse balance sheet, and auto and residential could be good opportunities for transactions.
Christopher O'Connell, Analyst
Okay. Great. And then maybe just two housekeeping items. Do you have, maybe I missed it, the CRE concentration metric in the first quarter? And then also the quarter-on-quarter change in the criticized classified special mention, I know you mentioned a bit high-level, but any specifics there.
Ira Robbins, CEO
The CRE ratio is going to be about 464%. It should be down about 10% from December 31.
Mark Saeger, Chief Credit Officer
On the migration, as we mentioned, approximately 500 migrated into criticized for the quarter, disproportionately in office, which should not be a surprise with what's going on in the market today.
Operator, Operator
Our next question comes from Jon Arfstrom from RBC Capital Markets.
Jon Arfstrom, Analyst
Just a follow-up on the last answer to Chris' question. Are you guys telling us just to expect higher criticized and classified loans each quarter? It sounds like you're doing a deep dive maybe every quarter. But how do you want us to think about what's ahead just to prepare us for that?
Mark Saeger, Chief Credit Officer
We did a special review on the sensitive asset classes and overall portfolio, touching just over 60% of the portfolio in the first quarter, with a focus on rent-stabilized and office loans. So I anticipate, because of the high-rate environment, we will continue to see some migration throughout the year; we believe the first quarter migration was elevated because of the focus of the reviews and the percentage of the portfolio that was reviewed.
Jon Arfstrom, Analyst
Okay, that's helpful. Mike, can you go over your margin expectations again? I think I heard you say that you feel like the margin's trough and we're going to get a lift in the second quarter, but I just want to make sure I heard that correctly.
Michael Hagedorn, CFO
Yes. First of all, thanks for asking the question. I was clearly left out this morning. So that's good. So I don't believe I said the word trough, but let me go back to the first quarter, and then I'll give you the guidance. Generally, the first quarter results were in line with our expectations on a day count basis, and the modest headwinds relating to net interest income were really the noninterest-bearing deposits and slower loan growth. But those were also offset by some deposit cost reductions we've spoken about as well. We continue to look at that. The guidance being revised slightly down is again a function of a starting point with lower noninterest-bearing deposits and again, this lower loan growth that we talked about, especially when you consider the participations that we've visited about being in the latter part of the first quarter. While we did assume fewer Fed cuts, I would assume most people are doing that. Remember that long-end rates are forecasted to be higher relative to where they were at the start-up point on 12/31. So that, on a net basis, the shifting yield curve, whether it's on the higher or short end is a modest benefit to us because we're more exposed on the long end.
Jon Arfstrom, Analyst
Okay. All right. That makes sense to me. Ira, if I heard you correctly, you said with these guidance changes, do you still expect relatively consistent PPNR to what you said before these adjustments? Is that right?
Ira Robbins, CEO
Absolutely.
Jon Arfstrom, Analyst
Okay. So it's just for us, it's a question of trying to figure out what the provision is. And that's the bottom line; you're just seeing some modest growth in the reserve.
Ira Robbins, CEO
We've tried to give you some guidance on where those numbers could shake out. But it's market-dependent, as Mark said. We've reviewed a lot of the portfolio. We will continue to monitor and do credit reviews. We believe that this is a strong point for us. It drives down loss given default; it is part of who we are to actively manage the portfolio and not just wait for something to happen. So we're all over every single loan we have. As market conditions change, we'll adjust them accordingly.
Operator, Operator
Thank you. Our next question comes from Manan Gosalia from Morgan Stanley.
Manan Gosalia, Analyst
With all the button takes on the loan side that you just discussed, and given the fixed rate loan repricing and the 40% of loans being floating rate, how should we think about the loan yield expansion from this quarter's levels under a three-rate cut scenario?
Ira Robbins, CEO
The pace of loan yield growth has slowed as rates have stabilized on the front end. That immediate benefit has played itself out. However, you do have some tailwinds. We originated loans this quarter with loan yields still in the high 7s. From a CRE perspective, our CRE origination yield was $780 million. There is still some opportunity to enhance loan yields there.
Manan Gosalia, Analyst
I appreciate that. And you noted that you purchased some Ginnies this quarter. Is there more room to do that? And how should we think about the level of on-balance sheet liquidity that you want to manage to over the next few quarters?
Unknown Executive, Executive
Yes. The Ginnie Mae purchases, obviously, they're zero risk-weighted. They average about three to four years, and the yield on that portfolio on the recent purchases has been in the 5% range. The runoff on the portfolio, there's really no prepayment, so it's going to be just the stated maturity payoffs running around $75 million to $90 million a quarter, and we would continue to add, we believe, in zero risk-weighted Ginnies at probably 5% to 5.5% yields.
Manan Gosalia, Analyst
In terms of the liquidity you need to maintain going forward, is there potential for it to increase, or do you feel it's currently at an appropriate level? I ask this because you mentioned that the loan-to-deposit ratio should drop below 100% in 2025. I would like to understand what the ideal level of liquidity would be.
Unknown Executive, Executive
Overall, you're probably going to see a little bit more on-balance sheet liquidity, but not to a significant degree. Getting the loan-to-deposit ratio down to 100% will definitely require core deposits coming on and being reinvested in securities instead of going into loans. I don't think you'll see a significant shift within what that securities book looks like.
Manan Gosalia, Analyst
Got it. Yes, that's what I was getting to. Thank you.
Operator, Operator
Our next question comes from Jared Shaw from Barclays.
Jared Shaw, Analyst
Looking at the CRE sales that you did this quarter, being able to do those at par is great. I guess that's a little surprising, just given where rates are, that there wasn't even a rate mark on there. Could you give any detail on the term and yield of the types of loans that we sold and if there was any retained credit participation on that?
Thomas Iadanza, President
Yes. It's Tom here. These were participations for the most part. Those participation rates range probably from, I think, 7.4% and up fixed side was 7.4% to 7.5%, and they were all participated at par. We retained a portion as lead bank on those. On the floating side, they were mostly prime-plus construction loans, and again, we retained a position in those.
Michael Hagedorn, CFO
The last point is important too, because we're preserving customer relationships. As you heard Ira say in the prepared remarks, CRE is a very valuable asset class, and we will remain in it. We have a deep pool of high-quality commercial real estate borrowers, but there are ways we can balance the need to manage the balance sheet with preserving and building customer relationships.
Jared Shaw, Analyst
Okay. And then following up, what's the expectation for deposit growth from here? And as we look at some of the promotional products that are rolling off, where are you seeing those coming on, and where is the new product coming in terms of term and price?
Thomas Iadanza, President
While we've continued to have the noninterest-bearing rotation, one of the bright spots has been the growth in savings, which has more than offset what we've lost in noninterest-bearing or rotated into noninterest-bearing products. Growth in our niche businesses has been strong as well. In the first quarter alone, we added over 3,000 net new deposit accounts. We feel pretty good about that. Growth will come from our niche businesses and continued efforts in our retail branches to grow households. If we see a flattening of rotation of noninterest-bearing, that's only going to help us.
Ira Robbins, CEO
I want to add two points. Last call, I mentioned some disappointment where funding costs have gone within the organization. We were very proactive in looking at $10 billion of different deposit products across the organization and lowering those by 40 basis points. That did not happen in the first month of the quarter, but occurred throughout the quarter. We think there will be some tailwind associated with that as we consider deposit costs. The new originations came on strong in deposits for the quarter, with a cost of just 3.23%, and there's well over $1 billion of net new originations. Some of that offset the higher cost time deposits that ran off.
Operator, Operator
Thank you. Our next question comes from Steve Moss from Raymond James.
Stephen Moss, Analyst
Following up on deposits here. Just curious, when did you guys reduce deposit rates by 40 basis points in the quarter?
Unknown Executive, Executive
There were tranches of deposit classes that we reduced beginning February 1 and then continuing through parts of March.
Stephen Moss, Analyst
Okay. And so just, I guess, basically, the idea is to see how they hold, and if we stay in the current rate environment, will you continue to press for additional deposit rate cuts?
Unknown Executive, Executive
Yes. We manage it weekly. We look at the levels, and we have not seen any significant change in those levels from the groups that we reduced.
Stephen Moss, Analyst
Okay. I appreciate that. And then in terms of credit here, with the deep dive you guys took on the specific portfolios, you mentioned that you examined the office portfolio and there was migration there. What is the specific reserve for office? And also, are you looking apparently at the specific properties? Or are you looking at the borrowers' global cash flows? I'm curious how those global cash flows are holding up these days.
Mark Saeger, Chief Credit Officer
Yes, absolutely. As part of our standard credit process, we look at not only the property that we finance but the overall global cash flow of any of the developers that we do business with to get an overall view to see if the stress in our property is reflecting global stress or vice versa. All those factors go into the risk rating and migration in the portfolio. We don't publish a separate office reserve, but as I mentioned earlier, we have a substantially higher level of reserves for criticized assets, and there is an elevated level of criticized assets in our office portfolio.
Thomas Iadanza, President
Many of our customers are in multiple asset classes, not just a single class.
Stephen Moss, Analyst
Right. And maybe just in terms of the office portfolio, I think it was $150 million or $160 million. I forget the debt service coverage ratio right now. But are a lot of those borrowers in the current environment headed towards one? I'm just curious how much capital a borrower might have to put up to right-size those loans.
Mark Saeger, Chief Credit Officer
You see the granularity in the portfolio with a $3 million average loan size in that. We do look at individual cases that are migrated. Clearly, there was stress in debt service coverage on those assets, necessitating the downgrade. But historically, our leverage on office assets and our going-in coverage was exceptionally strong with long-term customers we have relationships with, which we believe assist in overall performance of that portfolio in the long run.
Ira Robbins, CEO
We showed the average loan size to indicate the granularity and diversity of the portfolio. Given that our average loan size, when a borrower needs to bring additional cash reserves or equity into a deal, these lower average loan sizes require less in terms of absolute dollars to right-size. That benefit component is part of loss mitigation and credit management.
Stephen Moss, Analyst
Okay. And maybe just one more related to commercial real estate office. Where you're seeing the migration? Is it in your larger loans these days, or is it across the board?
Mark Saeger, Chief Credit Officer
It's really more geographically focused. Our largest percentage of office is in Florida and Alabama markets, and we've seen much lower levels of migration in that portfolio, with the majority of migration in the Northeast, particularly in the New Jersey and New York marketplace. Notably, our Manhattan exposure is quite granular and small.
Operator, Operator
Thank you. Our next question goes to David Chiaverini from Wedbush Securities.
David Chiaverini, Analyst
I wanted to follow up on expenses. It looks like we could see a decent reduction here. Could you talk about what areas you're pulling back on? And any initiatives that are pushed to the back burner?
Ira Robbins, CEO
From a macro perspective, there's going to be less activity in volume in certain loan classes. So there's probably going to be some continued reduction in those specific areas. A large piece goes back to what we talked about last quarter. The core conversion we had took significant resources from an internal and external perspective. As we continue to get the benefits of migrating onto one core platform, we believe expenses will benefit from that. It's definitely not to the degree we saw traction from last year to now. But we think there's still opportunities on the expense side of the book.
Thomas Iadanza, President
To give you an example, prior to conversion, we ran on three separate GL systems, and we had two different core systems. We closed the books this quarter at the fastest pace since I've been at Valley.
David Chiaverini, Analyst
And I also want to follow up on liquidity. To put a finer point on it, cash and securities as a percent of assets was 11%. Should we expect that 11% to trend higher over time?
Ira Robbins, CEO
Slowly over time, directionally, that makes sense, but I don't anticipate any bulk action occurring at any point. That's just general direction; we've trended higher if you look back over the last couple of years, and we'll continue to do so. We have a stable deposit base that is very granular, and we feel well-positioned as it is today.
Operator, Operator
Thank you. Our next question goes to Ben Gerlinger from Citi.
Benjamin Gerlinger, Analyst
Slides 12 and 13, the debt service coverage ratios were really helpful. A modest migration is one to be expected. Is it fair to say that all of those now include 2023 manuals? Are we still waiting on a little bit? I'm just trying to look for the most up-to-date type ratio there.
Mark Saeger, Chief Credit Officer
On a large portion of our portfolio, we do have updated current rent roll information. However, not 100% of them include 2023 numbers. We think that in all asset classes other than office, we've seen strength in NOI growth.
Benjamin Gerlinger, Analyst
Got you. And then I noticed multifamily down here in the Southeast. The Florida-Alabama portion came down a decent amount quarter-over-quarter. Any commentary on that?
Ira Robbins, CEO
We'll go back and take a look at that number. You mean the debt service coverage came down?
Benjamin Gerlinger, Analyst
Yes. It went from basically...
Ira Robbins, CEO
It also happens to be the same number. I'll take a look at it and get back to everyone.
Benjamin Gerlinger, Analyst
Yes. Okay. And then lastly, I know it's a long call, and I apologize if you're going to repeat yourself, but did you guys give a monthly or an exit spot rate on deposit costs?
Michael Hagedorn, CFO
We did not give a spot rate, but you can see in the IP that the total deposit costs went from 3.1% to 3.16%, so they're up 3 basis points.
Operator, Operator
Thank you. Our next question comes from Matthew Breese from Stephens Inc.
Matthew Breese, Analyst
I had just two quick follow-ups. The first one was just on the taxi medallion charge-off. What happened there? Was that part of the credit review? It seems like a fairly big charge given how far away we are from the kind of the height of the taxi medallion days? What's the remaining balance on that portfolio?
Mark Saeger, Chief Credit Officer
The remaining balance is $52 million, which is fully reserved down to current market prices. The charge-off we experienced this quarter was also fully reserved for. It was one relationship of a customer who had been paying. We were in a long-term negotiation and hit a standstill. Subsequent to the charge-off, we have entered into a forbearance agreement, and that loan has continued to pay.
Matthew Breese, Analyst
Great. Okay. And then just in light of a slower loan growth outlook, could you just stack order for us capital deployment priorities? And I'm really curious if share repurchases become part of the plan here, even a little bit. The other thing is understanding Ira, your comments on M&A, would FDIC-assisted deals be something you look at should they arise? That's all I had. Thank you.
Ira Robbins, CEO
From a capital deployment perspective, allocating capital to growing the CRE book is probably not going to happen. There's ample opportunity internally just to serve our current CRE clients. I think that's where the focus would end up being. We're seeing strong C&I growth now compared to a couple of years ago, so allocating capital to those specific segments seems to offer better returns today. From an M&A perspective, if an opportunity that aligns strategically arises, we will look at it. The guardrails surrounding tangible book value are significant to me.
Operator, Operator
I am showing no further questions at this time. I will now turn it over to Ira Robbins for closing remarks.
Ira Robbins, CEO
Thanks. I just want to thank everyone for taking the time to listen to us today. I look forward to speaking to you next quarter. Have a nice day.
Operator, Operator
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.