Valley National Bancorp - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Third Quarter 2023 Valley National Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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, Head of Investor Relations. Please go ahead.

Travis Lan (Head of Investor Relations)

Good morning, and welcome to Valley's third quarter 2023 earnings conference call. Presenting on behalf of Valley today are CEO, Ira Robbins, President, Tom Iadanza, and Chief Financial Officer, Mike Hagedorn. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight slide two of our earnings presentation and remind you that 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. In the third quarter of 2023, Valley reported net income of $141 million and earnings per share of $0.27. Exclusive of non-core items, adjusted net income and EPS were $136 million and $0.26, respectively. Our quarterly results were highlighted by organic capital growth, sound asset quality metrics, improved core deposit flows, and solid expense control. The current interest rate environment, reflected on an inverted curve, has challenged traditional banking models, and we have not been insulated from these pressures. That said, while the duration of the current inversion has exceeded original expectations and is anticipated to continue for the foreseeable future, we do not intend to change our foundational business model.

Our net interest income declined at a much lower pace than in recent quarters, and we believe that NII is near the bottom of its decline, all else equal. While the external environment remains fluid, our focus on executing our strategic initiatives remains steadfast. One of our strategic efforts over the last few years has been to transform our core operating environment to allow flexibility in integrating unique delivery channels, enhancing fintech integrations, and positioning the bank for scalability without the traditional technology expense hurdles. I'm pleased to report that during the first weekend of October, our team worked tirelessly to complete the transformational conversion of our core operating system. This was a massive undertaking, which required months of planning, development, and testing.

Valley is now operating on a single system with bespoke delivery channels, and I couldn't be prouder of our disciplined ability to execute on this project, which I reiterate, was done in the face of an extremely challenging operating environment. This technology conversion is a natural progression of a cultural evolution that has occurred over the last few years. We have collectively developed a growth-oriented mindset, which has been evident in our recent financial results. To support this mindset, we continuously strengthen and develop our capabilities to bring us more in line with the largest players in our industry. Our bankers now have a more robust infrastructure, and we expect to see significant opportunities to leverage these new technologies and drive additional growth as the environment normalizes. Our successful conversion was yet another example of our discipline and proven ability to execute.

As we enter 2024, we anticipate generating both expense efficiencies and revenue scale resulting from our common core platform. As we have moved to a cloud-based infrastructure, we're not burdened with the massive hardware costs that are typically associated with type of technology investments. We are more nimble today than we were a month ago, and the opportunities ahead of us remain significant. With that, I will turn the call over to Tom and Mike to discuss the quarter's growth and financial results.

Tom Iadanza (President)

Thank you, Ira. Slide four illustrates the approximately $300 million of total deposit growth during the quarter. We experienced strong growth in interest-bearing transaction accounts and retail CDs, which offset non-interest-bearing deposit declines and indirect CD maturities. The pace of non-interest-bearing deposit runoff has slowed, but mix shift to interest-bearing products has continued to weigh on our total deposit cost. Slide 5 provides more detail on the continued diversity of our deposit portfolio. During the quarter, we benefited from stability in our branch-based deposits and strong growth in our specialized verticals. Inflows were particularly strong in our national deposits business and through our online channel. These dynamics enabled us to pay off some maturing indirect CDs during the quarter. We also continued to reduce our adjusted uninsured deposit exposure and have significant coverage with cash and high-quality liquidity.

Slide six further illustrates the 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. Now turning to slide seven, you can see an overview of our loan growth and portfolio composition. Annualized loan growth on a year-to-date basis has slowed consistently as the year has progressed. Originations declined meaningfully during the quarter as we require wider spreads on new loans. These efforts continue to result in higher new origination yields. Slide eight breaks down the diversity of our commercial real estate portfolio by collateral type and geography. As a reminder, we have an extremely granular loan portfolio with an average loan size of roughly $5 million. From a metric perspective, our weighted average LTV remains at 58%.

As interest rates have increased, debt service coverage ratios have declined somewhat to 1.7x. 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 following slide illustrates the continued strong metrics and granular composition of our diverse office portfolio. With that, I will turn the call over to Mike Hagedorn to provide additional insight on the quarter's financials.

Mike Hagedorn (CFO)

Thanks, Tom. Slide 10 illustrates Valley's recent quarterly net interest income and margin trends. The sequential $7 million decline in net interest income was less than half of the reduction experienced in the second quarter of the year. While asset yields continue to improve, continued pricing competition and mix shift drove funding costs higher. On the second quarter call, we indicated that we were observing signs of net interest income stabilization. During the quarter, monthly net interest income was generally stable and higher than the June level. Our fully tax-equivalent net interest margin declined a modest 3 basis points on a linked quarter basis versus 22 basis points in the second quarter of 2023, and has been generally stable over the last few months. All else equal, we expect fourth quarter net interest income to be relatively in line with the third quarter level.

By the end of the quarter, our liquidity position has been effectively normalized. Absent abnormal environmental factors, we expect cash to remain generally consistent with third quarter levels. Moving to slide 11, we generated nearly $59 million of non-interest income for the quarter, as compared to $60 million in the second quarter. Exclusive of approximately $6 million of non-core items, adjusted non-interest income was closer to $52 million for the quarter. The decline was primarily related to lower capital markets fees associated with our slower loan growth. Other business lines were generally stable. On slide 12, you can see that our non-interest expenses were approximately $267 million for the quarter, or approximately $264 million on an adjusted basis. Adjusted expenses declined from the prior quarter, despite an increase in certain technology costs, partially associated with our successful core conversion.

Specifically, we began to see the benefits of recent headcount reductions about midway through the quarter. FDIC assessment costs and outside consulting fees also declined on a sequential basis. We continue to execute on previously identified efforts to slow future expense growth. Legacy Valley and Leumi have now joined on a common core. After a certain adjustment period, we expect the core conversion to result in the next wave of previously announced cost savings early in the new year. To reiterate, our focus is on controlling expenses in the face of revenue pressures, which have resulted from the inverted yield curve. Turning to slide 13, you can see our asset quality trends for the last five quarters. Nonaccrual loans have been effectively flat for the last three quarters. Early-stage delinquencies ticked up during the quarter, but remained well below the average level of the last 12 months.

Third quarter net charge-offs declined somewhat from recent levels. On slide 14, you can see that tangible book value increased approximately 1.4% for the quarter and is up nearly 10% from a year ago. Our balance sheet positioning has enabled us to avoid the significant challenges that other peers have faced related to the OCI impact associated with available-for-sale securities. We manage all risk areas prudently and are proud in our ability to insulate tangible capital from this headwind. Tangible common equity to tangible assets increased to 7.4% during the quarter as a result of our normalized cash position. As loan growth slowed, our risk-based regulatory capital ratios have increased between 16 and 18 basis points as compared to the second quarter of 2023.

We continue to prioritize organic capital growth in this challenging environment and are prudently managing our balance sheet to incrementally strengthen our position. With that, I'll turn the call back to the operator to begin Q&A. Thank you.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi (Managing Director)

Good morning. Just on the, just on the trajectory of, of NII/NIM, I mean, you talked about, the hopeful trough here. In a higher for longer scenario, you know, just, just thinking out into 2024, do you think there's some stabilization in NIM and then you get a reversal, from there, so you get a little bit of a, a trajectory upwards? Or is it more sort of like, in higher for longer, sort of bouncing along, the bottom for a period of time? Just, just wondering your general thoughts there.

Mike Hagedorn (CFO)

Hi, Frank, it's Mike. You know, I think that when you look at the trajectory of NIM in 2023, as we said in our prepared remarks, we've been in that mid-2.9%s to low 2.9% range since April. And when you look at the cost of deposits, you'll notice that from fourth quarter to first quarter, they were up 60 basis points. From first quarter of 2023 to second quarter of 2023, they were up 49, and they were up 49 in the third quarter as well. So we're starting to see a normalization both in the cost but also in the NIM. In a higher for longer rate environment, I think a couple of things would happen that would, all things being equal, result in a slightly higher NII and slightly higher NIM.

The first of those, the... and it's been true for all of 2023, the biggest driver of the compression on our NIM has been the rotation out of non-interest bearing and into interest-bearing product. So I would think in a higher for longer environment, there is some place, some equilibrium, that we see a plateau in that. You know, second, you got to keep in mind that we've had a very large liquidity build, both at the end of the first quarter and throughout the second quarter, as a result of all the chaos that was created with the bank failures earlier this year. That is completely off our balance sheet as of 9/30.

And then when you go forward and you kind of think about deposits, stabilizing, I think the, the thing that will drive, at least in our current modeling, the thing that will drive, NIM expansion and NII increases is going to be the repricing on our assets, earning assets, but more, more specifically, loans. And as we look at our modeling, we know what our, our fixed rate book, repricing is, along with the repricing opportunities that we have throughout 2024 in the adjustable rate book. So we would expect that to be the main driver of any NIM expansion next year.

Frank Schiraldi (Managing Director)

Okay, great. Appreciate all the color, Mike. And then just as a follow-up to that, in terms of the brokered balances, you know, it looks like you guys have had some really good success raising customer deposits, and so you've let these roll off. I guess, do you expect that to continue? And if so, as you look out at the, you know, the maturity table, when do you expect or how quickly do you expect brokered balances to kind of fall here?

Mike Hagedorn (CFO)

Yeah. So our current thinking and our current modeling is that we will see further reduction in our brokered balances, and that's certainly one of our goals. But I want to, I want to make sure everybody understands how we've been using brokered. We've been using brokered throughout 2023 to fill the gaps, especially earlier in the year when we had much higher loan growth, to fill the gaps on the balance sheet expansion, while also paying very close attention that we're not repricing the back book of our deposit, our core deposit base. And the second thing that we've done is we've used that, in those stopgap measures, we've used both duration and rate in that portfolio to help manage our NIM and NII.

I, I-- while I know they have a, a bad connotation sometimes, they've been a very effective, and the, the market has been excellent for us to use that in certain, certain times and in certain circumstances, and very effectively.

Frank Schiraldi (Managing Director)

And just, just last, lastly on that front, in terms of as you look at the indirect market versus what you're able to get directly from customers here, is there much of a difference in terms of pricing, in terms of new, you know, new brokered versus new direct?

Mike Hagedorn (CFO)

Yeah, the inversion of the curve probably is the biggest impact on that. If you're talking about exactly the same duration, I would say the incremental cost of deposits is fairly close to one another. So there may be 10 basis point difference, but it's not that remarkably different. So I think, again, I'd go back to my previous comments is, you know, you want to use that for both rate and duration, but in the, in the case that you're asking about, you probably want to manage duration in this inverted curve.

Ira Robbins (CEO)

Frank, this is Ira. I would just, I would just add to that. You know, when we think about the incremental piece of deposits, as Mike alluded to earlier, there was significant demand for us to put some of those incremental deposits on based on the loan growth we were seeing, and that obviously ratcheted up the incremental cost of some of these deposits. As we now have scaled back some of the loan growth, the demand for those brokered deposits and higher cost CDs have actually come, you know, a bit down. And we're still originating core deposits. I think as we spoke about last time on the call, I think the overall deposit originations for this quarter were around $370 million-$380 million-ish.

So, on a blended basis, marginal deposits are coming in much cheaper than what the indirects are. And as we curtail the loan growth, we definitely anticipate some expansion on margin based on that incremental new loan that's coming onto our books.

Frank Schiraldi (Managing Director)

... Great. Okay, I appreciate all the color, guys. Thanks.

Ira Robbins (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Matthew Breese with Stephens. Please go ahead.

Matthew Breese (Managing Director of Financial Services)

Hey, good morning, everybody. Maybe just sticking with the NIM. Can you provide what the monthly NIM was across the quarter? Is the September, the September NIM a good launch point into fourth quarter about where it could shake out for the fourth quarter?

Travis Lan (Head of Investor Relations)

Matt, this is Travis. Just on a monthly basis, July was 2.91%, August 2.92%, and September 2.91%. So when we say it was pretty stable throughout the quarter, I mean, we really mean it. So you can use, you know, September and the quarter were the same number. But yeah, it's a good launch point.

Matthew Breese (Managing Director of Financial Services)

Thank you. And then I was hoping also for some additional color on near-term loan growth outlook and, maybe perhaps when you would feel comfortable, you know, reaccelerating loan growth?

Tom Iadanza (President)

Hey, Matt, it's Tom. Yeah, the loan growth, the fact is slowing it down are really customer related. The uncertainty of the rate market as well as widening spreads has slowed down their activity. We still service those valued real estate customers when they need it, and we continue to grow that portfolio just at a much slower pace. I just want to point out, our C&I portfolio has grown 12% over the last year. So our focus is really just on that relationship-driven C&I piece. We're still getting higher percent growth in the Florida market and stable growth here in the Northeast. I would expect, you know, that growth in the fourth quarter to be in a similar fashion to the third quarter, and we'll be in that range of 7%-9% for the year.

Matthew Breese (Managing Director of Financial Services)

Great. Okay. And then, Ira, you know, just acknowledging yours and Valley's relationship with Bank Leumi, and first, you know, just wishing everybody on your end and on Leumi's end, the best as they deal with the horrific events over in Israel. In light of that, I was curious if events overseas will have, and because of the partnership, any impact on your bank balance sheet or private client group in any way?

Ira Robbins (CEO)

Well, thank you very much. I appreciate that. And for all our employees and clients, it's been a very difficult time. You know, that said, you know, Bank Leumi obviously is a significant partner for us on the participation side. We haven't seen any interruption as of yet, and we continue to anticipate business as usual. So while it's definitely difficult for a lot of people, you know, we still think we're going to continue to move forward and not be impacted by it.

Tom Iadanza (President)

Yeah. Hey, Matt, it's Tom. Just kind of give you a little context here. The only direct loan exposure we have is to high net worth U.S. citizens, and it's secured by State of Israel bonds, and it's a very, very small portfolio. Otherwise, you know, we help finance domestic subsidiaries of Israeli companies, but it's all done here in the U.S., U.S.-based entities. The back and forth and flow of business slowed down really based on natural economic conditions, but it's business as usual in working with them on partnered transactions.

Matthew Breese (Managing Director of Financial Services)

Got it. Okay. And then could you give us some update as to where we are in the previously mentioned cost saving plan? I believe it was like $40 million identified. Last we spoke, it was expected to progress over, you know, four quarters. How is execution matching up versus planning? And is there anything else you've uncovered as you've kind of looked into this, in terms of additional cost saves?

Travis Lan (Head of Investor Relations)

Yeah, Matt, it's Travis. In the quarter, I'd say you probably got 20%-25% of, you know, on an annualized basis, what, what we had anticipated. I don't expect much incrementally in the fourth quarter. Post-conversion, we're keeping the support teams, staffed up and running. But then as we get into the first half of 2024, I think that's where you hit the next wave, which will come from a combination of third-party vendors and some additional, you know, resource, efficiencies. So I don't anticipate much in the fourth quarter. But again, once we get to the first half of, of 2024, I think that's where you see the bulk of what's, what's remaining. We are still looking, you know, obviously post-conversion at, opportunities that we hadn't previously identified.

You know, we'll continue to dig there.

Matthew Breese (Managing Director of Financial Services)

Okay. We should be thinking of this expense plan as one that slows down the natural pickup in expenses versus one that, you know, dollar for dollar lowers the run rate, correct?

Travis Lan (Head of Investor Relations)

Yeah, that's correct. So, I mean, if you think, and this is just high level, and I don't mean for these to be numbers to take away, but you know, historically, we've run kind of high single digits from an operating expense growth perspective as a growth company. You know, there are obviously headwinds from an inflation perspective, FDIC costs, regulatory perspective, on top of that. And then we're just trying to work our way back into kind of that mid single digit expense growth level based on these initiatives.

Matthew Breese (Managing Director of Financial Services)

Great. Last one for me is just, I don't know if you have one or not, but could you just comment, if you do, on, on syndicated loan exposure? What's the size of that book? How is it performing? Or any other metrics we should be aware of there?

Tom Iadanza (President)

Yeah, sure, Matt. It's, it's Tom again. The portfolio is about $1.4 billion spread over a number of loans. We're not HLT lenders. We don't really have leveraged transactions in there. They're mostly club deals with a small group of banks, direct contact, relationships, with any of the borrowers, and they're all in market.

Matthew Breese (Managing Director of Financial Services)

... Perfect. I appreciate it. That's all I had. Thank you.

Tom Iadanza (President)

And just we lead a lot of those transactions also. We're not participant. We tend to be the lead bank in over 50% of that.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Michael Perito with KBW. Please go ahead.

Michael Perito (Managing Director)

Hey, guys. Thanks for taking my questions.

Tom Iadanza (President)

Morning.

Michael Perito (Managing Director)

I apologize. I got on a couple of minutes late, so if you guys addressed this already, apologize for asking again. But just taking into context all the commentary you guys have given around NII and the expense plan, kind of execution, is it fair for us to be thinking about the third quarter of 2023 as probably the peak in the efficiency ratio here? And are you guys, at this point, able to provide any kind of context around the type of year-on-year improvement you're hoping the expense plan can drive, assuming, you know, your NII projections kind of play out as you expect them today?

Mike Hagedorn (CFO)

So I don't think there's any bank CFO that would say that, third quarter would tend to be their peak. I think fourth quarter tends to be the peak for a lot of reasons, right? You have year-end expenses that get pushed through. There's some bonus accrual work sometimes in the fourth quarter that might drive costs up. So I wouldn't necessarily agree with that it's third quarter, but I would point you back to Travis's comments right before that. If it's fourth quarter, that's actually the peak, again, in the first half of 2024, we expect to realize the vast majority, the remainder and the vast majority of our previously announced cost savings initiatives, which in turn would then drive down our efficiency ratio.

Michael Perito (Managing Director)

Got it. That's helpful. And then, just a couple more quick ones on, you know, I think the kind of New York, New Jersey area of credit, commercial real estate dynamics, you know, we've probably beat the dead horse on that for quite some time now. But just curious if you guys can maybe, you know, provide some context about updated demographics and trends you're seeing in the Florida and Alabama market. I mean, are there similar kind of supply and demand dynamics? Is there still kind of inflow of population growth? And just wondering kind of what the demographics are down there more recently.

Tom Iadanza (President)

Yeah, sure, Michael. This is Tom. Yeah, you know, the impacts of slowing and higher interest rates are affecting them also. The metrics on the transactions we do aren't any different. They're below 60% loan-to-value, usually 1.6% or 1.7% debt service coverage. So we're still generating transactions with those similar metrics. We are seeing continued growth in those markets. The population migration has slowed, but there's still migration into that Florida market. Our consumer business is strong down there, but probably half of what it was in the earlier part of this year. It's still a growth market for us in all cases. But, you know, I'll continue to point out, we underwrite very conservatively in all markets. We have floors on our cap rates in all markets. We track those cap rates.

We're more suburban than urban. We're not big players in the Miami market, we're more spread around the six or seven other major, you know, areas of Florida.

Michael Perito (Managing Director)

Thanks, Tom. Really helpful. And then just the last one for me. Just once again, kind of taking into context all your other commentary, is it fair for us to be thinking about kind of the asset base to be pretty stable here for the next several quarters and then, you know, possibly some lift beyond that, assuming the environment is permitting of kind of growth reaccelerating? Is that similar to how you guys are budgeting it, or is there any kind of anything that you would point to that could make it different?

Mike Hagedorn (CFO)

No, I think you have it generally right, Mike. I mean, I think, you know, end of the third quarter, our cash position was normalized. Again, I think Tom referenced the growth that we anticipate in the fourth quarter and then kind of picking up maybe somewhat in 2024. But I don't think there's any type of significant other changes that you would see on the balance sheet.

Michael Perito (Managing Director)

Very good. Thank you, guys. I appreciate it.

Tom Iadanza (President)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Hey, thanks. Good morning, everyone.

Tom Iadanza (President)

Morning, John.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Maybe a question for you, Mike. On slide 11, you show the fee income numbers and capital markets being down, and you tied it to loan growth. What kind of expectation should we have for capital markets? And then also curious if there's any kind of expense offset, how much bottom line impact there is to lower capital markets fees.

Tom Iadanza (President)

Yeah. Hey, Jon, it's Tom. Yeah, the capital markets, for us, has really been driven by gain on sale in the consumer resi space, as well as swaps in the commercial space. We expect that to be flat, going forward. We don't expect any lift there.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Okay.

Tom Iadanza (President)

You know, we have other, we have other avenues, and we have a tax advisory, advisory business. We get a slight uptick in the fourth quarter to get things closed by year-end. We continue to build out our FX and trades, which shows, you know, you know, progress quarter to quarter, but we're, we're expecting flat into next year.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Okay. Okay, good. Credit looks great, but some of the accruing past dues are up sequentially. Anything to note there or anything that you're thinking about there that we should be aware of?

Tom Iadanza (President)

... No, no, I'm looking at it, really, it's coming out of the consumer and resi buckets. On the consumer side, it's primarily our cash surrender value life insurance business. It's a matter of liquidating and collecting on there, so that's not going to be problematic from any potential loss standpoint. On the resi side, I just want to point out, our 2Q levels were abnormally low. We are still below where we were a year ago at this point. We're about $99 million, you know, the third quarter of 2022, we're $79 million in the third quarter of 2023. So we're really gravitating to more normal levels. So no, we, we don't anticipate any problems.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Okay, good. And then, Mike, you referenced slide four, that upper right chart with the deposit cost increases. And, what, what, what do you think that looks like in a quarter or two? I mean, that you, you referenced the, 49 and 49 for the last two quarters, but is that curve bending at all from the 49?

Mike Hagedorn (CFO)

If it's bending, it's ever so slight. I think you'll see the real bend and inflection point happen early next year. But you, you still see some migration. It has slowed considerably, but you still see some migration from non-interest bearing into interest bearing. From a incremental next dollar cost of deposit funding, and more broadly, even liability funding, that has definitely stabilized in that mid 5%-ish range.

Jon Arfstrom (Managing Director and Associate Director of US Research)

Okay. All right. Thank you very much.

Operator (participant)

Thank you.

Tom Iadanza (President)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia (Banks Midcap Research Analyst)

Hey, good morning.

Tom Iadanza (President)

Hi.

Manan Gosalia (Banks Midcap Research Analyst)

You spoke about getting higher yields on new originations, and that fixed rate loan repricing will be one of the main drivers of NIM expansion from here. Can you give us some more color on what level of loans are repricing? What level loans are repricing at over the currently, and you know, if you could size the amount of fixed rate loans that are coming due over the next year or so?

Tom Iadanza (President)

Yeah, it, it's Tom here. Give you some context. We repriced about $1.8 billion of loans for the first nine months of this year. The spreads, it really depends on asset class, but the spreads are in the, you know, mid-350, around the 350 or so range. We expect that to continue. Looking forward, there's probably another $600 million on reprice over the next six months. We expect those spreads to be the same. There's also a lot of renewing loans, loans that will mature, so it, it tends to be in that $1 billion or so range over the next six months in total.

Mike Hagedorn (CFO)

Yeah, I think that number is a little bit overstated, right? So we have, or a little bit understated, excuse me. So we have a $20 billion fixed rate portfolio. Average life has extended to about five years. So if you do the math, I mean, just assuming all else equal, you'll get about $4 billion a year of fixed rate loans that come due and would ultimately reprice higher.

Ira Robbins (CEO)

I think the one other thing, if you look at, I forget what slide it is, maybe slide seven, you can look at the credit spreads, right? If you go back to just third quarter of 2022, and you look at where the new origination yield was versus where the index was, you're sitting around a 200 basis point spread. When you do the same math just today, you're sitting at about 270 basis point spread. New originations are coming on definitely at a higher spread. As Travis and Tom both alluded to, the repricing is probably going to come on at 300-400 basis points above where current rates are today on those.

There's a significant pickup when you think about the $4 billion ± what's going to be due next year.

Mike Hagedorn (CFO)

This is Mike. I'll just add to what Ira said. So the simple average of new loan originations in the second quarter was 7.38%, and for the third quarter, it was 7.89%. And the last month, September, that quarter finished just over 8%. So clearly, we're seeing repricing on new loan originations, both from the spread increases that both Ira and Tom mentioned, and then also just because of the discipline that we have around here to make sure that we're getting paid for the risk we're taking.

Ira Robbins (CEO)

And can I maybe just one thought. I think this is an important piece, right? When we think about sort of our overall portfolio and how we manage the balance sheet. You know, obviously, based on sort of the sensitivity that we have, there was a decline in the NIM, maybe earlier than what some of our peers were, but we do have a significant amount of tailwind coming from the assets that are going to reprice. So once we get into a more stable environment, whether it is higher for longer or just stable from where we are today, you know, there is that tailwind that's going to come from a significant amount of assets, and I think that will be a significant positive for us.

Manan Gosalia (Banks Midcap Research Analyst)

That, that's very helpful. And maybe just on the flip side, on the funding side, the 3.60% or so pricing that you mentioned, that deposits are coming on at right now, would you be able to provide a breakdown between, you know, CDs and savings accounts and what those are coming on at right now? And also, if there's any update to your through the cycle deposit beta guide of around mid-50%s.

Mike Hagedorn (CFO)

So on regular savings accounts, you're probably in the mid-3%-ish type category, but we also have a high yield savings account out there in our direct channel, which is in the mid-5%, maybe at actually low 5%s. And while we don't have a new CD special, we haven't had a new one for a while, we're retaining anywhere from about 92% up of all maturing CDs.

... So I think that when you think, as I said earlier, when I talked about the incremental cost of the next dollar of funding, it's gonna be in that mid- to low-5% range. But you got to realize that it's in certain pockets within our deposit pricing where we've had some growth that are a little more competitive.

Ira Robbins (CEO)

And that's just for that incremental CD that's coming on. I think the bigger piece is, you know, we had our strongest quarter to date of new account opening. So although you're seeing a mix shift still continue in an average coming out of a non-interest-bearing, the number of accounts in non-interest-bearing continued to escalate significantly. And we were able to grow both consumer and commercial. Just as an example, in the month of September, it was a blended commercial that came on with at a rate of 2.48% for our overall deposit base. So while Mike's correct in looking at some of those CDs and what the specials are, and keep in mind, we're still originating and opening core accounts in this organization like we haven't ever historically before.

That will have, continue to have a positive impact on how we think about what those marginal funding costs are. So, you know, the marginal funding cost that you saw, the 360, 370-ish for the quarter on that blend is something we anticipate to, to continue assuming interest rates stay at their current levels.

Manan Gosalia (Banks Midcap Research Analyst)

Great. And the through-the-cycle deposit beta of mid-50%s, any update on that?

Ira Robbins (CEO)

I mean, our through the cycle estimate was for the fourth quarter of 2023 to the third quarter of 2023. You know, we're, we're in the mid-50%s, so it's likely that we'll end up above that. But that's factored into all the commentary that we've already given about stable NII in the near term and, and opportunity to expand NII as we, as we get into 2024.

Manan Gosalia (Banks Midcap Research Analyst)

I appreciate it. Thank you.

Tom Iadanza (President)

Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Steve Moss with Raymond James. Please go ahead.

Steve Moss (Managing Director of Banking)

Good morning.

Ira Robbins (CEO)

Morning, Steve.

Steve Moss (Managing Director of Banking)

Maybe just on, morning, Ira. On credit here and just, you know, the dynamic of fixed rate loans repricing. Just curious, you know, what you all are seeing for the impact on debt service coverage ratios and, you know, what's the dynamic of, you know, how many clients have to put up additional cash to support a loan or a project?

Tom Iadanza (President)

Yeah, sure, Steve. It's, it's, it's Tom. As I mentioned earlier, we repriced in 2023 or reset the rate in 2023 on $1.8 billion of our loans. We did not have to modify the contractual payment terms on any of them. They just reset flow through with continued P&I payments. No cash upfront to customers if needed. I want to point out our upfront underwriting underwrites more conservatively, typically a 1.6x, 1.7x average debt service coverage, a 60% LTV, so that creates cushion in our upfront analysis.

Steve Moss (Managing Director of Banking)

Okay. Just given that, you know, rates have moved up quite a bit here in the last month or two, you still expect that dynamic to play out into 2024?

Tom Iadanza (President)

Yeah, I think I mentioned earlier, but I think there's another $600 million that will reset over the next six months. We do a forward analysis of this. We don't expect any different results or modifications based on that analysis today.

Ira Robbins (CEO)

Maybe just, you know, highlighting what Tom said, and he said it twice now, and I just want to make sure everyone is hearing what he said. We did $1.8 billion, and not one client had to come and bring additional equity into it. They reset as to what they were. And I think that's something significant when we look at how we underwrite loans day one, how we think about resetting these loans and the capacity of our clients to pay. And I think that's a big distinction with versus what you're seeing at other organizations today.

Steve Moss (Managing Director of Banking)

Greatly appreciate all the color. And then just in terms of, you know, as, as we think about, you know, the, the outlook going forward here, just curious, you know, Ira, I know you said you're, you're focused on organic growth and internally, but, you know, are you seeing more M&A opportunities or, you know, has any thought process changed here, just given the, the more volatile macro environment?

Ira Robbins (CEO)

I think on the back end of what we're seeing with regards to the curve, you know, there's gonna be more, definitely a lot more opportunities based on some of the challenges that many banks have. You know, that said, I think we've been very diligent and disciplined around our tangible book value. And to have a deal work in this environment becomes very, very challenging. So some of the economics need to change. You know, if you go back to the tangible book value, we had 3/30 of 2018, which was the first quarter that this management team took over, we were sitting at $5.64. Today, we're sitting at $8.63, which is pretty much $3 of incremental tangible book value.

When you add in the dividends that we paid out, $2.86 during that same period, we have effectively doubled the tangible book value in a 5.5 year period. And I think that's something that this management team is very, very proud of. We want to make sure as we think about potential acquisitions as we move forward, that we're not denigrating that kind of a track record.

Steve Moss (Managing Director of Banking)

Okay, great. Thank you very much. Appreciate the color.

Ira Robbins (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Matthew Breese with Stephens. Please go ahead.

Matthew Breese (Managing Director of Financial Services)

Hey, good afternoon. Just one follow-up M&A question. You know, obviously, the intensity of the events from March have subsided, but doesn't feel like we're quite out of the woods yet. Just wanted to make sure that, you know, when we talk about whole bank M&A versus organic growth, Ira, I would love your thoughts on, you know, FDIC-assisted deals, or if that were to still come about, would that be something you were interested in?

Ira Robbins (CEO)

I think we've been an active player in FDIC deals before, but they have to make economic and both strategic sense for us. I think those are still two variables that are important to us as we think about those as potential avenues for growth. That said, there is tremendous internal opportunities that we have today as we focused organically on, like I mentioned earlier, changing the core here is something that's been significant to us. The growth that we're seeing in C&I has been phenomenal here. If you look at the deposit page, we're up to $8.7 billion in differentiated specialized deposits today. I think that has been significant for us, and there's a lot of opportunity still for organic there.

So while I think there's definitely opportunities we should look at, if there is something from an FDIC. That said, I couldn't be more excited about what we're doing here organically and what those outcomes could potentially look like for us.

Matthew Breese (Managing Director of Financial Services)

Got it. Well, I appreciate you taking my follow-up. Thank you, guys.

Ira Robbins (CEO)

Thank you.

Operator (participant)

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Ira Robbins for closing remarks.

Ira Robbins (CEO)

Thank you, and I just want to thank everyone for taking the time to listen to our call today, and we look forward to speaking to you in three months.

Operator (participant)

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.