Q1 2024 Valley National Bancorp Earnings Call

Participants

Travis Lan; IR Contact Officer; Valley National Bancorp

Ira Robbins; Chairman of the Board, Chief Executive Officer of Valley National Bank; Valley National Bancorp

Thomas Iadanza; President of Valley and Valley National Bank, Chief Banking Officer; Valley National Bancorp

Michael Hagedorn; Chief Financial Officer, Senior Executive Vice President; Valley National Bancorp

Mark Seager; Executive Vice President of Valley and Chief Credit Officer of Valley National Bank; Valley National Bancorp

Steven Alexopoulos; Analyst; JPMorgan

Matthew Breese; Analyst; Stephens Inc.

Frank Schiraldi; Analyst; Piper Sandler Companies

Jon Arfstrom; Analyst; RBC Capital Markets

Manan Gosalia; Analyst; Morgan Stanley

Jared Shaw; Analyst; Barclays

Steve Moss; Analyst; Raymond James

David Chiaverini; Analyst; Wedbush Securities Inc.

Ben Gerlinger; Analyst; Citi

Presentation

Operator

Welcome to the Valley National Bancorp earnings conference call. (Operator Instructions) 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

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

Thank you, Travis. During the fourth quarter of 2024, Valley reported net income of $96 million, an earnings per share of $0.18. Exclusive of non-core 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 pre-tax, 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, non-interest 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 pre-tax, 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 were 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 sale transactions each occurred at or above par and incrementally benefit 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 non-accrual 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 consistently industry-leading loss content of our portfolio has contributed to significant shareholder value creation through above-average tangible book value growth.
Our strong network of borrowers have banked with Valley for decades and have performed very well in other periods of rising interest rates. We remain very confident with our capital allocation and in 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 this 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 to risk-based capital, an allowance coverage ratio above 1%, and a loan-to-deposit ratio around 100% by year end 2024. These metrics are consistent with the strategy which we have discussed previously and our ongoing efforts to further strengthen our balance sheet and enhanced 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 non-interest 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 non-interest expenses relative to our prior guidance. All else equal, this would lead pre-tax, pre-provision income 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 end rates, which impacts the repricing of roughly 60% of our loans.
Before I turn the call to Tom, I wanted 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 (inaudible) efforts to maximize near-term results.
Customer count 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 line, 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 sides 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 de-emphasis 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 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 Seagar, our Chief Credit Officer, will be available for your questions.

Thomas Iadanza

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 was primarily offset by growth in interest-bearing, non-maturity 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 non-interest 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 and our online deposits and technology business continued to expand.
Slide 11 illustrates the management actions which 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 mature 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 healthcare.
On slide 12, I would highlight that our loan to values are based on the most recent appraisal received on a property. The average life of these appraisals is approximately 2.5 years. Our debt service coverage ratios are calculated based on the most recent borrower financial information that we have, which is typically received at least annually.
The following two slides provide additional detail on our multi-family and office portfolios. We continue to have modest exposure to New York multi-family loans and highlight that a mere $531 million or roughly 20% of that sub portfolio has more than 50% rent-controlled units.
Our office portfolio remains diverse by geography and supported by generally diverse cash flows with nearly 65% of our loans to multi-tenant properties. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.

Michael Hagedorn

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 lower 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 non-interest 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 cost, which will further benefit net interest income during the second quarter, all else equal.
Turning to the next slide, you can see that non-interest 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 to 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 debt lease revenues will decline somewhat from this quarter's elevated levels.
On the following slide, you can see that our non-interest expenses were approximately $280 million for the quarter. Adjusting for our $7.5 million FDIC special assessment and certain other non-core charges, non-interest 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.
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 non-accrual 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 de minimis. 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 timeframes. Loss-given default is a calculation of charge-offs relative to nonaccrual loans.
This analysis suggests that over time, our non-accrual loans were significantly less likely to be charged off than our peers given our loss mitigation techniques. The most important last 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.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Steven Alexopoulos, JPMorgan.

Steven Alexopoulos

Hey. Good morning, everyone. I want to start -- so Ira, first, on the CRE concentration and moving down to 440% or lower. 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

Yeah. 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 on what that starting number (inaudible) like.
I think we had a really successful quarter and working with [Bleed] and some of the other partners that we've worked 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 it really isn't a rate issue, as our -- which would hinder some of our ability to really 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, 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

Okay. That's helpful. I'm curious, Ira. So stock's off -- I think it's a little over 30% this year. You mentioned perception, I believe, in terms of on the real estate portfolio. When you compare yourselves -- I mean, this has all happened in the aftermath of New York Community. When you compare your free portfolio to peer banks, what do you think the market's missing.

Ira Robbins

I think to acknowledge that there is not an issue in commercial real estate on a macro perspective I think would be putting my head in the sand. I think that said, if you really dive into the areas that are really under stress today, I think office is an obvious, right? And that's just not a function of where interest rates are. That's behaviors have actually changed.
The rent regulated in New York City is another area of stress. And then I think my third perspective is the repricing risk that exists. So if you just really 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.
But when you look at the specific underlying metrics of those loans, they're very small in size. In addition to that, what we try to do is give you an update even on what those updated debt service coverage ratios are. So we're sitting on [168] of service coverage ratio on the office portfolio, which I think is very differentiated.
I would say the larger differentiation on the office 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. So I think that's something that's probably a little bit differentiated.
And the rent regulated is obviously a little bit differentiated as well. As Tom mentioned in his prepared comments, we're really sitting with about $500 million of rent regulated. That's north of 50% of what that composition looks like.
So once again, I think it's a very small portfolio and very manageable as we think about what the risk of that portfolio looks like. Everything is current today with the portfolio.
And then I think the third one that I alluded to was really the rate reset risk. And we tried to give a little more granularity in the earnings call as well as in the presentation. The rate reset risk is not what it's like at many of our peers here.
That said, look, I acknowledge the CRE concentration is pretty significant. On a macro level, we look at the concentration. People just have a perspective of what that is at Valley. So I'm aware of that; I acknowledge it.
I think as an organization, we need to begin to reduce what that macro CRE concentration is. But at Valley, CRE concentration doesn't mean that you're going to have an absolute loss. We migrated some loans into classified and criticized loans this specific quarter.
As we mentioned before, the loss history is very, very different here at Valley as well because a loan gets classified as a criticized loan here. It does not mean you're going to have a loss associated with that. We've proven that year over year.
I think in the third quarter, we had a significant increase in what our classified loans were as well. And if you look at the results this quarter, there's not an uptick in non-accrual. There's not an uptick in delinquency. We had an uptick in classified a few quarters ago.
So I think it's just getting familiar with the granularity of what our portfolio is, which takes time for some people and takes effort as well. And that said, we have patience here and we're very comfortable that over the long term, we're going to end up in a really good spot.

Steven Alexopoulos

Okay. That's helpful. If I could just ask one other one and change direction. On the expense, the updated expense guide, just as below low end of the range. What actions you guys 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

I think it's hopefully lower than where it is today. I think we announced on last call -- not last call (inaudible) last year, right, when we started to really see some additional pressure associated with the inverted yield curve, that we're going to put forth a 5% head count 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 really begin to recognize some of the benefits of being on one platform. And we think that will continue throughout 2024 as well.

Steven Alexopoulos

Got it. Ira, thanks for taking my questions.

Ira Robbins

Thanks.

Operator

Thank you. Matthew Breese, Stephens Incorporated.

Matthew Breese

Hey. Good morning, everyone. 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, C&I, especially, grow around it?

Thomas Iadanza

Hey, Matt. It's Tom. As you see, we revised our guidance for our total loans to be between zero 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. We'll let them mature and leave. 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.
Or see, we're not changing our C&I expectations. 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.
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. So that's 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

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 New York community and now the category four 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, commercial real estate, reserve capital needs to migrate to your category four peer-like levels despite whatever CECL says in terms of your quarter-to-quarter change in reserving?

Mark Seager

Hey, 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

I think on a macro basis though, Matt, I mean -- to your specific question, do we have to be at where peer levels are, right? I think at our size of the organization, with 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 loans and criticized loans. But I don't think there's a guidance as we need to be at whatever the $100 million-plus banks are.

Matthew Breese

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 have made some significant changes along the way. And I'm curious if that's part of the plan here.

Ira Robbins

I think, obviously, going to $100 billion and saying we're going to have 400% CRE concentration is something that [doesn't] make any sense. That said, obviously, we have a very long runway, Matt. I mean, if you even 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's going to happen at Valley over the next six-ish years.
And I think getting the CRE concentration down is something we've talked about for years now of what the strategic focus has really been here. We've instituted C&I business lines from the tech business to a commodities business to all different types of C&I businesses many, 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. So it's not like we woke up one day and said, hey, the CRE concentration is too high. We need to begin to establish some of these foundational C&I businesses. We've been doing it for years. And we've actually seen a lot of positive outcomes associated with that C&I business as well.
So obviously, the CRE cannot be the same level at Valley that it's been historically. And we put a lot of good strategic initiatives in place to really begin to drive C&I business here that we've seen the fruits of for many years now, and we anticipate continuing to accelerate that.

Matthew Breese

Last one for me, and then I'll hop back in the queue. Tom, you had mentioned undergoing, it sounds like, fairly extensive stress test 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 that stress has resulted in?

Thomas Iadanza

So we don't publish neither say 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

Matt, and I think one thing I would just add to that is the size of the scope of what we do when it comes to the credit review process. We laid out on slide 19 really Valley-specific credit framework, and that's really led to a lot of the lower loss-given defaults that Mike mentioned earlier.
We manually -- credit officers looked at over 60% of the commercial real estate portfolio just this last quarter. So stress testing for us isn't just what assumptions you're applying to those stress testing, but the scale of what that stress testing is.
It's not just, hey, let's look at a couple of loans that are coming into in the next 12-ish months. It's really deep dives on each of these individual portfolios. So what you're seeing in the migration this quarter isn't just reflective of loans that are coming due in the next 12-ish months; it's 60% of the entire CRE book that we have.

Matthew Breese

I appreciate all the color. Thank you.

Operator

Thank you. Frank Schiraldi, Piper Sandler.

Frank Schiraldi

Hey. guys. Good morning. Just to follow up on the last line of question a little bit, just on the -- I just want to make sure I understand slide 5, the reserve. Mike, you talked about being relatively comfortable with where reserves are. And given loss rates, you've actually better reserve than peers in many ways.
So just trying to understand when we get to the roughly [110] reserve over the next 12 to 24 months. So 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

I think from a macro perspective, it's probably two things, right? Obviously, the CRE reviews that we do and the migration associated with that has really benefited us from what the loss-given defaults are. So potentially, there's going to be a bit more migration to what that 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 end up driving up what that coverage ratio looks like.

Frank Schiraldi

Got you. Okay. And then just wondering about the potential to accelerate some of this reduction in concentration. You obviously moved some stuff out of CRE at par this quarter. And obviously, it seems like there's been some opportunity on the commercial side.
We've certainly seen commercial teams moving around, I'd say, given -- to a greater degree, given some of the dislocation in the marketplace, let's say. So I'm just curious, as you think about that, if that's something that you guys are seeing potential there to maybe accelerate this through greater mix shift in the near term.

Ira Robbins

I think -- maybe I'll start, if you don't mind, and then I'll turn it over to Tom. But I think one of the constraints that we've always operated in here is what that tangible book value number is, right? And it's really been a focus within the organization to not dilute shareholders through tangible book value transactions, as we mentioned earlier, whether it be through silly M&A transactions that have very long buybacks or through balance sheet restructures.
I mean, we see that today in what's happening with some securities books. We see what's happening with also sales. So I think that's a constraint that we look at to make sure what our alternatives are that we have to make sure that that tangible book value and capital really continue to grow within the organization. That said, we were able to execute a lot at par today.

Thomas Iadanza

And Frank, in your referencing question regarding deposit-driven commercial teams, we have opportunistically added teams in certain markets, including the Southeast and the North.

Frank Schiraldi

Okay. All right. I guess the big -- 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 of things. Obviously, you guys reduced your expense guide a bit.
Yeah. So I was just curious if maybe there was a significant pickup opportunity here just in the near term. We've obviously seen some other press releases from other places. So I was just curious about anything in the near term of size.

Ira Robbins

Yeah. Maybe then I misunderstood your question first, and I apologize. I thought you were going a little bit more on the loan side, and I should just deferred to tom right off. Look, I think as we mentioned on the call, we're seeing a lot of growth in that Southeast market.
So some of the dislocation that you're seeing up here in the Northeast, with people coming with teams, they obviously come at a significant expense. We've looked at some of them. And the marginal cost to bring on some of those deposits, when you combine it with the expense of those teams, we're finding much, much cheaper alternatives elsewhere. And that's where we intend to allocate a lot of our resources to.

Frank Schiraldi

Got you. Okay. No, that makes sense. Appreciate it.

Operator

Emily Lee, KBW.

Yeah, it's Chris. In terms of, Ira, the capital, 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 to kind of -- I understand 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 mid-10s, even $11 million.

Ira Robbins

Yeah. I think, look, overall, Chris, we've talked a lot about relative to our peers that our allowance and capital ratios. We justified them being slightly below where peers are, understanding that they still need to be higher than where we are today.
So I don't know if your question is on the immediate term or where we view ourselves in the long term. But if you look at that near-term expectation column, all these metrics reflect 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's no significant rash actions that are 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. So I'm not sure if that's the answer, but --

Yeah, that helps. Just a follow-up on that. Would there be any situation where you would do like a credit-linked note or some sort of RWA mitigation to accelerate that? You've seen some peers do that with success.

Ira Robbins

I would say that all RWA optimization opportunities are on the table. And there are certain portfolios that lend themselves more to that than others, but we have a very diverse balance sheet. And we have portfolios like auto and residential that could be good opportunities for transactions like that.

Okay, great. And then maybe just two housekeeping. 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 little bit high level, but any specifics there?

Ira Robbins

Yeah. The CRE ratio is going to be about 464%, so it should be down about 10% from December 31. And Mark [comment] --

Mark Seager

Yeah. On the migration, as we mentioned, approximately 500 migrated into criticized for the quarter, a little granularity on that disproportionately in office, which should not be a surprise with what's going on in the market today.

Great. Perfect. Thank you.

Operator

Jon Arfstrom, RBC Capital Markets.

Jon Arfstrom

Hey. Thanks. Good morning. 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 Seager

This is Mark. Just pointing to what Ira spoke to before, we did a special review on the sensitive asset classes and overall portfolio touching a little over 60% of the portfolio in the first quarter with a focus on rent stabilized and office.
So while we anticipate, because of the high-rate environment, that we will continue to have some migration throughout the year, we do believe that the first quarter migration was elevated because of the focus of the reviews and the percent of the portfolio that was reviewed.

Jon Arfstrom

Okay. That's helpful. Thank you for that. 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

Yeah. Thanks for asking me a question. I was feeling left out this morning. That's good.
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. So generally, the first-quarter results were in line with our expectations on a day-count basis. And the modest headwinds as it relates to net interest income were really the non-interest-bearing deposits and slower loan growth. But those were also offset by some deposit cost reductions that we've spoken about as well, and we continue to look at that.
The guidance being revised slightly down is, again, a function of a starting point with lower non-interest-bearing deposits and, again, a slower 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. So that impact isn't in the numbers in the first quarter as much as it will be in the second quarter.
And then 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 as the start-up point in 12/31. So then on a net basis, the shifting yield curve, whether it's on the higher or the short end, is a modest benefit to us because we're more exposed on the long end.

Jon Arfstrom

Okay. All right. That makes sense to me. Ira, if I heard you correctly, you said with these guidance changes, you still expect relatively consistent PPNR to what you said before these adjustments. Is that right?

Ira Robbins

Absolutely.

Jon Arfstrom

Okay. So it's just-- for us, it's a question of trying to figure out what the provision is. And that's -- and you're just seeing some modest growth in the reserve. PPNR stays the same. Just the geography on the income statement is different. Is that right?

Ira Robbins

I think we've tried to give you some guidance as to where those numbers could shake out. But obviously, look, it's market dependent, as Mark said. We've gone through and looked at a lot of the portfolio already.
That said, we're going to continue to monitor the portfolio and do the credit reviews. We believe that that's really been a strong point for us in the ability to have the significant reviews that we do as it's driven down to lower loss-given default.
So it's been part of a hallmark of who we are in actively managing the portfolio and not just waiting for something to happen. So we are all over every single loan that we have and we continue to really be. And as market conditions change, we'll adjust them accordingly.

Jon Arfstrom

Okay. All right. Thank you, guys. Appreciate it.

Operator

Thank you. Manan Gosalia, Morgan Stanley.

Manan Gosalia

Hey. Good morning. With all the puts and 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

Look, I think you've seen the pace of loan yield growth has slowed as rates have stabilized generally on the front end. So that immediate benefit has kind of played itself out probably. But you do, obviously, have some tailwinds.
And we show you -- I think, in the deck, we show that mature increase side. That may be a good kind of guide to help you in terms of what's coming off and then where you're putting things back on. We originated loans.
Loan yields this quarter, still in the high 7s. So the CRE perspective- -- our CRE origination yield was $780 million. So there's still some opportunity to enhance loan yields there.

Manan Gosalia

All right. I appreciate that. And then 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?

So the Ginnie Mae purchases, obviously, they're zero risk-weighted. They average about three to four years. And the yield on that portfolio -- on recent purchases, I should say, have been in the 5%, slightly more than 5% range.
The runoff on the portfolio, there's really no prepayment. So it's going to be just the stated maturity payoffs run 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

Got it, sir. In terms of the on-balance-sheet liquidity you need to maintain from here, is there room for that to move up? Or do you think you're at the right level? I ask in context of -- you also mentioned that the LDR should trend below 100% in 2025. So I just want to get a sense of what the right level of liquidity is.

I want to make sure I'm answering -- you're referring specifically to, say, FHLB or Federal Reserve availability.

Ira Robbins

I think, overall, you're probably going to see a little bit more on-balance-sheet liquidity not to a significant degree, but the part of getting the loan-to-deposit ratio down to 100% will definitely be a little bit of the core deposits coming on and being reinvested in securities as opposed to going into loans. But I don't think you really need to look at a significant shift within what that securities book looks like.

Manan Gosalia

Got it. Yeah, that's what I was getting to. Thank you.

Operator

Thank you. Jared Shaw, Barclays.

Jared Shaw

Hey. Good morning. Thanks. 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 though, just given where rates are, that there wasn't even like a rate mark on there. Could you give any detail on the term and yield of the type of loans that we sold and if there was any retained credit participation on that?

Thomas Iadanza

Yeah. It's Tom here. These were participations for the most part. Those participation rates range probably from, I think, 7.4%. On the fixed side was 7.4% to 7.5%. 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

I think that last point is pretty important, too, because we're preserving the customer relationships. And as you heard Ira said in the prepared remarks, I mean, CRE's a very valuable asset class will remain in it. We have a deep pool of high-quality commercial real estate borrowers, but there are ways that we can balance the need to manage the balance sheet with preserving and building those customer relationships.

Jared Shaw

Okay. Thanks. And then following up, what's the expectation for deposit growth from here? And then as we look at some of the promotional products that are rolling off, where are you seeing those coming on? Where is the new product coming in terms of term and price?

Thomas Iadanza

While we've continued to have the non-interest-bearing rotation, one of the really bright spots has been the growth in savings and now, which is more than offset what we've lost in non-interest-bearing or rotated into non-interest or out of non-interest-bearing into other products. And the growth in our niche businesses has been very strong as well.
And maybe a harbinger of or an indicator of the future growth and the strength there is just in the first quarter alone. On a net basis, we added over 3,000 net new deposit accounts. So we felt pretty good. What I'm telling you is I think the growth is going to come out of the niche businesses and the continued efforts in our retail branches to grow households. And to the extent that we could see a flattening of rotation of non-interest-bearing, that's only going to help us.

Ira Robbins

Maybe, Jared, I'll add just two different pieces to that. Last call, we talked about -- at least me, specifically -- some of the disappointment I had in where the funding costs have gone within the organization. So we were very proactive in going out and looking at $10 billion of different deposit products across the organization and lowering those from a 40 basis points.
And that did not happen in the first period, assuming the first month of the quarter, but it happened throughout the quarter. So we think there's going to be some tailwind associated with that as we continue to think about deposit cost.
That said, the new originations came on very, very strong in deposits for the quarter. The cost was only 3.23% and there's well over $1 billion of net new originations that came in. And obviously, some of that offset some of the higher cost time deposits that Tom met or someone that Mike mentioned that ran off.
So I think we've done a really good job bringing in newer deposits into the organization at a much lower cost than what marginal cost of some of the current deposits that we have here. And we've also been able to be very successful in bringing down some of the cost of deposits that's sitting on the book right now. So we believe that there's a lot of tailwind associated with that.

Manan Gosalia

Great. Thank you.

Operator

Thank you. Steve Moss, Raymond James.

Steve Moss

Good morning. Following up on deposits here. Just curious, when did you guys reduce deposit rates by 40 basis points in the quarter?

There were tranches of deposit classes that we reduced beginning February 1 and then continuing through parts of March.

Steve Moss

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?

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. Okay.

Steve Moss

Okay. I appreciate that. And then in terms of -- on credit here, with the deep dive you guys took on the specific portfolios, you guys mentioned that you examine the office portfolio had migration there. Just curious, what is the specific reserve for office?
And then also along those lines, just curious, are you looking apparently at the specific properties? Or are you looking at the borrowers' global cash flows? I'm just kind of curious as to how those global cash flows are holding up these days.

Mark Seager

No, absolutely. Let me address the end of the question. Yeah, 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 that overall view to see if not stress in our property, are there stress in this global or vice versa, strength in the global cash flow, and weakness in property.
All of those factors go into the risk rating and the migration in 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

And the only thing I just want to add to that is many of our customers are in multiple classes of assets, not just in a single class.

Steve Moss

Right. And maybe just in terms of the office portfolio, I think it was $150 million or $160 million. I forget the debt service [cards] ratio right now. But like are a lot of those borrowers in the current environment headed towards one? Just kind of curious as to how much capital a borrower might have to put up to kind of rightsized those loans these days.

Mark Seager

Yeah. I think you see the granularity in the portfolio with a $3 million average loan size in that. We do look in the individual cases with 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 to long-term customers that we have relationships with, which we also believe assist in the overall performance of that portfolio in the long run.

Ira Robbins

Steve, we showed the average loan size. I mean, I like to indicate the granularity and diversity of the portfolio. But in reality, to your last question -- and it doesn't apply just to offices, but I think across the portfolio, given our average loan size.
When a borrower does need to bring additional cash reserves or equity into a deal, these are low average loan sizes that require less in terms of absolute dollars to rightsize things. And I think that's a benefit and a component of the loss mitigation and credit management.

Steve Moss

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 Seager

So I would say from -- it's really more geographically focused. So our largest percentage of office is in the Florida, Alabama market. And we've seen much lower level of migration in that portfolio, with the majority of migration in the Northeast and the New Jersey and New York marketplace but noting that our Manhattan exposure is quite granular and quite small in that.

Steve Moss

Okay. Appreciate that. And then just stepping back from things here, Ira. I was just curious here with the plan to reduce commercial real estate concentrations. It might not be easy to do a deal today. But just curious as to how the shift is changing your thinking on the M&A front?

Ira Robbins

Look, I think this is the strategic initiatives and plan that we've outlined for a couple of years now. So I think we're just looking at accelerating some of the things that we're doing. If there's an M&A opportunity that helps accelerate some of the strategic initiatives, we're definitely something we would look at.
That said, the guardrails around tangible book value are real to me. So obviously, the valuation in today's market limits the ability to do some of that. But M&A that really accelerates strategic initiatives is something that's definitely -- that we are, as an organization, are open to.

Steve Moss

Okay, great. Appreciate all the color. Thank you.

Operator

Thank you. David Chiaverini, Wedbush Securities.

David Chiaverini

Hi. Thanks. 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 getting pushed to the back burner?

Ira Robbins

I think from a macro perspective, obviously, 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. But I think a large piece of it goes back to what we talked about last quarter.
The core conversion that we had here took significant resources from an internal perspective and from an external perspective. And as we continue to get the benefits of migrating onto one core platform, we do believe that there's going to be some sales from that, definitely not to the degree.
I think that we saw the and traction from last year to now. But that said, we do think that there's opportunity on the expense side of the book.

Thomas Iadanza

Maybe to give you an example to hopefully make this real, prior to conversion, core conversion, we ran on three separate GL systems and we had two different core systems. We've closed the books this quarter the fastest we've done in the time that I've been at Valley. So that's a good example of showing the efficiency in the core conversion and how it has ancillary benefits that kind of spill through the whole organization.

David Chiaverini

Thanks for that. And I also want to follow up on the question on liquidity. I guess to put a finer point on it. Cash and securities as a percent of assets was 11%. Should we expect that 11% kind of trend higher here over time?

Ira Robbins

Yeah. I think slowly over time, directionally, that makes sense; but I don't think there's any bulk action that's going to occur at any point. I mean, that's just a 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 very stable deposit base. It's very granular. And so we think we're well positioned as it is today. But just directionally, too, as we grow, we will continue to have more cash and securities.

David Chiaverini

Thanks very much.

Operator

Thank you. Ben Gerlinger, Citi.

Ben Gerlinger

Hey. Good afternoon, everyone. Slide 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 Seager

On a large portion of our portfolio, we do have updated current rent roll information. I don't believe 100% of them, though, we had clearly include 2023 numbers. And we think that in all asset classes other than office, we've seen strength in NOI growth.

Ben Gerlinger

Got you. And then I noticed the multi-family down here in the Southeast. The Florida, Alabama came down a decent amount quarter over quarter. Any commentary on that?

Ira Robbins

Ben, we'll go back and take a look at the number. You mean, the debt service coverage came down?

Ben Gerlinger

Yeah. It went from basically --

Ira Robbins

Yeah. It also happens to be the same number -- no. I'll go back and take a look at it because it happens to be the same number as the row above. And so I'll take a look at it and get back to everyone.

Ben Gerlinger

Yeah, okay. And then lastly -- I know it's been 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

We did not give a spot rate. You can see in the IP that the total deposit costs went from 3.13% to 3.16%, so they're up 3 basis points.

Ira Robbins

A lot of the deposit costs [changing].

Michael Hagedorn

Thanks.

Operator

Thank you. Matthew Breese, Stephens Inc.

Matthew Breese

Hey. 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 just seems like a fairly big charge given how far away we are from the height of the tax medallion days. What's the remaining balance on that portfolio?

Mark Seager

The remaining balance, we have $52 million left in portfolio that's fully reserved down to current market prices. For the charge-off that we experienced this quarter, that was also fully reserved for.
It was one relationship of a customer who had been paying. We were in a long-term negotiation and kind of hit a standstill. Subsequent to the charge-off, we have entered into a forbearance agreement, and that loan has continued to pay.

Matthew Breese

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

Look, I think from a capital deployment perspective, allocating capital to growing the CRE book is probably not going to happen here. There's ample opportunity internally just to serve our current CRE clients. So I think that's probably where more of the focus would end up being.
But once again, we are seeing strong C&I growth, and we have for a couple of years now. So allocating capital to those specific segments seems to be a much better return to us today. From an M&A perspective, I think once again, if it's something that's strategic and makes sense, we will look at it. But once again, the guardrail's around intangible book value, and some of that's significant to me.

Matthew Breese

That's all I had. Thank you.

Operator

I am showing no further questions at this time. I will now turn it over to Ira Robbins for closing remarks.

Ira Robbins

Thanks. I just want to thank everyone for taking the time to listen to us today. And I look forward to speaking to you next quarter. Have a nice day.

Operator

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