Valley National Bancorp (NASDAQ:VLY) Q3 2022 Earnings Conference Call October 27, 2022 11:00 AM ET
Company Participants
Travis Lan – Head of Investor Relations
Ira Robbins – Chief Executive Officer
Tom Iadanza – President
Mike Hagedorn – Chief Financial Officer
Conference Call Participants
Michael Perito – KBW
Frank Schiraldi – Piper Sandler
Dave Bishop – Hovde Group
Steven Alexopoulos – JPMorgan
Matthew Breese – Stephens Inc.
Jon Arfstrom – RBC Capital Markets
Travis Lan
Good morning, and welcome to Valley’s Third Quarter 2022 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.
With that, I’ll turn the call over to Ira Robbins.
Ira Robbins
Thank you, Travis, and welcome to those of you on the call today. I have a few comments to make this morning, and then we ask Tom to provide insight on the quarter’s loan and deposit results. Mike will then discuss the financial results in more detail.
In the third quarter of 2022, Valley reported net income of $178 million, earnings per share of $0.34 and annualized ROA of 1.30%. Exclusive of non-core charges, adjusted net income, EPS and ROA were $182 million, $0.35 and 1.32%, respectively. These exceptional results reflect the benefits of our asset-sensitive balance sheet and our consistently strong credit results.
As you are aware, Valley has undergone a meaningful evolution over the last few years. By expanding in terms of both size and capability, we have uniquely positioned ourselves as one of the premier service-oriented commercial banks in the entire country. From a size perspective, we sit in an incredibly strong position with only a handful of nationwide peers.
Our customers have access to the robust suite of products and services that we found at a large bank but with Valley’s exceptional responsiveness and high-touch approach. This combination has accelerated our brand awareness and enabled us to selectively add top-level talent and desirable clients.
This unique approach also positions us to capitalize on market disruption that may occur as a result of future economic volatility. While we remain selective with regards to how and when we grow, we believe that times of stress can create exceptional customer acquisition opportunities. As the pool of banks that look like Valley continue to shrink, we are prepared to maintain our momentum and maximize our competitive advantages.
One of Valley’s distinguishing characteristics is our positioning in some of the country’s most attractive commercial markets, including Metro New York, Florida and California. We believe these markets will weather economic downturns while providing unique opportunities for diversified loan and deposit growth. Our results this quarter reflect the benefits of our diversified business model and the economic strength of our targeted markets of operations.
Before I turn the call over to Tom, I want to briefly update you on the guidance we had previously provided. On Page 4 of the deck, we compare selected third quarter results to last quarter’s guidance. While we are not formally adjusting our near-term guidance, we believe that the loan growth and net interest income is likely to exceed our prior expectations. Meanwhile, the guidance for our efficiency ratio and tax rates remain unchanged.
With that, I will turn the call over to Tom and Mike to discuss this quarter’s growth and financial results.
Tom Iadanza
Thank you, Ira. Slide 5 illustrates the quarter’s 15% annualized loan growth which is below the mid-20% organic growth rate from the second quarter. While loan origination slowed during the third quarter, net growth is above the high end of our anticipated range as a result of two key factors: first, as interest rates have increased faster than anticipated, payoffs have slowed dramatically; second, contributions from the residential and consumer portfolios exceeded expectations, partially as a result of cross-sell to legacy Leumi customers.
On the commercial side, our growth remains well diversified across asset classes and geographies. We have selectively tightened underwriting standards, which led to lower loan-to-values and higher debt service coverages on originations during the quarter. We also continue to see a significant amount of loan production to repeat customers.
These borrowers are sophisticated and well known to Valley and come back to us, time and again, to benefit from our responsiveness and strong execution. As Ira mentioned, we have continued to add talented commercial bankers across our footprint.
This is consistent with our proven ability to enhance our franchise, particularly in times of disruption around us. These efforts should help us offset a broader slowdown in demand and be additive to our loan and deposit production in 2023 and beyond.
Finally, on Slide 5, you can see the 113 basis point increase in average new origination yields to 5.21% during the quarter. As you would expect, origination yields increased each month as market rates moved higher. This is a positive indicator that we are able to pass through higher rates to our borrowers, and we anticipate that origination yields will continue to ascend.
Turning to Slide 6. You can see that deposits grew at an annualized rate of approximately 13% during the quarter. As we have previously discussed, we have devoted significant resources to diversifying our deposit gathering channels over the last few years. While certain of our funding sources have become more competitive, we’ve been able to tap other customer segments and business lines to fund our loan growth.
As an example, we have seen private banking customers take advantage of higher rates by redeploying deposits into the treasury securities market. To offset this and support growth, we rolled out retail CD promotions over the summer, which generated over $1 billion of new deposits. These promotions were timed in advance of Fed hikes and have added duration at rates that are extremely attractive in retrospect.
We continue to focus on the deposit side and acknowledge that each Fed hike brings more pricing and competition. We are tactically managing our business lines to ensure that we generate deposits in the most cost-effective manner to support our loan growth.
With that, I will turn the call over to Mike Hagedorn to provide more insight on the quarter’s financials.
Mike Hagedorn
Thank you, Tom. Slide 7 illustrates Valley’s recent quarterly net interest income and margin trends. Net interest income increased over $35 million or over 8% from the linked quarter. The increase reflects continued loan growth and the benefits of our asset-sensitive balance sheet and a rising interest rate environment. These factors more than offset a sequential reduction in PPP income and PCD accretion, which fell to $8.5 million and $12.1 million in the second quarter. This was primarily the result of slower acquired loan payoffs.
Our third quarter fully tax equivalent net interest margin increased 17 basis points to 3.60% from the second quarter of 2022. Asset yields expanded 54 basis points during the quarter which more than offset a 40 basis point increase in total funding costs. The asset yield increase was driven by both the repricing of our floating rate loans and a significant increase in the yields on newly originated loans.
As you saw on Slide 6, we calculate a cumulative year-to-date deposit beta of approximately 20%. This is running better than modeled so far, but as Tom noted, we acknowledge the competitive landscape and are working hard to ensure this trend continues. Using the implied forward curve at September 30, we anticipate net interest margin will increase further in both the fourth quarter of 2022 and the first quarter of 2023. Net interest margin results beyond that point will be more dependent on our ability to acutely manage future deposit betas.
Moving to Slide 8. We generated over $56.2 million of non-interest income for the quarter as compared to $58.5 million in the second quarter. The reduction was driven by lower gain on sale income resulting from a decline in conforming residential loan production. Swap and other market-based revenues were generally stable during the quarter. On the swap side, we anticipate that revenue could revert from $11 million this quarter to the high single-digit level in the fourth quarter, should loan origination activity decline further.
On Slide 9, you can see that our total non-interest expenses were approximately $262 million for the quarter or approximately $254 million on an adjusted basis. The quarter’s adjusted expenses included $2 million charitable contribution and higher incentive compensation accruals related to our strong financial performance. Outside of these discrete costs, additional expense increases generally reflect the inflationary environment and the competitive talent market. The quarter’s strong revenue growth helped drive our efficiency ratio to 49.8% from the second quarter’s 50.8% level. As Ira said, we remain confident in our previous sub-50% efficiency ratio guidance for the second half of 2022.
Turning to Slide 10. You can see our asset quality trends for the last five quarters. Our allowance for credit losses as a percentage of total loans declined to 1.10% at September 30 from 1.13% at June 30. We assessed our portfolio in the wake of Hurricane Ian and determined there was no significant impact to our required reserves at September 30. We continue to support our impacted customers and employees as they recover from the storm. As a reminder, our reserve coverage remains well above the 0.89% day one reserve we established upon the adoption of CECL in 2020. Neither our earnings and our capital levels have benefited from reserve releases, which differentiates us from many of our peers.
During the quarter, we experienced a positive resolution of certain non-accrual credits. This resulted in nearly $6 million of net recoveries and a sequential reduction in non-accrual loans as compared to June 30. Relative to non-accrual loans, the reserve increased to 162% from 150% at June 30.
On Slide 11, you can see that tangible book value increased approximately 2% for the quarter. This was the result of our strong earnings and a modest negative OCI impact associated with our available-for-sale securities portfolio. Relative to peers, our OCI headwind remains manageable as a result of our smaller securities portfolio and modest AFS exposure, which reflects our continued focus on tangible book value preservation. Tangible common equity to tangible assets declined slightly as a result of our loan growth. Our Tier 1 ratios were stable during the quarter and total risk base increased as a result of our successful subordinated debt offering in September.
With that, I will turn the call back to the operator to begin Q&A. Thank you.
Question-and-Answer Session
Operator
The floor in now open for your questions. [Operator Instructions] Our first question comes from Michael Perito from KBW. Please proceed.
Michael Perito
Hey guys. Good morning. Thanks for taking my questions.
Ira Robbins
Good morning.
Michael Perito
I wanted to start on the deposit side. I guess, you kind of have a two tapes here. Obviously, in the quarter itself, the betas were pretty reasonable, and you had the nice NIM expansion. But obviously, just on a dollar basis, the mix of growth was very CD and brokered CD heavy and some of the rate hikes were a little later in the quarter. So I guess I’m just curious, as we look to next quarter here, how do you guys expect the mix of deposit growth to trend? I mean, is it going to continue to be very CD and brokered CD have? Is there room for other kind of verticals or areas to contribute more? And I guess, as a follow-up to that, I mean, depending on what you answer there, I mean, can betas accelerate pretty meaningfully next quarter? Do you think there’s still room to kind of keep those at reasonable rates? Or how are you guys thinking about that dynamic?
Tom Iadanza
Hey, Michael. It’s Tom. We have, over the past few years, built a number of verticals that are growing at rates that are a little bit higher than what our traditional core deposits are growing. And that’s – those are the HOA, cannabis, national deposit groups as well as an emphasis on our Valley Direct product. We will continue to see growth in those areas that will outpace our traditional core. Equally important is that our relationship-driven commercial model results in net increases in business accounts each and every quarter. Those accounts tend to be 61% non-interest-bearing deposits.
We will continue to focus. We don’t have a reliance on any single niche. We’ll continue to focus on these niches – the average deposit cost – total deposit costs for September was 73 basis points. I’ll just remind everyone our loan yields for that same month of September, we’re approaching 6%. So we have a number of levers, a number of verticals that will continue to push.
Mike Hagedorn
As it relates to the betas, Mike, our modeling on a forward basis shows that we’re going to have margin expansion. Our expectation is that we’ll have margin expansion in both the fourth quarter and the first quarter of 2023. Our modeling also includes a very wide range of deposit betas for those incremental costs. And even with that, we’re still showing net interest income growth full year 2022 to full year 2023. So we feel pretty good about where we sit right now.
Travis Lan
And I just want to clarify on Tom’s comment on the loan origination yields approaching 6% on the origination side.
Michael Perito
All helpful, guys. Thanks for running through that. I guess, just as a follow-up then. I mean, why – I guess, is it the range of outcomes that keeps the NII guide from changing here? I mean, it sounds like that just based on what you laid out, it would be a reasonably confident statement to say that you’ll be above that $900 million. But obviously, you guys didn’t formally change that. So is that just uncertainty over the next three months? Or is there any other dynamic that we should be thinking about as we model kind of the near-term NII trajectory?
Travis Lan
Mike, this is Travis. So no, there’s confidence that the NII is going to continue to grow in the fourth quarter. I mean, as Mike said, the margin is going to – we anticipate the margin will go higher in the fourth quarter and again in the first quarter. So NII will continue to expand. We just didn’t formally update the guidance because it was only one quarter. I think everyone’s going to be waiting to see what the 2023 guidance looks like in January. So it’s more a formality than anything else as you saw, I mean, we were on pace with the fourth – with the third quarter NII to be ahead of that $900 million guide, and we’re growing from there.
Michael Perito
Perfect. Yes, that’s what I figured. I just wanted to double check. And then just lastly, maybe a question for Mike. Any thoughts – I mean, the efficiency ratio guidance is unchanged. You guys were just under 50% this quarter. Quarter-on-quarter, although the expense rate stepped up a bit. I mean, just anything you’d flag out there. And as you guys continue to invest to grow the business and the diversity of the business, I mean, any initial budgeting thoughts on growth rate on the OpEx side for next year, even if it’s just kind of qualitative commentary?
Ira Robbins
Hey, Michael. This is Ira. I think just high level, we’re really focused on generating positive operating leverage. If you see for the quarter, we were at 1.6 times, which we think is really trending in the right direction for us and consistent with where we’ve been over the last few years of how we think about growth and balancing that with the expenses across the entire organization.
As Tom mentioned, though, we think there is going to be significant opportunity for us based on the economic environment. We hired 20-plus frontline bankers last year on the commercial side, and we’ve done the same thing so far this year. So the expense guide or as you see the expenses increased, for us, it’s really in relation to what we’re seeing on the asset side of the balance sheet as well. We try not to manage any one individual component of the financial statements and sort of independently, but rather much more so in the aggregate, and we’re really seeing the benefits of that today.
Michael Perito
Great. I’ll let someone else come in, but thank you guys for taking my questions. Appreciate it.
Ira Robbins
Thanks.
Operator
Our next question comes from Frank Schiraldi from Piper Sandler. Please proceed.
Frank Schiraldi
Thanks. Good morning.
Ira Robbins
Good morning, Frank.
Frank Schiraldi
I wondered if – just a follow up on the deposit kind of storyline. I don’t know. You might even have mentioned, but I would think it’s fair to assume that just given the environment that the Bank Leumi’s technology-focused deposits would have been down quarter-over-quarter. And if that’s the case, just wondering your thoughts there on trend, could those perhaps have stabilized, which would lead to less dependence on CV growth in 4Q.
Tom Iadanza
On the venture tech side at Leumi, the deposits were stable for the quarter. We do expect a little bit more volatility going into the fourth quarter, but we’re optimistic and we’re very proud of the long-term prospects of that business. We expect it to be a long-term deposit growth opportunity for us.
Travis Lan
Frank, this is Travis. I mean, interestingly, the acquired Leumi business where we saw the most pressure on the deposit side was on the private banking. Ira and Tom mentioned that in his prepared remarks, but folks that were sitting there with deposits and no yield alternatives for multiple years and then turn around and get treasuries in the 4% area. We saw them take deposits out and invest in the treasury market, which they do through our broker-dealer, so we preserved the customer relationship, it could benefit economically there. But that’s actually the area that saw the pressure candidly across the organization from a deposit perspective.
Frank Schiraldi
Got you. Okay. And are you still seeing kind of that story play out here in the fourth quarter?
Tom Iadanza
I think there’ll be near-term volatility in those portfolios as rate rise and such. But again, long-term, it’s still a very important and solid business for us.
Mike Hagedorn
Yes. And I would just add to that, that even though you see the rotation out of non-interest-bearing, which many of the peers have experienced as well, the stability of the other verticals that we built have really weathered the storm for us on that rotation, and that goes back to Travis’ comments in the wealth space as well. The money that was at zero is a little longer sleepy, and it’s going to start earning some rate of interest. The thing we’re most excited about is through the cycle right now for total deposits our beta is only 20%. So I mean, I’m not saying it’s going to be 20% in the fourth quarter. Please don’t make that jump, but 20% through the cycle right now, considering the history of our company when we had a different balance sheet mix, I think, is pretty dug on good performance at this point.
Frank Schiraldi
Well, thinking about the CD promotions, I think they were – correct me if I’m wrong, but sort of done at an opportune time earlier in the third quarter. Just kind of curious if you could talk about is there any sort of similar promotions going on currently? And kind of what’s the pricing there that you’re seeing?
Tom Iadanza
Yes. We have a promotion now for 19 months, 3.5% on the CD, and we’re seeing a lot of positive activity began a little over a week ago. We also have a Valley direct product, a high-yield savings at around 3.01%, and in the last quarter, we opened up over 1,000 new accounts there. So we are seeing traction at rates that give us a little more duration and there will be attractive rates.
Mike Hagedorn
And Frank, as a reminder to your comment around what we’ve done opportunistically before Fed increases. We’ve raised over $1 billion on two other CD promotions at rates less than 2.5%. And so that’s one of those things that’s really been helping to buoy our overall deposit beta.
Frank Schiraldi
Great. Okay. And then if I just could sneak in one last one on the expense side as well. Is there any reason to sort of as we look at the fourth quarter, I know you provided your guide and under 50%. We’re very confident in terms of the efficiency ratio. Just wondering if there’s any reason to think some of those accruals in the quarter might have been a little bit front-loaded. Is there – I guess, is the 3Q a pretty good run rate expectation, all else equal for the – as we go into the fourth quarter here.
Mike Hagedorn
Sure. Appreciate the question. I’m going to direct everybody’s attention on the call to Slide 9 in the deck. As a reminder, the adjusted expenses are $254 million for the quarter. And if you back out the $2 million that we talked about for the charitable contribution, which obviously, we don’t expect that to continue in the fourth quarter, you start to look at the other increases. And the good news, I think, from our perspective, it goes back to the comments that Tom made earlier about hiring new producers within our company, the majority of that cost increases in the salary and compensation-related lines.
So to the extent that there’s recessionary pressure there, which I think everybody is experiencing, I think it’s fair to say that that’s right. I think a kind of base rate going forward, at least for the fourth quarter, expenses is $250 million, and then you can build your growth on top of that relative to a sub-50% efficiency ratio.
Frank Schiraldi
Great. Okay. Thank you.
Mike Hagedorn
Thanks, Frank.
Operator
Our next question comes from Dave Bishop from Hovde Group. Please proceed.
Dave Bishop
Hey, good morning gentlemen. How are you?
Ira Robbins
Hey, David. How are you?
Dave Bishop
Good, good. Just curious with the Bank Leumi acquisition behind you, just the appetite for share buybacks here?
Ira Robbins
I think there’s so much opportunity for us to really continue the growth trajectory of the organization. And I think the best use of our capital is to continue to leverage it into the balance sheet and provide capital for the loan originations internally. So I think that’s probably more likely than a share repurchase at this point.
Dave Bishop
Got it. And then overall credit looks fine. But any color you guys can provide on the rise in the early-stage delinquencies, the construction and commercial real estate credits? Thanks.
Tom Iadanza
Yes. There was a single construction loan that moved into the non-accrual bucket. It’s – the collateral is fine. We have guarantees on it. We don’t expect any loss there. In total, our non-accruals declined from 72 basis points to 65. And that was all due to positive resolution of some older loans that we had on the books with primarily full repayment on each of them.
Dave Bishop
Got it. Thanks.
Operator
Our next question comes from Steven Alexopoulos from JPMorgan. Please proceed.
Steven Alexopoulos
Hey, good morning, everyone.
Ira Robbins
Good morning, Steven.
Steven Alexopoulos
I like to start and dive a little deeper into the non-interest-bearing deposit outflows in the quarter. So if I look prior to the pandemic, you were about mid-20% mix of non-interest-bearing now that’s about mid-30s. Where do you see this level normalizing to, and could we go below 30%?
Mike Hagedorn
As a reminder, in September of 2021, I believe we were around 34%, give or take, 32%, sorry, and we peaked in the prior quarter at just under 37%, and now we’re at 34%. So we feel pretty good about the retention that we’ve seen here. I think what you’re seeing in our numbers and you’re probably seeing in other banks numbers is, at some point on the interest rate cycles, especially in this cycle, there’s a place where people are no longer going to leave as much in non-interest-bearing as they did before.
So it’s about effective use of their capital, mostly relates back to the commercial space. So we feel pretty good about how we’ve been able to hold our own in that space. But in any event, if some of that money moves to us, we’re not losing those accounts. So as Tom mentioned earlier, our account basis in the commercial space has gone up.
Ira Robbins
I think just from a more broad perspective, Steve, the composition of the balance sheet has changed dramatically since then, much more focused on the commercial deposit versus the consumer deposit. And as you know, those carry higher non-interest-bearing deposits from an operating account and payroll account perspective as well as just the shift in bringing in Leumi what their funding base look like as well. So I don’t anticipate at all going back down to those levels.
Steven Alexopoulos
Okay. So could we read into this that you think you could maintain about mid-30s about where you are now, so the mix doesn’t change that much moving forward?
Ira Robbins
I think there’s a lot of pressure externally. You saw $200 billion flow out of the banking space. So I think there is going to be some pressure. I think the diversified funding mix that we’ve created here is really providing us the ability to continue the growth without having to look to the borrowings marketplace.
That said, I think the beta isn’t going to be much less than what they were last time. Steve, if you look at – we had 20% impact in beta this quarter just because of the growth that we put on. So I think on a core basis, as Tom was referring to, we are getting the real benefit of the diversified funding book. The retail branches are doing well all across the individual geographies and the focus on the commercial customer versus maybe the CRE customer is really supporting balances as well.
Our commercial customers give us between 25% and 35% balances that come along with that growth. If you look back to when we had – I think as you were referencing earlier, when we were in the mid-20s, 60% of the balance sheet was – excuse me, yes, 60% of the balance sheet now is sitting with fixed and 40% on the adjustable side, and that was really switched from where we were before. So we’ve seen significant – did I get that wrong?
Mike Hagedorn
You got it…
Ira Robbins
The other way, right?
Mike Hagedorn
60% is adjustable. 40% is fixed. And within the adjustable portion 40% would re-price in the next three months.
Ira Robbins
Right. So that massive shift…
Mike Hagedorn
The total portfolio.
Ira Robbins
Yes. So that massive shift in asset base reflects the change in the deposit composition as well that really comes along with it. So on a macro basis, it’s a much more asset-sensitive balance sheet and the funding structure looks much better as well.
Steven Alexopoulos
Ira, if we put this together, what should we assume for the through-the-cycle deposit beta for you guys?
Ira Robbins
I don’t think I want to give guidance on that specific, but I think it’s going to be much better than what we were historically, Steve.
Steven Alexopoulos
Okay. Right.
Mike Hagedorn
We won’t give guidance, but I will say this, Steven. On the low end of our modeling at 27% beta to the high end in our modeling of 87%, and we have all kinds of points in between there. Our net interest income still grows on a year-over-year basis. So we feel very confident right now that we’re going to continue to grow margin in the fourth quarter and the first quarter, as we said in our prepared remarks, it’s a little murkier after that. But on a net interest income perspective, the numbers look solid.
Steven Alexopoulos
Okay. And then one final one for me. Just given the inverted curve and rising deposit costs, how should we think about holding residential mortgage loans beyond this year? Should we expect that to continue? .
Tom Iadanza
No. Steven, just your point of reference, we’re only holding jumbo mortgages in portfolio. There was a small portion of conforming that closed too late in the third quarter, about $20 million, to be sold in the third quarter, they will be sold in the fourth quarter. So we continue to only hold jumbos, not conforming.
Steven Alexopoulos
Not conforming, okay. Thanks for taking my questions.
Ira Robbins
Thanks, Steve.
Operator
Our next question comes from Matthew Breese from Stephens Inc. Please proceed.
Matthew Breese
Good morning.
Ira Robbins
Good morning, Matt.
Matthew Breese
I was hoping for a little bit more guidance on accretable yield that came down this quarter. I think to $8.5 million. I’m just curious what we should be using on a run rate basis there.
Travis Lan
Yes, Matt, this is Travis. So we were $12 million last quarter, $8.5 million this quarter. The reduction is because payoffs slowed dramatically. I mean, I think anywhere in that range is reasonable if you want to pick the mid-point, I think that’s fine. With where rates are, maybe you use the $8.5 million for the next few quarters, but I don’t anticipate that it would move significantly lower than this.
Matthew Breese
Okay. And then thinking back historically, Valley has operated more or less in a kind of interest rate neutral position. Curious, over time, will you look to go back to that kind of interest rate position, perhaps lock in some of these that the margin gains you’ve had more recently? Or do you expect to maintain the asset-sensitive position?
Mike Hagedorn
Yes, it’s Mike. Thanks for the question, Matt. Yes, we are currently exploring some options to lock in some of that, as you said, new interest income or some of that margin that we’ve gained during this upward rate environment. So we are looking at that. And I do think, over time, you would see us migrate back to a somewhat more neutral balance sheet position.
Matthew Breese
Okay. And then just tying two thoughts together, right? You had mentioned NIM expansion through the early part of 2023 plus perhaps locking some of this in the extent we see some NIM pressure on the back of the Fed stopping hikes. To what extent might we see that pressure? Or do you expect it to be more of a stabilizing point versus real pressure?
Travis Lan
Yes, Matt, this is Travis. So I mean, our margins at 3.60% this quarter, right, we’re up from about 3.15% or so two quarters in regards to that significant increase in the last two quarters. We’re going to grow for another two quarters, although likely at I think a slower pace than what you’ve seen so far.
But then even when you see the pressure, right, I think we all believe that we’re going to see our margin even out somewhere well above kind of at low 3% level. So maybe it’s not the 3.60% area that we would ultimately level out following the conclusion of the Fed hikes, but I think the margin is going to stabilize at a higher level than what you’ve seen historically for this company.
Matthew Breese
Okay. And I’m sorry, did you provide a – was there a number in there like a 3.50% or 3.60% number you think it will stabilize that?
Travis Lan
I was just using this quarter’s 3.60%, like the reference points are going to grow two more quarters. And then at some point, if you see the pressure, I mean, I think you’re going to normalize in this kind of mid-3% level.
Matthew Breese
Got it. Okay. Last one for me, just on fee income. Any sort of guidance there. I know there’s a number of different business lines now kind of working. Curious if that kind of $55 million, $56 million range is a good one going forward?
Mike Hagedorn
Yes, we feel pretty good about that range right now. I mean, obviously, the resi mortgage business is going to continue to be challenged as it was in the quarter. But yes, we think that’s probably in the ballpark.
Matthew Breese
Great. Okay. That’s all I had. Thanks for taking my questions.
Ira Robbins
Thanks, Matt.
Operator
Our next question comes from Jon Arfstrom from RBC Capital Markets. Please proceed.
Jon Arfstrom
Thanks. Good morning, everyone.
Ira Robbins
Good morning, Jon.
Tom Iadanza
Good morning.
Jon Arfstrom
Just a couple of follow-ups. Ira, question for you. In your – early in your prepared comments, I think you used the term times of stress, give you opportunities to grow. Does this feel like a time of stress, for you? And it sounds like you’ve got some opportunities to grow, but help us understand that word stress?
Ira Robbins
I think it’s beginning to feel like it. You’re seeing definitely some contraction in GDP, overall. I think there’s still inflationary pressures that are being addressed obviously by the Fed. But you look at the balance sheet, right, and people are migrating deposits outside of traditional financial banks, which is impacting, obviously, the ability to fund.
But that said, I think for us, specifically, the credit quality is holding up. I keep on going back to what our performance was in the beginning of COVID. We had a significantly $30-plus billion balance sheet, and we only had a modified $40 million of our loans during that time period really demonstrates to me the way that we underwrote day one and the ability of our borrowers to continue to perform in a challenging economic environment. So for us, I feel really, really good about our opportunities to continue to grow opportunity to support our customers and to add new customers for others, I’d be a bit concerned.
Jon Arfstrom
Okay. That’s helpful. And then on your loan growth pace, help us understand just kind of environmental versus market share gains. You still had a good growth quarter, and I know we talked a little bit last quarter about some of your new markets. But is the environment healthy? And is that providing opportunities? Are these market share gains? And just help us think through how you view…
Tom Iadanza
Yes, it’s Tom. Jon, so what we’re most proud of is that our growth is very balanced across regions, types of businesses, types of product types of collateral. We continue with that balanced growth, and we’re seeing accelerated growth in our newer Florida market, more so than the stable markets up here in the Midwest, and we’re seeing growth in California.
We entered new markets in Philadelphia, Nashville, Atlanta. We continue to see opportunities there and grow there. We have added. Ira mentioned, we added 25 front-end people, including three in our venture business, two in New York, one in Palo Alto. So we’re getting lift through these added people through the new markets that we’re entering and staffing into those new markets, but I just want to stress, we’ve done this without compromising any credit standards.
We’ve tightened our underwriting standards. Our weighted average loan-to-value is around 60% on our new production. Our weighted average debt service coverage is over 1.6. On the C&I side, it’s even higher. It’s over 2 times on that debt service coverage calculation that we have and 70% overall of our businesses to our existing customer base.
On the construction side, it’s closer to 80% to existing customer base. So the balance of that growth utilizing our existing customers. Leumi and the West Chester Bank are benefiting from a much larger balance sheet. Leumi growth is 30% annualized and 75% is coming from existing customer base. We’ll continue to see the benefit of that. But we’ll guide – our guidance is 8% to 10% growth for the fourth quarter and high-single digits for 2023.
Jon Arfstrom
Yes. Okay. That’s helpful. And then Mike, just one for you. You got a lot of questions on deposits and growth obviously. But any cap on your loan-to-deposit ratio when you guys think through it, you’ve operated above 100% in the past but how do you think about the loan-to-deposit ratio? Or is that just not a concern or limitation for you?
Mike Hagedorn
We don’t provide like specific guidance, but I think that when you look at us relative to the midsized bank peers in the $50 billion to $100 billion range, I think it’s advantageous for us. To the extent we can do this in a cost-effective way and also not turn away any growth, so one of the things we want to make sure that we never do is be in a position where we can’t fund the good loan growth that Tom’s team puts on day in and day out.
So that typically means that we’d like to keep at $100 billion or less. If it came up a little bit above $100 billion, it’s been much higher historically, a little bit above $100 billion, I think, would be okay. But there’s not a goal to necessarily keep it there. But assuming we can do it cost effectively, we’d like to be less than $100 billion.
Jon Arfstrom
Yes. All right. Thanks for the help. Appreciate it.
Ira Robbins
Thanks, Jon.
Operator
Our next question comes from Michael Perito from KBW. Please proceed.
Michael Perito
Hey guys, thanks. Sorry, just one last quick follow-up. Just the tax rate, Mike, has been creeping up a little bit. Just wondering if you could just give us a little guidance there on where you think that will shake out in the fourth quarter and maybe initial range for next year would be helpful. Thank you.
Mike Hagedorn
Yes. We think that 27.7% is the same rate that will be – that you should use in your models for the fourth quarter. Remember, there are some things throughout the year the way taxes are collected, et cetera, that can give it some kind of seasonality. So it tends to be lighter in the first half and then accelerate a little bit in the second half. So that’s what you’re seeing.
Michael Perito
And at this point, no expectations for major changes year-on-year in terms of like any tax credit or muni bond purchases anything like dramatic or no?
Mike Hagedorn
No, no.
Michael Perito
Okay. Great. Thank you, guys.
Mike Hagedorn
Yes. Thanks.
Ira Robbins
Thanks, Mike.
Operator
That does conclude today’s questions. I will now turn the call over to Ira Robbins for closing remarks.
Ira Robbins
Just want to once again thank everyone for joining today. I thank our employees for such an unbelievable performance this quarter, and we look forward to talking to you next quarter. Thank you, and have a nice day.
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