Valley National Bancorp (NASDAQ:VLY) Q4 2022 Earnings Conference Call January 26, 2023 11:00 AM ET
Company Participants
Travis Lan – Head, IR
Ira Robbins – CEO
Tom Iadanza – President
Mike Hagedorn – CFO
Conference Call Participants
Michael Perito – KBW
Steve Moss – Raymond James
Jon Arfstrom – RBC Capital Markets
Steven Alexopoulos – JPMorgan
Manan Gosalia – Morgan Stanley
Matthew Breese – Stephens
Frank Schiraldi – Piper Sandler
Travis Lan
Good morning, and welcome to Valley’s Fourth 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 the 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.
I have a few comments to make this morning, and then we have Tom to provide insight on the quarter’s loan and deposit results. Mike will then discuss the financial results in more detail.
In the fourth quarter of 2022, Valley reported net income of $178 million, earnings per share of $0.34, and an annualized ROA of 1.25%. Exclusive of non-core charges, adjusted net income, EPS, and ROA were $183 million, $0.35 and 1.29%, respectively.
In 2022, we generated net income of $569 million and adjusted net income of $650 million. This represents a significant increase from 2021, as a result of strong organic loan growth, the acquisition of Bank Leumi USA, and the benefit of higher interest rates that were realized for the majority of the year. I am extremely proud of Valley’s consistent financial performance throughout my tenure as CEO.
Our profitability metrics and earnings per share have increased steadily across a variety of economic and competitive backdrops. Despite the negative impact of interest rates on equity in 2022 and completing the largest acquisition in our company’s history, our focus on tangible book value resulted in year-over-year growth. In fact, our stated tangible book value has increased 36% since 2017. This compares to a 14% increase for our proxy peers over the same period and a 14% increase for Valley between 2012 and 2017. Our value creation, as measured by tangible book value plus the dividends we have paid has totaled 72% since 2017. This is over 1.5x our proxy peer median of 47%. We have generated real franchise value on both an absolute and relative basis.
Within the context of our sustained financial success, I want to focus this morning on what I see as our key accomplishments over the last five years and how the evolution of our company positions us for the years ahead.
From a balance sheet perspective, we have done a tremendous job diversifying our funding base. At the end of 2017, approximately 92% of our deposits were held in retail branches. By focusing on commercial relationships and both niche and digital deposit channels only 70% of our deposits are from the branch network today. From a geographic perspective, 78% of our total deposits were in New Jersey and New York branches in 2017. Today, that number is down to just 48% of total deposits.
Finally, despite a challenging few quarters, CDs and borrowings comprise just 23% of funding today versus 31% five years ago. Our focus on geographic diversity and a holistic approach to commercial relationships has benefited the asset side of our business as well.
In 2017, 78% of our loan portfolio was in New York and New Jersey. Currently, less than 60% of our loan portfolio is in these states. The ongoing addition of higher-yielding and increasingly adjustable loans has helped to better align our asset and liability betas. In our view, this increased balance should help to reduce the net interest margin volatility that we have experienced in prior cycles. Ultimately, our sustained credit excellence provides a stable foundation upon which the aforementioned transformation could occur. Our premier asset quality will continue to be the hallmark of our organization. This credit strength is a result of both stringent underwriting criteria and a focus on holistic relationships with wealthy and sophisticated commercial clients.
Heading into 2023, we have not identified any underlying trends, which would indicate meaningful stress on the loan portfolio. In any event, we believe that our experience during the height of the pandemic indicates the exceptional resilience of our borrower base.
In aggregate, the balance sheet transformation that we’ve undergone has been a direct result of our company’s strategic evolution and targeted M&A activity. We have focused on business and geographic diversification, premier customer service and establishing a sustainable organic growth engine.
Our hiring efforts and tactical initiatives have aligned with these outcomes, and we feel well-positioned to navigate the near-term operating environment headwinds that we face today.
Over the long-term, we will continue to focus on diversification and sustainable growth. We believe the progress made over the last five years will drive our continued success and ultimately benefit our associates, customers and external stakeholders.
With that, I will turn the call over to Tom and Mike to discuss the quarter’s growth and financial results.
Tom Iadanza
Thank you, Ira.
Slide 6 illustrates the quarter’s 15% annualized loan growth. While quarterly loan originations remain below peak levels, net growth continues to benefit from slower payoffs and more sustained activity on the residential and consumer side. Our commercial loan growth remains well diversified across asset classes and geographies. We continue to experience significant repeat business from our longstanding and sophisticated commercial borrowers.
Legacy Leumi customers have also benefited from the utilization of our more robust product set and balance sheet resources.
We anticipate that customer demand will wane somewhat in 2023 largely due to the impact of higher interest rates. Still, we are well-positioned from a competitive perspective to capture high-single-digit loan growth for the year. Our continued focus on attracting and retaining top talent and preserving service excellence positions us well despite a potentially more challenging backdrop.
On Slide 6, you can also see the 99 basis point increase in average new origination yields to 6.2% during the quarter. We remain successful in passing rate hikes through to our customers and anticipate further expansion in origination yields in the near-term. As a reminder, approximately 40% of our loan portfolio is fixed and another 20% re-prices over a period beyond 30 days. These buckets should provide a re-pricing tailwind that will continue to support increasing portfolio yields as rate hikes slow.
Before moving on to the deposit side, I wanted to provide some additional color on the quarter’s net charge-offs. Approximately $21 million of the quarter’s charge-offs were related to a single C&I loan. Both Legacy Valley and Leumi has participated in this larger syndicated credit. Our combined loan exposure has previously been classified as non-accrual, and the remaining exposure is fully reserved for as of 12/31/2022. This is a discrete credit event, and the vast majority of our portfolio continues to perform extremely well. And as Ira mentioned, our underlying credit trends remain very strong.
Turning to Slide 7. You can see that deposits grew at an annualized rate of approximately 21% during the quarter. While the quarter’s net growth is largely funded by brokered alternatives, we are pleased with our ability to effectively defend our traditional deposit base in this challenging environment.
While we saw non-interest deposit pressure across business lines, the largest single driver of the quarter’s reduction occurred in our technology deposit area. Despite the volatility in this business, which has been exacerbated by certain environmental challenges, we continue to add customers and accounts and anticipate above average growth over time. As a reminder, our technology deposits contribute approximately 5% of our total balances. As we indicated last quarter, we are experiencing competition for deposit sources across the franchise. Specifically, on the commercial side, the same wealthy and sophisticated customer base that supports our strong and consistent credit performance has been actively requesting competitive deposit rates. This has incrementally pressured our betas and deposit costs.
Our retail network has been responsive to our CD offerings, and both digital and canvas deposits saw solid growth during the quarter.
We are keenly aware of the price competition that we face to defend and grow our deposit balances. A variety of channels remain available to us, and we will do our best to take advantage of the most cost effective alternatives to support our continued 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 8 illustrates Valley’s recent quarterly net interest income and margin trends. Net interest income increased approximately $12 million or 3% from the linked quarter. This reflects continued loan growth and expanding loan yields, which were partially offset by more robust interest-bearing deposit growth and funding cost pressures.
While our fourth quarter fully tax-equivalent net interest margin declined 3 basis points to 3.57% from the third quarter of 2022, our PPP adjusted margin remains 47 basis points above the fourth quarter of 2021.
During the quarter, a 69 basis point expansion in our asset yield was more than offset by a 78 basis point increase in total funding costs. The asset yield increase was driven by both the re-pricing of our floating rate loans and a significant increase in the yields on newly originated loans. During the quarter, we funded loan growth and our non-interest-bearing deposit runoff primarily with higher cost time deposits.
As you saw on Slide 7, we calculate a cumulative year-to-date deposit beta of approximately 34%. As we noted last quarter, deposit competition has accelerated rapidly, and we have had to offer higher rates to attract funds to support our significant loan growth. While we continue to benefit from asset re-pricing, this is likely to be more than offset by higher funding costs in 2023.
Moving to Slide 9. We generated just under $53 million of non-interest income for the quarter as compared to $56.2 million in the third quarter. The reduction was primarily the result of lower swap income. This was partially offset by stronger revenues from our trust, wealth and insurance businesses. We anticipate that our 2023 fee income could grow at a mid to high single-digit pace using the fourth quarter annualized number as a starting point.
On Slide 10, you can see that our non-interest expenses were approximately $266 million for the quarter or approximately $256 million on an adjusted basis. Most expense lines were well controlled during the quarter, and the modest increase from the third quarter levels was partially the result of higher counterparty collateral fees related to certain hedging activities.
Continued revenue growth helped drive our efficiency ratio to 49.3% from 49.8% in the third quarter. We anticipate sustaining a sub-50% efficiency ratio in 2023 and believe there will be opportunities to drive efficiency lower from our current level.
Turning to Slide 11. You can see our asset quality trends for the last five quarters. Tom detailed the single loan relationship that drove the spike in net charge-offs for the quarter. We believe this was an isolated incident and are pleased with our aggregate 5 basis point net charge-offs to average loan rate for 2022.
As a result of continued improvement in our underlying credit metrics and stability in the economic forecast, our allowance for credit losses as a percent of total loans declined to 1.03% at December 31 from 1.10% at September 30. As a percentage of non-accrual loans, the allowance increased to 170% from 162% at September 30 and 150% one year ago.
On Slide 12, you can see the tangible book value increased approximately 3.4% for the quarter. This was the result of our strong earnings and a modest improvement in the OCI impact associated with our available-for-sale securities portfolio.
Tangible common equity to tangible assets improved slightly as a result of the same factors. Our regulatory capital ratios declined modestly during the quarter as a result of our strong loan growth. We anticipate that growth will moderate in 2023, resulting in higher regulatory capital levels a year from now.
We lay out additional 2023 guidance items on Slide 13. For simplicity, we based our forecast on 2022 full-year results, which only included three quarters of impact from Bank Leumi. Based on our current pipeline and expectations for a modest pullback in demand, we anticipate 2023 loan growth of 7% to 9%. This would result in net interest income growth of 16% to 18%. We anticipate approximately 10.5% to 12.5% growth in expenses using 2022 reported less merger charges as a starting point. This would imply a full-year efficiency ratio at or below the mid-49% level posted this quarter.
With that, I’ll turn the call back to the operator to begin Q&A. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions].
And our first question comes from the line of Michael Perito with KBW. Your line is open. Please go ahead.
Michael Perito
I wanted to start drilling down on the margin a little bit. Appreciate the guide and the outlook, and obviously a strong kind of end to the year. I’m just curious, though, I mean, I imagine you guys are assuming some more beta pressure on the funding side in the first half of the year. But as we think about the thought process around a relatively stable NIM for 2023 and asset yield improvements being offset by funding improvements, are you guys also factoring in continued outflow on the non-interest bearing side? Or how are you guys thinking about mix? Because obviously, Ira, your point is well taken about how much the business has structurally changed, but is there still some kind of normalization to be had just from the environment that we’re coming out of?
Ira Robbins
Yes. And I think it’s a good question, and I’ll turn some of the mechanics over to Mike. But I do want to re-highlight once again the macro change that we have in the funding base today and especially just out of that retail footprint. I know, historically, the Northeast has been high on an absolute basis as well as high on a beta basis. And to now have 48% of our deposits just in the New York, New Jersey region versus 78% before is dramatically going to change what the overall beta performance is. But Mike, you’ve got some more details, I believe.
Mike Hagedorn
Yes. I think the thing to really keep in mind is we saw $900 million roughly rotate out of non-interest bearing into interest-bearing between third and fourth quarter. And our expectation right now as we look into 2023 is that, that will continue. And hopefully, it bottoms out into the high 20s type range. The reason that we think that is, we bank a fairly sophisticated wealthy customer base. And obviously, we pass the line where they’re going to leave excess deposits in non-interest bearing. Also keep in mind that with that $900 million that rotated, we also had about $700 million of “excess” put that quotation marks deposits that we put on in the fourth quarter in anticipation of the Fed’s — two additional Fed actions increases in the first half of 2023. So we’re getting out ahead of that a little bit. And obviously, those have a higher beta attached to them.
Ira Robbins
And I do want to really just add to one of the things that we have done is continue to grow the commercial book as well. If you look at a year-over-year basis, we’ve seen business checking accounts increase 11%. And obviously, those have a lot of operating accounts associated with them. So there is — there really isn’t as much excess deposits in some of those. So while there is pressure, I do believe some of the changes and focuses that we’ve had in the strategic areas are really going to unload to the benefit throughout 2023.
Michael Perito
Great. So taking that kind of all into context, I mean it’s fair to say that at this point, when you guys are kind of guiding towards a stable-ish NIM, you could kind of conservatively assuming that some of the headwinds that occurred in the fourth quarter continue to occur in 2023.
Travis Lan
And Mike, I think when you think about — this is Travis, when you think about our 7% to 9% loan growth guide and when you kind of take the fourth quarter run rate on NII and you figure out where the guide that we’re giving you is for 2023, you’ll see kind of closer to 4% NII growth. So we’re anticipating some amount of margin compression.
And don’t forget too, the first quarter, obviously, we’ll have additional headwinds. Like the day count issue is going to cost us a couple of basis points there as well. So I don’t think we’re guiding necessarily to a stable margin. I would say that if you factor it all together, there’s a little bit of pressure that’s baked in here, and it’s because of the factors that we’ve talked about.
Michael Perito
Perfect. Okay. Great. Thanks, Travis. And then secondly, Ira, on the efficiency ratio and — I guess just kind of a philosophical question, but I mean, do you think sub-50 is kind of the new table stakes? I mean, as you guys try to manage your business from an investment standpoint and an ROI standpoint on — in terms of like incremental margins of new business customers and stuff? I mean, is this — I guess the question is, is this kind of just the way we should be thinking about your business kind of base case moving forward kind of irregardless of where rates are? Yes, I guess, I’ll just leave it there. Curious what your thoughts are.
Ira Robbins
I mean candidly, we should not be disappointed if we went above 50% on a consistent basis. I believe even our forecast for this year continues to invest in strategic initiates that are really going to continue to drive franchise value for us. I think we focus on expenses probably too much in certain areas. If you go back to when I took over as CEO, we have 3,325 employees and $29 billion of assets the first quarter thereafter.
Today, we’re sitting with $57 billion of assets, 3,826 employees. So we’ve added 501 employees over the five years and grown the bank $28 billion. There’s tremendous focus here on efficiencies, process and making sure that we’re getting the most out of every single dollar that we spend on the expense side.
I think — but to your point, we have to build franchise value. We are investing in our future in certain businesses that we think are going to continue to really grow and so outsized performance. So it is a balance for us. But managing the macro number, I think, is something that’s really important to everyone here within the organization.
Michael Perito
Helpful. Perfect. And then just sneak one last one, and then I’ll drop back. Just the trust and investment fees were stronger than I was looking for, at least in the quarter. And I was just curious if you could maybe remind us what the fee structures there look like and depending — like are they market-dependent? Or are they more fixed? So just any color there would be great just so we have an idea of what to expect once we make some assumptions for next year.
Ira Robbins
Yes. Mike, I think the fourth quarter pickup was partially related to Dudley, which has some seasonally back-loaded revenues. So that flows through that trust investment insurance line for their advisory fees.
I do think our forecast for 2023, we assume that there’s some continued improvement in that line in total because should the equity and debt markets normalize, I think we would look for some improvement in our market-based revenues. So I think that’s reasonable, but we don’t anticipate a significant — obviously, we’re guiding to mid to high single-digit growth on the fee side. So it’s not astronomical.
Michael Perito
Okay. And the Dudley, is that seasonal revenue something that would — you would expect to occur kind of on an annual basis towards the end of the year?
Ira Robbins
That’s correct.
Michael Perito
Okay. Great, guys. Thanks.
Ira Robbins
Thank you, Mike.
Operator
Thank you. And one moment for our next question. And our next question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.
Steve Moss
Good morning. Maybe just following up on Mike’s question here, just going a little further into the weeds. Curious, where is loan pricing these days?
Tom Iadanza
I think when you — it’s Tom, Steve. When you look at our yield in the fourth quarter, we increased that 100 basis points to 6.2%. On a monthly basis, we were just under 6.5% for the month of December. We continue to push our spreads up to counter the cost of our deposits. It really will differ by asset classes, more so than anything else. And as Ira mentioned earlier, we’re 60% adjustable. So we’ll continue to benefit by the rise in short-term rates on that 40% of our portfolio tied to SOFR prime and LIBOR.
Steve Moss
Okay. That’s helpful. And then just on the deposit side, you mentioned growth in, I think, tech and cannabis here. Just kind of curious if you can give a little more color on the trends there, maybe size it up. And how much is maybe non-interest bearing versus interest bearing?
Tom Iadanza
Yes. It’s a deposit-driven business for us, and we are focusing on the multistate operators. We now do business with 10 of them. We grow accounts in double-digits on a quarter-to-quarter basis. We are — I don’t have it exactly, but we’re primarily non-interest bearing on our deposit accounts.
Steve Moss
Okay. Great.
Travis Lan
And one thing — this is Travis, we lumped cannabis in with a couple of other niche deposit businesses. So for us, there’ll be cannabis, HOA, national deposits and digital. And those four businesses in aggregate added $900 million in deposits during the quarter, which helped to offset some of the other traditional kind of commercial deposit runoff. And so that goes back to the Ira’s conversation about the transformation of the bank. Absent those businesses, which are relatively new to Valley, we’d be looking at a different deposit picture.
Steve Moss
Okay. That’s helpful. And then last question for me here. Just curious, any color you can give on the construction loan that was moved to non-performing status type geography, things of that nature?
Tom Iadanza
Yes. Sure. It’s Tom again, Steve. It’s a single loan based in New York City. It’s a for-sale construction project of six units, three are contracted to be sold. We’re awaiting a TCO to close those sales. Upon the three sales, we will be paid in full.
Steve Moss
Okay. Appreciate the color. Thank you very much.
Operator
Thank you. And one moment for our next question. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open. Please go ahead.
Jon Arfstrom
A question for you on the CD growth during the quarter. Ira, you mentioned it used to be, I think 31% five years ago. Do you guys see any limits to that CD growth? Should we expect more of the same in the next quarter or two?
Mike Hagedorn
I think you will see slightly higher levels, assuming that we have loan growth that’s in excess of what our expectations are in the guidance. And then brokered CD market is very liquid for us, and we’ll use it as a tool to fund up the balance sheet and manage our loan-to-deposit ratio.
But as Travis commented earlier, what’s really important is the growth we’re seeing in these other niche sectors, along with the fact that we did do another CD promotion in the fourth quarter that raised just about $1 billion as well.
And while those are higher-cost deposits, as I said earlier, trying to link it back to my earlier comment, we expect those deposits will become cheaper, assuming that the Fed’s expected rate increases occur in the first half of 2023.
Ira Robbins
And Jon, I mean, I just can’t reiterate enough the different levers that we have today that we never historically had. When we talk about where we used to generate fund income, you always have to come out of the branches. It came out of the FHLB or came out of the brokered CD market. Those were the three choices we had.
Today, to even to support the 15% loan growth, we have a litany of additional levers today. And we have the flexibility that if we wanted to go to the retail CD market because we think that’s attractive, then that’s where a portion of it could come from. We have the ability to extend duration on certain things that we’ve never had before.
So the flexibility that we have today is astronomical compared to where we were before. And I do believe over a period of time on a relative basis that that’s going to help us manage our funding cost to a much better degree than what we’re historically able to. And when you look at the asset side of the balance sheet, which they should be looked at in conjunction in the floating rate assets that we’ve been able to put on, it really helps dictate the types of funding that we want to do across the entire organization. We don’t necessarily look at one side of the balance sheet just in isolation.
Jon Arfstrom
Yes. Yes, that makes sense. I mean it’s a unique period, Ira, right? It’s — we’re in a period of maximum deposit pricing pressure right now and I understand that.
Ira Robbins
And keep in mind, we had 60 — I think, as Mike was alluding to, we had a 60-plus basis point runoff early, right, because of the asset sensitivity. So there was an expectation here that we’re going to see some increase in the funding cost to come along with that. But like you said, Jon, it’s unique, it’s interesting right now. But there’s massive franchise value that we’re able to build by adding 50% loan growth and be able to find the funds to really support that.
Jon Arfstrom
Yes. Okay. Just one quick one on this topic, and then I have one other one. But you mentioned the tech vertical, the decline in deposits there. Was that a surprise? And what drove that? Was that simply making a decision on rate? Or was that something else in there? And what was the magnitude of that?
Mike Hagedorn
I won’t give you the magnitude of it, but I will tell you what caused it. What caused it was one customer in their portfolio that went IPO. And as a result of that, the bank that took the IPO received the deposits that we previously had. And that should come as no surprise. That is the lifecycle of what happens inside of that tech business. But overall, our tech balances from the time we started to now are basically flat when you’ve seen most everybody else in that space have declines.
Ira Robbins
Which I think is a good thing. I mean, if you think about what you’ve seen from an industry perspective, you’ve seen tech deposits come down because of cash burn and needs at the overall individual portfolio companies. This was a great event. If you think about it from a client perspective, that there with you IPO and really still even in this market generate some sizable returns from an investor base. And I think it demonstrates the differentiation of what our tech business looks like maybe versus what some of the others do from an industry perspective.
Jon Arfstrom
Yes. Okay. Good. And then maybe this is for you, Mike, I’m not sure. But buried in the release, there’s a comment about talking about reserves, a lower quantitative factor in the reserves. And I’m just curious what was behind that. Was that related to the charge-off? Or was that something else that drove that? And then just if you could give us some thoughts on the provision as well, that would be helpful. Thanks.
Mike Hagedorn
Yes. You’re really in the weeds on that one. But the quantitative — for the most part, the quantitative adjustment was not an adjustment based upon economic assumptions because we kept those the same. So that’s probably what you really want to get at. It’s more a function around nuances in various loan pools that we use; kind of management overlays is the way to think about it.
And then if that’s good, on the provision question, all else being equal, we definitely believe that we will be able to — all else being equal, we’ll be able to maintain our current allowance coverage ratio of 1.03%. But it’s also important to note that from the time that we did CECL to where we’re at now, we’re actually up 14 basis points. So we started CECL at 89 basis points. We’re at 103 today. And by our math, the peer group is roughly down 20 basis points. So while you’ve seen massive releases and reductions, we’ve been the exact opposite. And clearly, we could have done that if we chose to in the fourth quarter, and we chose not to because I think it’s prudent going into this economic environment to try to preserve our allowance or our provision as best we can.
Ira Robbins
And maybe just following up on that, I mean just to put it in simplest terms; we didn’t believe the reserve when many of our peers did. So it’s not unlikely that we’re not going to have to provide as much if the economy does go into recession compared to where the peers were.
Jon Arfstrom
But just it doesn’t feel like you guys are — you’re being cautious, but you’re not necessarily seeing the erosion that maybe we’re all fearing is coming later?
Ira Robbins
I think when we were being cautious for the last five to six quarters, where our economic conditions still had a much more significant weighting towards a recession than what everybody else did. I find it unfathomable that people would drain their reserve 20 basis points below CECL for the last — coming out of a pandemic and put it down to their P&L. It makes no sense to me. So now where I think that we’ve been more conservative, it’s absolutely more likely that we’re not going to have to build to the level that everybody else is. They should have never dropped down below CECL, from my individual perspective.
Jon Arfstrom
Okay. All right. Thanks for the help guys.
Operator
Thank you. And one moment for our next question. And our next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is open. Please go ahead.
Steven Alexopoulos
I wanted to start — so first, following up on the NII guide, the up 16% to 18% in 2023. Within that guidance, what is the deposit beta assumption by the end of 2023?
Mike Hagedorn
So our through-the-cycle all the way through the end of 2023 is a cumulative deposit beta of 50%.
Steven Alexopoulos
50%. Perfect. And does that — do you assume rate cuts in there, by the way?
Mike Hagedorn
Hold on a second.
Ira Robbins
Sorry, I just want to clarify, like, so when you look in just for a simplistic terms, because Mike said it absolutely right, the simplistic terms like we wanted to give you the metric that would be comparable to the way we present the deposit beta in our investor deck. So if you look at that and you roll that forward to the fourth quarter of 2023 based on our rate assumptions, that that cumulative deposit beta would be 50%.
Steven Alexopoulos
Yes. Got it. But do you assume rate cuts in that scenario to get there? What’s the underlying assumption there?
Mike Hagedorn
There is one rate cuts, but it’s very late in fourth quarter, so I don’t think it will be very impactful.
Steven Alexopoulos
Okay. Got it.
Mike Hagedorn
And that’s based off of — go ahead.
Steven Alexopoulos
No, no, no, go ahead.
Mike Hagedorn
Yes. It’s just based off of the current expectation for Fed action. So it’s not ours. It’s a market-based assumption.
Steven Alexopoulos
Got it. Okay. And then in terms of the funding strategy, in terms of funding the loan growth in 2023, I’m hearing somewhat mixed messages, right? You have these lower-cost niches, which helped this quarter. But you’re relying more on brokered CDs and other CDs. How do you see the mix evolving through 2023? And is it going to skew materially towards these higher costs? Or do you think you could keep about the same mix, but because of the growth you get out of the lower-cost verticals?
Mike Hagedorn
So in our comments, we made a comment around non-interest bearing rotation that could possibly reduce that number as a percent of total deposits down to something in the high 20s. So I think the answer to your question is yes. We expect a further rotation out of non-interest bearing. I think that we expect a continued growth in those niches based upon different aspects that happen with interest rates throughout the year that will help fuel the loan growth that we expect and fund that loan growth. But to the extent that those are shortfalls and we don’t have enough funding, I think brokered is probably the first place that we’ll go. And we’ve been doing that. So I think it’s just a continuation of demonstrating what we’ve been doing.
Steven Alexopoulos
Okay. So if we put this together and think about the NIM being under pressure, at this point from the 4Q NIM, do you think it’s sort of down fairly consistently quarter-over-quarter through the year? Is it more pronounced in the first half then you get to some level of stability in the second half?
Mike Hagedorn
Yes. So I think the pressure right now — nobody has a crystal ball. This is really hard to try to figure this out. I think the pressure will be more pronounced, there may be some lag, but I think it will be more pronounced in the first half of the year. And then you’ll see a plateauing, hopefully, if in fact, the future rate curve is actually realized. And then you’ll see a plateauing and then maybe later — as we said earlier, later in the fourth quarter, you get a slight reduction that won’t be meaningful because of the timing of that cut.
Steven Alexopoulos
We recognize how uncertain it is that’s why we’re asking so many questions.
Ira Robbins
Yes. As you think, Steve — but just keep in mind, if you’re looking at it on a relative basis, right, I think the day count is really going to impact where we are from 4Q going into 1Q. So I think our comments are acknowledging that when you think about the pressure we’re going to see just in the first quarter. So not all the pressure is really from a funding base but just really that day count piece as well.
Steven Alexopoulos
Awesome. Got it. And then just one separate question on credit. There’s obviously a lot of market concern on commercial real estate given the rise in cap rates. And I’m just curious, looking at the detail that you could provide on Slide 15 of the deck, one, do you share the markets concern over commercial real estate more broad? And maybe could you drill down if you are concerned? Is it a particular geography or product? I’d love to hear your commentary on that. Thank you.
Tom Iadanza
Yes. Steven, it’s Tom. We certainly share the concern of segments of the markets in real estate. We still continue to see robust growth of people moving into the southern markets, especially Florida. A lot of our real estate growth is coming down in that Florida market to support that migration of people down there. As you well know, we are a very diverse granular book of business. We don’t have a sizable concentration in any segment.
Looking at our real estate portfolio, our average — weighted average loan-to-value is 62%. Our debt service coverage is 1.75. So we do look at this very closely. Our cap rates, we’ve always stressed at higher cap rates than our competitors. Our average cap rate is around 6.42%, but you’ll go through different categories and asset classes. And as an example, when multifamily cap rates were being — were in the 3%, 4% range, we were stressing at 5.5%. That allows us to obtain what will consider lower leverage growth in our markets and keeps down the weighted average LTV and debt service coverage. And we underwrite to cash flow. We don’t underwrite to collateral value.
Operator
Thank you. And one moment for our next question. Our next question comes from the line of Manan Gosalia with Morgan Stanley. Your line is open. Please go ahead.
Manan Gosalia
Hi, good morning. Had a question on CDs. You noted that customers have been responsive to your CD offerings. Can you expand on what terms you’re putting on? I know you were selling them out in the past. So has there been any change in the duration mix given that we’re closer to the Fed holding rate steady or potentially cutting? And if you could also help us with how much of the CD portfolio will likely — is likely to re-price in the next couple of quarters?
Mike Hagedorn
Yes. This is Mike. So our retail CD promotions that basically started in the middle part of 2022 and continued into the fourth quarter have all been around 12 or 18-month duration. So we’re not going out long on the curve because obviously, related to the answers we gave to earlier questions around our expectation for rates is that we do expect rates to come down in the very end of 2023 and obviously spill over into 2024. We’re also trying to build a fairly flat maturity schedule so that we don’t have any one quarter where you have a lot coming due.
So generally 12 months to 18 months and we’ve been very fortuitous on those offerings so that while at the time they might have been a little bit on the high side — the high beta side, when you look back now where we are with rates after the 425 basis points of Fed increases, you now look at those as being fairly good funding for us, actually fairly cheap in some cases. Now the one we did in the fourth quarter was obviously on the more expensive side of that. And that’s public. So I can definitely tell you where that was at. That was at 4.5%, and it raised just under $1 billion.
Manan Gosalia
Got it. Very helpful. And then apologies if I missed this, but I think last quarter, it sounded like you were tightening lending standards a little bit. Can you talk about how you — what you’re doing this quarter? And how you feel about [indiscernible] going in?
Tom Iadanza
Yes. Yes. I’m sorry. We consistently look at our lending standards and our criteria. And we again tighten those standards early on in the pandemic. And to remind everyone, 70% of our business is to our existing customer base that have been through the ups and downs in the economic cycles. So we manage our the — we never compromise standards to grow. We maintain our standards. And as we talked about before, we typically use higher cap rates to evaluate our loan-to-values.
Operator
Thank you. And one moment for our next question. And our next question comes from the line of Matthew Breese with Stephens. Your line is open. Please go ahead.
Matthew Breese
A couple of quick ones. First, what was the accretable yield for the quarter? And what’s the outlook for accretable yield in 2023?
Travis Lan
Yes. So Matt, we said the third quarter was $8.5 million on the loan side. That ticked up about $3 million this quarter. And we anticipate — I think we said that $8 million to $10 million is a good run rate on a quarterly basis, and that remains kind of our guidance.
Matthew Breese
Okay. And then what is — just give us some outlook for the securities portfolio in 2023 and whether or not you see much of any growth. Or should it match kind of overall balance sheet composition stay the same?
Mike Hagedorn
Yes. So as a reminder, it represents a little less than 10% of our earning assets. So it’s not a material driver of income. Nevertheless, that portfolio is very high quality. And remember, the majority of that is held in held — or held for maturity. So 75%-ish is out there, 25% is only held in the AFS portfolio. I don’t really expect a lot of changes. I guess the biggest change you’ve seen probably this is an industry change has been that any kind of payouts have ground to a halt. And so you have very little coming due that way. What we will add is in the highest-quality ranges and probably in the lowest risk-weighted asset ranges. And we’ll keep pace, obviously. We have — as a reminder, we have a lot of public fund money in this bank as well, and government banking as a niche for us is an important niche. So we do have to have collateral for that business. So we will continue to maintain at a minimum what we have.
Matthew Breese
Got it. Okay. And then, Ira just would love your thoughts in 2023 around M&A. Previously, the message was, look, we got a ton of stuff to do organically. There’s plenty of opportunity on that front. Felt like M&A would have to be incredibly spectacular for you to do it, but my read was probably not. Just wanted some updated thoughts there.
Ira Robbins
I would probably say you could copy and paste back into the comments for this quarter as well. I think we’re very fortunate that we are likely an acquirer of choice, a partner of choice for many people that are out there today, which is wonderful, I think, based on the experience and successes that we’ve had. Maximizing and focusing on tangible book value is something that I’ve always talked about from day one when I became CEO, and that really continues.
And today, when you look at the economic environment, I think it’s very difficult to do an M&A transaction that isn’t necessarily just a resource strain, but really drain the tangible book value as well, and that’s not something that I’m comfortable with doing. Outside of that, I do believe that we have such tremendous opportunities on an organic basis that we should continue to focus on those resources. We still need to continue to convert and get some of the synergies associated with the Bank Leumi deal, and there’s tremendous opportunities with that. So like I said, probably copy and paste, Matt.
Matthew Breese
Understood. Lastly, just thank you for adding the expense guide for 2023. I appreciate that addition to guidance. That’s all I had. Thank you.
Ira Robbins
Anything for you.
Operator
Thank you. And one moment for our next question. And our next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is open. Please go ahead.
Frank Schiraldi
Good, good. Thanks. Just on the niche businesses, I think, Tom, you talked about sort of the way you approach that, you lump in the cannabis, the HOA, the national deposits. And then, you mentioned a growth rate in the quarter. Just wondering, as we think about those businesses maybe ramping up, I’d assume that we could see greater contribution on a quarterly basis going forward. And then just also curious, is that largely low to no cost deposits within that umbrella?
Tom Iadanza
Yes. When you look at the individual components, certainly, we’ve been ramping up the HOA, and that’s largely non-interest bearing deposits. We talked about the national deposits business. That’s primarily an interest bearing program and process there. The tech will have a large portion of non-interest bearing, but we’ll have interest bearing mix in there also. And the plan on tech is really to broaden the users and have reliance in addition to domestic VCs will go along with the Israeli VCs that we’re doing business with today. There are other — cannabis again will be multi-state operators, primarily a non-interest bearing program. So yes, the plan is to ramp up our specialty or niche businesses, focusing on the deposit side of it.
Frank Schiraldi
And then on the technology deposits, you mentioned there’s been some volatility there. But overall, I guess it’s sort of flattish with where you acquired the business in terms of balances, it sounds like. And so do you — can you give any — put any parameters around how volatile it has been? I think you said 5% deposits right now and where that’s gotten to over the last couple of quarters? And do you see it just continuing to be volatile here in the short-term?
Mike Hagedorn
That’s a great question. Other than the IPO event, the very discrete event that we talked about, it’s not actually been that volatile for us. We know from talking and listening to industry folks that in other portfolios, it can be incredibly volatile, but ours has not been. Now granted, we’ve only had three-fourths of a year of experience with it. So you got to take that for what it’s worth.
Frank Schiraldi
Okay. And do you lump in there — is that like a Bank Leumi umbrella? I mean, do you lump the private banking that you got from that acquisition in with those technology deposits? Or how has that growth rate been for you guys?
Mike Hagedorn
No. The private banking both international and domestic is not included in technology.
Frank Schiraldi
Okay. And have you seen a contraction in that business? Or do you have any — the size — the relative size of that business at this point?
Mike Hagedorn
Yes. So I think we’ve said this before, the international business is from a deposit perspective, is larger than the domestic business. And the domestic business is going to grow. This is one of the synergies that we identified as part of the Leumi acquisition. We’ll grow because of the private banking business that we have on our side, the legacy side of the business, I should say.
The international private banking business has had some reduction in deposits. The good news is, remember, that’s both a deposit and an AUM business. And for the most part, their value add has been structured notes. And obviously, the market has not been conducive to that. So we’ve been able to retain those clients by moving a vast majority of them into treasury securities. And then in a different interest rate environment, I would expect some of those as they mature to come back on balance sheet.
Tom Iadanza
And just one thing to add. In the last six months, we’ve had over $250 million of referrals from the Legacy Valley customers into the domestic private bank for assets to manage. And it’s a constant flow of consumer loan business that comes out of that private bank portfolio into Valley.
Frank Schiraldi
Got it. Okay. And then just lastly, sorry if I missed it, but could you give any more color on the participation? I thought I heard you mention that you weren’t to lead, and I think you mentioned Leumi in there as well. But just wanted to make sure I heard right with the partial charge-off.
Tom Iadanza
Yes, certainly. So this is a customer that began banking with us in 2006, so almost 17 years. We began with a $7.5 million share and a total $25 million credit facility or 30%. Company performed well over the years. The credit facility grew to $160 million since that 2006 inception. We always manage our exposures, and we increased our exposure from 7.5% to 19% but reduced our overall from 30% to 12%. The company sells cardboard boxes for shipping produce. Their customers’ customer had a concentration to Russian entities. The embargo has put a very big strain on your customers’ ability to pay them. We saw that early on, took early action. We put this on non-accrual early in 2022. And we reserved the 100% of the loan during 2022. This represents about a 50% charge-off of our outstanding loans. Isolated, we do constant reviews of all of our receivable-backed loans, received as any stretching of payments on those. And as Ira mentioned earlier, our credit metrics remain strong.
Mike Hagedorn
It’s probably important to note that Leumi had a piece of this as well. So the combined number is a little different because they had a piece.
Frank Schiraldi
Okay. So I’m sorry, Leumi, the American Bank, had a piece? And so you’re saying it’s larger your total –?
Mike Hagedorn
Correct.
Frank Schiraldi
Okay.
Tom Iadanza
Yes. I was referring to the management of the Valley total over those 16, 17 years. When we acquired Leumi, they were also a participant in the bank group. The charge-offs and the reserve represents both bank shares.
Operator
Thank you. And I’m showing no further questions. And I would like to turn the conference back over to CEO, Ira Robbins, for any further remarks.
Ira Robbins
Well, I want to thank everyone for taking the time and the interest in Valley today, and we look forward to showing you our performance for 2023.
Operator
This concludes today’s conference. Thank you for participating. You may now disconnect.
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