Valley National Bancorp
NASDAQ:VLY
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Valley National Bancorp
Earnings Call Analysis
Q3-2024 Analysis
Valley National Bancorp
In the third quarter of 2024, Valley National Bancorp reported significant earnings growth, with net income of approximately $98 million and diluted earnings per share (EPS) of $0.18. This marks an increase from the previous quarter, where net income was $70 million and EPS was $0.13. This improvement is attributed to expansive revenue growth alongside effective expense management. The company's focus on maintaining a healthy balance sheet is evident as pre-provision revenue rebounded, which further supports financial growth.
The provision for loan losses, although higher than guidance due to growth in Commercial and Industrial (C&I) loans and preparatory reserves for potential impacts from Hurricane Helene, still reflects a positive trajectory. The bank anticipates credit performance normalization in 2025, with the allowance coverage ratio projected to expand to approximately 1.25% by the end of 2025 from the current 1.14%. There is optimism surrounding the stabilization of criticized and classified assets in the portfolio.
Valley continues to strategically manage their Commercial Real Estate (CRE) portfolio. They expect to sell approximately $800 million of performing CRE loans at an attractive 1% discount, which is anticipated to close in the fourth quarter. This sale will aid in reducing the CRE concentration ratio, now projected to be approximately 375% by the end of 2025, down from a previous goal of 400%. Such transactions position Valley to better manage capital ratios, with an estimated benefit of 16 to 20 basis points in capital ratios as a result of this sale.
During the quarter, Valley raised approximately $300 million in deposits, driven by growth in noninterest-bearing accounts. The bank has successfully reduced customer deposit costs by 22 basis points since the last Federal Reserve rate cut, contributing to improved net interest income. Direct customer balances have also shown positive trends, indicating successful customer acquisition strategies. The bank aims to sustain growth in its deposit base, targeting a loan-to-deposit ratio below 100% by the end of 2025, while ultimately aiming for a ratio in the low 90s over the next few years.
Looking forward, management provided guidance indicating a forecast for net interest income (NII) growth in the mid-to-high single-digit range for 2025. This outlook is underpinned by the expected growth in C&I loans and the anticipated normalization of credit costs. They foresee a gradual expansion of net interest margin (NIM) as loan dynamics evolve and interest rates stabilize. This growth will hinge on the ability to outperform deposit betas, especially following rate cuts from the Federal Reserve.
The bank's strategic initiatives, combined with its strong credit metrics and effective management of operating expenses—resulting in a reduction of approximately $10 million in core operating expenses compared to the previous year—have positioned Valley National Bancorp favorably in the current banking landscape. As the economic environment normalizes, the bank is well-prepared to capitalize on growth opportunities while maintaining sound financial health.
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Good day, and thank you for standing by. Welcome to the Third Quarter 2024 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 speaker today, Travis Lan. Please go ahead.
Good morning, and welcome to Valley's Third 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.
Thank you, Travis. During the third quarter of 2024, Valley reported net income of approximately $98 million and diluted earnings per share of $0.18. This compares to net income and EPS of $70 million and $0.13 a quarter ago. The significant improvement in earnings was broad based and primarily the result of top line revenue expansion and continued expense management. Our provision for loan losses declined during the quarter, but exceeded our third quarter guidance primarily as a result of the significant growth in C&I loans and unfunded C&I commitments as well as the discrete reserve for the potential impacts of Hurricane Helene. Exclusive of these variables, the third quarter provision would have been in line with our prior guidance. I'm extremely pleased with the financial progress made during the quarter. The continued improvement in our balance sheet metrics has been achieved in conjunction with a solid rebound in preprovision revenue. Tom and Mike will detail the key contributing factors to this improvement but as we work through our 2025 financial plans, we anticipate further profitability improvement, reflecting an anticipated net interest income tailwind and the normalization of credit costs.
Slide 4 illustrates the significant progress that we continue to make towards our balance sheet goals. Our diligent management of new commercial real estate originations and renewals has contributed meaningfully to the 53 percentage point year-to-date reduction in our stated CRE concentration ratio at September 30. This progress has been supplemented by organic capital growth and our recent preferred stock issuance. Throughout the year, we have patiently monitored the market for a potential sale of CRE loans to further accelerate our progress relative to CRE concentration, capital and funding flexibility. I'm pleased to report that in the fourth quarter, we expect to sell upwards of $800 million of performing commercial real estate loans to a single investor at an extremely attractive 1% discount. The characteristics of the pool that we expect to sell are consistent with our broader portfolio in many ways. The underwriting and credit metrics are very similar, though these loans tend to be somewhat larger.
From an asset class perspective, there is a tilt towards more industrial and less office, as you may expect, though the pool is geographically diverse, consistent with our broader portfolio. This transaction is expected to close in the fourth quarter and reflects the underlying credit strength of our portfolio and our continued ability to enhance our balance sheet in shareholder-friendly ways. As I previously stated, commercial real estate is a terrific asset class and one that has provided excellent risk-adjusted returns for our company. While the transactional elements of our portfolio continue to wind down, we remain focused on supporting the clients that have more holistic banking relationships with Valley. There are opportunities to further penetrate these banking relationships and expand this client base without applying undue pressure to our balance sheet.
While the transfer of loans to held for sale helped to improve our period-end loan-to-deposit ratio, we anticipate using a significant portion of loan sale proceeds to repay maturing broker deposits in the fourth quarter of 2024. Regulatory capital ratios are expected to benefit by 16 to 20 basis points as a result of the sale, all else equal. And this transaction positions us to achieve our near-term CET1 goal of approximately 9.8% by the end of 2024. The ongoing execution of our strategic initiatives positions us to exceed most of our previously announced intermediate term balance sheet goals sooner than anticipated. To this end, we now expect that our CRE concentration ratio will be approximately 375% by the end of 2025 as compared to our prior intermediate-term goal of 400%.
Similarly, and largely as a result of our recent and anticipated future C&I growth, we now expect that our allowance coverage ratio will be approximately 1.25% by the end of 2025 relative to elative our current 1.14% coverage level, this implies a much slower pace of reserve build over the next 5 quarters and particularly throughout the course of 2025.
Slide 6 highlights our expectations for the fourth quarter of 2024. We anticipate that continued growth in our C&I and consumer portfolios will contribute to low single-digit annualized loan growth during the quarter. As a result of the anticipated CRE loan sale, we expect net interest income will decline somewhat in the fourth quarter. However, exclusive of the sale net interest income would likely grow modestly as our recent experience in reducing customer deposit costs following the September Fed action offsets the impact of lower front-end rates on our floating rate loans. Our expectations for noninterest income and noninterest expense are generally unchanged from the prior quarter's guidance.
From a credit perspective, the general improvement in the commercial real estate backdrop has helped to isolate the few lingering issues that may result in credit losses. Our ongoing analysis of these situations and the potential impact of Hurricane Helene and Milton could result in higher net charge-offs during the fourth quarter. These factors, combined with our continued C&I growth expectations are likely to result in a year-end allowance coverage ratio of approximately 1.20%. With all of this in mind, we expect to be well positioned for credit performance normalization in 2025.
Finally, I want to offer our team's thoughts to the Valley customers, employees and communities that have been impacted by the recent hurricanes in our Southeast markets. Unfortunately, we have all been through many of these weather events, and we know the tool that can take upon individuals and businesses. Valley is always there for those in need, and we have proactively offered our support to the communities that have been in the path of these storms. With that, I would turn the call over to Tom and Mike to discuss the quarter's financial highlights and results. After Mike concludes his remarks, Tom, Mike, myself and Mark Saeger, our Chief Credit Officer, will be available for your questions.
Thank you, Ira. Slide 9 illustrates the quarter's deposit trends. Total deposits increased approximately $300 million compared to the second quarter, largely due to higher levels of direct customer deposits. We are very pleased that a portion of this growth was the result of expansion in noninterest deposit balances. During the quarter, we added roughly 25,000 new deposit accounts with nearly 11,000 of these being on the noninterest-bearing side. While there was very little impact on the quarter's results, we have now reduced customer deposit costs by approximately 22 basis points since the September Fed rate cut. This implies a 44% total deposit beta, which is somewhat better than our modeling. Importantly, direct customer balances have continued to trend higher during October.
The next slide provides more detail on the composition of our deposit portfolio by delivery channel and business line. Growth trends in our International and Technology segment and other commercial verticals were strong during the quarter. Slide 11 illustrates the components of the quarter's lending activity. We continue to execute on our strategic initiative to enhance C&I and deemphasize multifamily and investor CRE loans. C&I growth remained in the mid-teens on an annualized basis for the second consecutive quarter and remains broad-based across our geographies and business lines.
On an organic basis, multifamily and investor CRE declined by $700 million during the quarter as we experienced an uptick in prepayment activity as interest rates have fallen. Ira provided details on the additional transfer of over $800 million of high-quality CRE loans to held for sale during the quarter. We are extremely pleased with the pricing on this transaction, which will help to accelerate our strategic initiatives. While new origination yields have declined in line with order interest rates, our portfolio yield continues to climb. As a reminder, 40% of our loan portfolio floats based on shorter-term rate indices, this makes us modestly asset sensitive from a structural perspective, but incremental origination activity and the opportunity to outperform our deposit betas should offset some of this headwind.
Slide 12 provides additional detail on the composition of our commercial real estate portfolio by property type and geography as adjusted for the transfer of loans to held for sale in the third quarter. In general, the commercial real estate markets and borrower performance across our footprint remain healthy. I previously mentioned that a few select loans will likely impact our net charge-off experience in the fourth quarter, these are identified and isolated situations, and we are beginning to see the underpinnings of stability in terms of criticized and classified migration. With that, I will turn the call over to Mike Hagedorn to provide additional insight into the quarter's financials.
Thank you, Tom. Staying on the CRE topic for a moment, Slide 15 illustrates the contractual maturities of our commercial real estate portfolio. We've included the LTV, DSCR and rate by maturity bucket for your benefit. This maturity schedule continues to illustrate the minimal near-term repricing risk that exists in our portfolio. Slide 16 highlights the continued expansion in both net interest income and net interest margin during the third quarter. Interest income is now generally in line with the level a year ago. As Ira mentioned, we expect to close on the sale of over $800 million of commercial real estate loans during the quarter. We anticipate that a significant portion of these proceeds will pay off maturing broker deposits. Consequently, we expect the sale to weigh on net interest income by approximately $5 million during the fourth quarter, all else equal.
To reiterate, we were very quick to lower deposit costs across the franchise in the wake of the September Fed action. In total, we reduced deposit costs by roughly 22 basis points on our $40-plus billion of customer deposits. As customer deposits have continued to grow, we remain confident in our ability to quickly follow additional Fed rate cuts, which may occur.
Turning to the next slide, you can see the detail on our noninterest income. Adjusted noninterest income for the quarter excludes both a $7 million benefit for litigation settlement and a $6 million negative mark-to-market adjustment on the transfer of loans to held for sale. Exclusive of these items, adjusted noninterest income increased significantly as compared to the second quarter of 2024. This was primarily due to increases in tax credit advisory, service charges on deposits and other income. Deposit service charges benefited from fees related to updated pricing on treasury services capabilities, which started in mid-August, and we expect additional tailwinds in this area on a go-forward basis.
On the following slide, you can see that our noninterest expenses were approximately $270 million for the quarter. Exclusive of the amortization of tax credit investments, adjusted noninterest expenses were approximately $264 million. This represents a decrease from the second quarter of 2024 and general stability relative to the third quarter of 2023. Expenses benefited from a decrease in technology-related and compensation costs. Our ability to control operating expenses without sacrificing necessary investment opportunities remains a hallmark of our organization. We continue to model modest expense growth to support our aspirations but will work to offset these investments as we have done recently.
On Slide 19, you can see the continued and notable stability in our nonaccrual loans. Roughly 85% of the sequential increase in past due loans was related to a pair of pre-loans. Both loans are well secured, and we anticipate near-term resolution without loss of principal. The next slide illustrates the trend in allowance coverage charge-offs and provision. Our allowance coverage ratio increased 8 basis points for the second consecutive quarter, partially driven by substantial growth in C&I loans and unfunded C&I commitments as well as the allowance set aside for Hurricane Helene. We expect that allowance coverage will expand towards 1.2% in the fourth quarter primarily as a result of these same factors. From a longer-term perspective, we believe that credit costs will normalize meaningfully in 2025 and result in a much slower pace of reserve build.
The next slide illustrates the sequential increase in our tangible book value and capital ratios. Tangible book value benefited from a reduction in the OCI impact associated with our available for sale portfolio during the quarter. Our Tier 1 and total risk-based capital ratios increased as a result of our Series C preferred stock issuance during the third quarter. As Ira mentioned, the CRE sale planned for November will likely add to an additional 16 to 20 basis points to each risk-based capital ratio. With that, I'll turn the call back to the operator to begin Q&A. Thank you.
[Operator Instructions] Our first question comes from Jon Arfstrom with RBC Capital Markets.
This all looks good. But maybe Mike or Ira on the last comment, you were talking about provision and reserves and maybe more normalizing in 2025. What does that really mean and look like? Is that a return to provision levels that are more like pre-second quarter, is that what you're signaling to us?
Yes, I don't have a second quarter in front of me. So I'm not quite sure, but I think we spent a lot of time during the course of the year looking at our portfolio and really assessing what type of credits we have in there today. And as we really begin to see the environment normalize a little bit, we feel really strong and confident about what those numbers begin to look like. I think as we guided towards what 2025 is going to look like, I think we had some internal thoughts regarding what those net charge-off numbers are going to be, which are much lower than what you're seeing this quarter. And then there's only an incremental build really needed to get to that $125 million. So much more in line, I think, with what you would have historically seen at Valley, which really creates optimism within the organization as we see the tailwind on the margin and tailwind regarding what the credit is going to look like as well.
Okay. So the reserve building is going forward more about the mix of loans and not necessarily about any need to build for the existing portfolio. Is that fair?
And I'll let Mark maybe address that a little bit. But I think as we have emphasized the shift in building some C&I loans within the organization, which I remind you was a multiyear sort of strategic initiative that we put forth a few years ago. The growth has been tremendous, which is a real positive. So that should help as we think about the recalibration of what the balance sheet looks like. That said, they do come on at a higher reserve level than what the CRE loans look like. So as that mix shifts, there's going to mandatorily be a requirement to increase the reserve purely on what that composition of loan looks like.
Fair enough.
Go ahead. Yes. No, just reiterating what Ira was mentioning there. There's a substantial premium to C&I from a loss perspective to CRE. And as we continue that shift successfully, we will see a slight build along those lines, but really just related to the...
John, are you still there?
Yes. I'm all set, guys.
Okay. Thank Thanks, John.
Our next question comes from Chris McGratty with KBW.
Great. I may have missed this. But Ira, beyond the adjustments you're making to your targets for 2025. Do you think this is all the adjustments that we'll likely see, meaning the CRE ratio, reserve capital levels, anything else that might be on the horizon beyond this? Or is this kind of where you're thinking is more appropriate with lower rates?
I think with everything we sort of understand now how we're thinking about the balance sheet, how we're thinking about some of the strategic initiatives that we're putting forth. I think those intermediate targets are something that we're very, very comfortable with. And we feel very confident that we'll be able to achieve them within the time frame outlined.
Perfect. And then maybe overall, I guess, liquidity for assets? I mean the 1% mark is really, really great execution. It looks like. Any comments on how liquidity may have changed for the market's appetite for assets given rates moving down?
Yes. Look, I think we've seen -- Chris, this is Travis we've seen pretty consistent demand from the private equity side in terms of the core assets that we have, and we've had those discussions as the year has gone on. I think earlier in the year, given the backdrop at that point in time, there was just a very wide gap between what we view to be the value of our portfolio versus the way private equity investor may look at it. And as time has gone on, that gap has obviously narrowed to a point where I think a 1% discount, we're all thrilled with the execution there and that would include nothing on the credit side as well. It's all rate driven. So I think there's been demand out there. I think we're happy to be able to execute something like this. But it's not just Valley, right? You've seen other banking organizations execute not only loan sales, but also arrangements going forward to help offload bank assets into the private equity markets, and that's likely to continue.
Our next question comes from Manan Gosalia with Morgan Stanley.
It's good to hear that the customer deposit costs are going down that 22 basis point reduction that you pointed out. Can you give us some more color on what you're baking in in your 4Q NII guide in terms of total deposit costs and especially going into 2025 as well? Because it seems like your all-in deposit beta can be a little bit higher as you pay down those broker deposits. So any color on that near-term trajectory would be great.
Manan, I think -- this is Travis. I think that's pretty insightful and we generally agree with you. So we still bake into the model relative to nonmaterial deposits of 50% beta on interest-bearing and when you factor in noninterest-bearing, that goes down to 35%. We did outperform that with the first Fed rate cut. We think there are additional opportunities to outperform that going forward, not only impacting the fourth quarter, but into 2025 as well and so as we think about NII in 2025, our base case, we're still working through the plans, but the base case would kind of be mid-to-high single-digit NII growth in 2025 and to the degree we can continue to outperform from a beta perspective, you would move to the higher end of that range.
Got it. And on NIB deposits, those were roughly flat Q-on-Q. You noted you've increase the number of accounts that you've put on as well. Do you think you have the trough there? And anything you've noticed in the underlying data that would point to more acceleration going forward?
So I think while they were stable, there was a slight uptick in noninterest-bearing deposits, which was the first time we've seen that since the middle of 2022. So if you look at this 2.5 years later or give or take, I think it's a very positive sign for us. On an average basis, NIB was from a daily perspective, a little bit higher, I think, than where it had been in the prior quarters. And we continue to see that tailwind here quarter-to-date in October. So I think there is optimism there. We do anticipate that 22% of total deposits will be the bottom of NIB. We've been there 2 quarters in a row and anticipate that it will continue to increase relative to the total.
Great. And if I can just clarify the 22 basis points reduction in deposit costs since the Fed rate cut. Those are total deposit costs, including NIB.
Yes, that's correct. So the actual data on the interest-bearing side was higher.
And our next question comes from Matthew Breese with Stephens.
I appreciate your insights on deposit betas. Just stepping back a little bit, we've kind of defined the balance sheet as they had asset sensitive. And then we have an NII guide for 2025 early, albeit in the mid-to-high single-digit range. Given we're in a rate-cutting environment, could you just discuss a little bit the NIM outlook and how that kind of fits with the assets into the balance sheet? It feels like the NIM should expand from here, but just wanted to hear you clarify a little bit.
Yes, I think that's generally right. I mean we are structurally asset-sensitive, but that assumes the lower beta in the model. And again, our ability to outperform after the first cut and should that continue would provide additional upside. Regardless of that, I mean, we do anticipate that the margin will continue to expand -- we are, as we've said in the past, generally neutral to the front end of the curve, more sensitive to the longer end and that fixed rate asset repricing opportunity will continue to exist as 20 -- as we get into 2025 and move through the year. And on that front, I mean, the shape of the curve has definitely improved since we ran our preliminary numbers at September 30. And the 5- and 10-year points are 40 to 50 basis points higher today than they would have been at that point in time which supports that as well. Similar to what I said on the beta side, sustainability or improvement in those longer-term rates, I think, would definitely support us getting to the higher end of that range I laid out.
And Matt, I just want to add, I think one piece when you look at an asset sensitivity balance sheet, you're not looking at the rate of change as to what those assets are, right? So when you think about the longer end commercial real estate that we have, even though those loans are actually repricing, they're not repricing down based on where they were originally struck at. So those may be asset-sensitive assets that are being shown, but they're going to reprice higher based on where those repricing rates are today versus where they were those loans were originated. So there's a lot of tailwind coming on those longer commercial deals day 1 and other on or dated loans as well.
Got it. Okay. The other one I had was just on the fee income guide for the fourth quarter, it suggests kind of a flattish move from the third quarter. And the reason it stands out is usually the fourth quarter is strong for you given the tax advisory business. So I was hoping you could talk a little bit about some of the moving parts and where you expect reductions in fee income to kind of get to the guide.
I think you're going to get tailwinds on the tax credit side and also on deposit service charges. I think it gets a little bit offset or mitigated by some of the other income stuff that's bucketed in a single line there can be lumpiness there relative to recoveries or other things that move around. So generally that. Look, I think longer term, there's absolute tailwinds behind us to grow fee income. But I think there were some positive events that benefited the third quarter and just want to make sure that we're appropriately conservative heading into the fourth.
And keep in mind that on the fee income side, as we've said before, the growth for the future is really going to be driven around our treasury management offering that we've talked about before. And then also with lower interest rates, we would expect that gain on sale would pick up as the resi mortgage business increases as well.
Okay. Last one for me. It just feels like you're pretty well set up for operating leverage here over the next 12 to 18 months? When do you think you can get back above a 1% ROA on a sustainable basis?
Yes. I think when you normalize credit and look at where the margin is going, I don't think it's that long.
And our next question comes from Ben Gerlinger with Citi.
So on Page 4, I know these are kind of longer-term targets, and you're not going to give me a detailed or finite answer, -- but when you say loan-to-deposit ratio below 100% by the end of '25, I mean when you just kind of think hypothetical like '26 or '27 or whatever down the road. Are we talking closer to like [ 90 or 95 ] or just what would be like the optimal range. I guess that you're not going to press the gas to get there, but like where would you want this to be 3 years from now?
Yes. Look, I think the low 90s probably makes sense on where we think we'll end up being 3-ish years or so from now. It doesn't have to be a linear path as to probably get there either. We have a lot of initiatives internally as to how we think about deposit growth across the organization. We've been pleased with the new account generation that we've seen here at Valley. And we anticipate continued strong deposit growth that will help get us to those numbers that we've identified. But I think sort of where you're describing in the low 90s probably make sense a few years out.
Got you. That's helpful. And then when you think about behavior response from clients, it seems like across the industry with limited loan growth it's pretty easy to price on deposits. I mean the first 100 basis points is probably the trimming aspects, but you kind of -- have people pushed back on anything? Or have you seen a mix shift or any kind of frustration from the clients? Or is it just kind of willingly taking the compression given that we're not -- we don't have a huge amount of demand for loans, you don't really necessarily need to keep every deposit.
It's funny. I think the people that are more sensitive to deposits are the analysts and our internal bankers as to what they think the client reaction is going to end up being, I think we were very aggressive as to how we thought about deposit repricing -- that said, we've seen deposits increase, even though we've been reducing balances. That's on what you would define as direct deposit accounts from a digital perspective as well as sort of longer-term relationships. So across the board, we've seen real pricing ability here. So we are definitely optimistic about what the future of that looks like. And once again, deposits balances were up even though we were aggressive in reducing rates.
Our next question comes from Jared Shaw with Barclays.
Maybe first on the loan sales, do you have the yield on the blended yield on that portfolio?
Yes, it's slightly above 7%.
Okay. And then when I look at the gain on sale or the gain loss on sale of loans, what's the difference between the loss you called out on this portfolio and what's in the income statement were there other loans sold as well -- and what should we expect for like sort of the pace of loan sales going forward beyond this?
Yes. So that line in the income statement also includes our traditional gain on resi mortgage sale. That was about $2 million this quarter, which was up somewhat from the prior quarter.
Okay. And then in terms of the ability to or the desire to sell more of the CREs and like in a pool like that, what's the appetite for additional sales?
Look, I think we've been pretty consistent on this front that we didn't feel like we had a gun to our head from a CRE perspective or any other action that we've taken this year. So we were patient and methodical and allowed it to play out. And we reached a point where I think the discount was extremely attractive for us. And all it does is help accelerate kind of the strategic progress we've been discussing on the balance sheet side. So I don't anticipate that there will be more presales candidly, but we always monitor the environment for all of these opportunities and are willing to do what's best for the shareholders at a given point in time.
Okay. Great. And then just finally for me on the expenses. You've had good success as the broader expense base has been able to come down. Is there anything that when we look at technology and equipment expense, anything that's sort of unique there? Or at what point do you need to start, I guess, maybe reinvesting in technology or where we could see that number start to increase?
I think we're always reinvesting in what technology and other areas to what our future looks like. We went through a pretty significant core transformation about it a year ago. And as we mentioned at that time, sometimes it does take a while to sort of bleed through what some of those expense saves are going to look like. It's not just the immediate expense save with a third-party vendor, but what your internal processes look like and how you to arrange how you service a client. So there's always opportunities to reassess what that looks like. I think if you go back and look at where third quarter expenses were a year ago, I think we're almost flat really on an operating basis. And when you add in the fact that FDIC insurance is up $7 million, if you then layer in the fact that we have a CRT trade that we didn't have before that added a few million dollars as well. We've actively on an operating basis, contracted $10 million in core operating expenses just in a year, and we continue to believe that we have opportunity to further improve the efficiency within this organization.
Our next question comes from Anthony Elian with JPMorgan.
On Slide 10, you called out specialized deposits at about $11 billion, which I think shows about $1 billion growth sequentially. I think most of those segments showed growth versus the prior quarter. Could you just talk about what's driving the recent growth specifically in the technology bucket?
Yes. Technology, I mean, we continue to have a good pipeline of companies that we bank on that side and progress there can be relatively lumpy, but there have been significant growth opportunities to be capitalized on this quarter. Other commercial deposits is kind of the traditional banking that you would anticipate our online account despite the fact that we've cut the rate there a handful of times and now have a 425 rate out there, continue to see growth in balances. So I think it's pretty diverse and broad based. But as we've said, we said now for a year or so, these are the lines that are going to provide above average deposit growth for us as we look forward. So you have a quarter like this where you see each of those contributors continue to grow. And I think that's generally in line with what we've been talking about.
And then my follow-up, you're guiding to low single digits annualized loan growth in 4Q, but you called out the mid-teens growth you saw in C&I this quarter. I guess once you get down to your CRE concentration of $375 million and loan growth for the industry returns more broadly, what do you think is a more normalized level of loan growth for the company as a whole?
It's Tom. I think when you look forward, it will be in that mid-single-digit level. We'll continue to manage the CRE concentration through 2025. And we've experienced the C&I growth really the 5-plus years in that low to mid-double-digit level. And our pipelines tell us that, that should continue into the fourth quarter and into the next year, but somewhat offset by what we're going to do with our CRE concentration.
Your next question comes from Steve Moss with Raymond James.
On the C&I portfolio here, you guys have experienced 2 good quarters of growth. Just curious kind of where you're seeing the drivers of growth and if there's any component that's either participation driven or your national credit?
No. I mean our [ SNC ] portfolio is very small, less than 3% of our total, and we're aging on 30-plus percent of that. So we're not getting that buying participations in any way. I just want to remind everyone, and Ira said it earlier, we have experienced this level of growth for 5-plus years in that low double-digit level. And that goes back to when we started bringing in teams emphasizing the Florida market and bringing in teams of [indiscernible] lenders in Florida and opportunistically bringing the people in the Northeast, and we still do. So a lot of this is coming from that middle market business banking, local regional. It's steady growth. They are accelerated in Florida versus what we're seeing it in the Northeast. And then the specialties, many of which we have had for years and some that have come through acquisitions have added growth on top of that but it's that continued sales process, relationship-driven middle market-type business.
Okay. Great. And then just also noticed kind of -- I know you guys have been building reserves broadly, but the C&I bucket has always had a higher reserve. It's up 26 basis points year-over-year to 170 as a reserve as a percentage of loans -- just curious kind of what are the drivers for that portfolio in terms of higher reserves.
So within the C&I portfolio, really at the end of the day, that portfolio, as can be expected, has a slightly higher loss given default than our CRE portfolio really the primary differentiator between the end reserve rates on that portfolio. As we migrated this past year in a higher interest rate environment, there has been some stress on portfolio. So on the C&I portfolio, as a CRE portfolio, there was some migration which contributes to that increase as well as criticized assets carry a higher reserve than pass rated.
Okay. And to that point on criticized and classified, I think I heard the comment that the increase has moderated. Just kind of curious, is that kind of like stabilizing here and maybe the driver and the criticized C&I or just kind of the dynamics there that you guys are seeing?
So we absolutely believe that the interest rate environment has shown some easing, and we anticipate that the migration that we've seen over the past year in criticized classified assets should definitely abate with likelihood at some point in 2025 potentially towards the end of the year versus the beginning that we should see some positive migration in the portfolio.
And our next question comes from Matthew Breese with Stephens.
Just a quick follow-up. We discussed on the call expectations for kind of elevated charge-offs in the fourth quarter. Can you just give us some sense for how lumpy that could be? What are we talking here?
So as it relates to potential charge-offs, we have an isolated group of loans that we've been tracking that we have our eyes on for potential losses, not definite, there is we expect that there is a chance that, that level could be elevated from what we've seen. But materially, not a level for the year, which is out of line with anything that we've seen at a quarter level as a percent of portfolio.
I'm showing no further questions at this time. I would now like to turn it back to Ira Robbins for closing remarks.
Okay. Thank you for taking the time to listen to our call today and the interest in Valley, and we're excited and looking forward to talking to you next quarter.
This concludes today's conference call. Thank you for participating. You may now disconnect.