Valley National Bancorp (VLY) Q3 2026 earnings call transcript

Good morning, and welcome to Valley's third quarter 2026 earnings conference call. I am joined today by CEO Ira Robbins and CFO Travis Lamb. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release and presentation at valley. com. Please note slide two of our earnings presentation, and remember that comments made today may include forward-looking statements about Valley National Bancorp. , the banking industry, and our pending acquisitions of Providence Financial Corporation and Blue Vine, Inc. Actual results may differ from those statements. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8K, 10Q, and 10K.

With that, I'll turn the call over to Ira Robbins.

Thank you, Andrew. In a few minutes, Travis will review our exceptional third-quarter financial results. Before that, I want to use slide six to add context to those results and explain why our strategy, including the pending acquisitions of Providence and Blue Vine, will position Valley to create meaningful shareholder value. The foundation of our journey began in 2017, when Valley was a $24 billion Northeast-focused bank.

Through technology modernization, consistent organic growth, and targeted strategic acquisitions, we transformed Valley into a geographically diverse $57 billion regional bank by the end of 22. While investing over $300 million in CapEx during this period, we meaningfully improved efficiency and generated above-average returns relative to similar-sized peers.

While we were proud of these profitability results, our Cree concentration, loan-to-deposit ratio, and capital and reserve levels made Valley an industry outlier. These metrics were appropriate for our risk profile, but created an external perception that Valley could be more exposed to challenges when the industry landscape shifted rapidly in 2023.

Against this backdrop, the second chapter of our journey required us to recalibrate our balance sheet to close the valuation gap created by these outlier metrics. To address these perceived concerns, we acted swiftly and decisively to strengthen capital, reduce Cree concentration, and improved funding. Our allowance coverage ratio improved during this time as well.

These balance sheet de-risking efforts set the stage for the current performance-driven third chapter of our journey. As of September 30, 2026, our CRE concentration ratio has declined by more than 160 percentage points from its peak in the fourth quarter of 23.

CET1 has grown to 10.7% of risk-weighted assets. our loan-to-deposit ratio has improved to 96%, and most profitability metrics have returned to 2022 levels.

Since 2017, we have built a larger, stronger, and more profitable bank, and opportunities remain to continue this momentum. Over the next few years, we are targeting a 90% loan-to-deposit ratio, Cree concentration well below 300%, an efficiency ratio in the mid-40% range, and returns on tangible common equity in the high teams. We believe this quarter's strong results, supplemented by our pending acquisitions, will position us well to achieve these aspirations as we continue to focus on returning to our position as a top-performing regional bank.

As we progress towards these goals, funding optimization remains our top priority and will likely be the most significant driver of further profitability improvement and valuation expansion. As detailed on slide 14, we have grown deposits from $18 billion in 2017 to $55 billion today. Despite strong loan growth and significant market disruption, we have reduced our reliance on wholesale funding over this time.

The combined acquisitions of Providence and Blue Line are expected to add over $3.5 billion of low-cost core deposits to Valley. This should further improve our funding profile, expand our margin, and enhance the value of our franchise.

Our strategic focus on small business and business banking will likely be central to our funding strategy. More than 36 million small businesses operate in the United States and account for nearly half of private sector employment. These entities generate the granular operating deposits that we value most, those that tend to value relationships and user experiences above absolute rate.

Capturing these valuable operating deposits requires a combination which few providers can offer. Large banks often lack the personal attention that small businesses value.

Community banks may lack the product breadth and technology. And fintechs typically cannot match the balance sheet strength and stability of a regulated bank. With its pending acquisitions, value will bring these advantages together, delivering sophisticated deposit, treasury, lending, and wealth solutions through deep client relationships and experienced advisory services. Our pending acquisitions also attack the small business opportunity from complementary angles. Providence provides an established physical network in Chicagoland, a market with over 1 million active small businesses.

Bluevine is expected to add national digital reach with approximately 185,000 active small business customers and over $2 billion of low-cost core deposit relationships. Blue Vine should expand our small business client base by nearly 20 times while creating meaningful cross-sell potential for the roughly 40% of its clients that already operate within Valley's footprint.

AI is another structural area lever that should drive further profitability improvement for Valley. Banks which deploy AI effectively can create capacity for growth while structurally lowering efficiency ratios. We were early to identify the AI opportunity and quickly dedicated significant resources to build a foundation that is critical to recognize the meaningful benefits we expect. Our approach is disciplined.

We focus on measurable value, centralized governance, and human oversight. Building on our investments in data and core infrastructure, we are already deploying AI in several areas, including customer care, fraud, and AML reviews, auto loan collections, and most recently, agentic credit underwriting and loan servicing.

Bluevine is expected to accelerate these efforts by enhancing our AI engineer and developer talent base. There are innumerable cases for AI efficiency in the banking space. and expanding our capacity to solve these use cases will continue to repel our performance in the next chapter of our journey.

Over the past eight years, we have accomplished a lot. We have modernized our foundation, built a tech-forward culture, strengthened our balance sheet, and improved our funding base. We have rebuilt our profitability and are looking forward from a position of strength. Our next chapter will focus on further optimizing our funding base, capturing profitable small business and middle market growth, and using technology to drive sustained operating leverage.

I'm proud of our team and the foundation we have built to deliver a substantial value for our shareholders, clients, and associates. With that, I will turn the call over to Travis.

Thank you, Ira. This quarter's strong results position us to finish 2026 at the high end of the guidance ranges provided at the start of the year. Compared with last quarter's guidance update, the primary change for modeling purposes is the effective tax rate, which is now expected to be approximately 20% for the full year, reflecting our opportunistic purchase of additional tax credits during the quarter.

Turning to capital deployment on slide 11, our improving profitability supports strong loan growth, meaningful capital returns, and the value-enhancing acquisitions we recently announced. During the quarter, we returned approximately $96 million to shareholders through common dividends and the repurchase of 2.5 million shares. Our regulatory capital ratios remain comfortably within our target range, providing flexibility to pursue opportunistic share of purchases while funding the strong loan growth we expect over the next several quarters.

Slide 12 details the $1.1 billion increase in direct core customer deposits during the quarter, led by commercial non-maturity accounts, particularly in our technology vertical and Metro New York footprint. The brokered deposits were unchanged as excess core deposit growth funded the repayment of approximately $400 million of maturing short-term debt during the quarter.

Within brokered deposits, we replaced roughly $350 million of interest-bearing non-maturity balances with term brokered CDs. Non-interest deposits declined by about $100 million due to late runoff in the quarter. However, average non-interest deposits increased nearly $300 million from the second quarter, and spot balances have rebuilt in October. Total deposit costs increased five basis points to 2 but remain well below 2 from a year ago We are working to limit deposit cost increases following the recent Fed hike and continue to believe that replacing wholesale funding with core deposits offers relative net interest margin upside versus peers. This position will be augmented by the acquisitions of Providence and Bluevine targeted for early 2027. Slide 15 highlights solid loan growth during the quarter, concentrated in our strategic focus portfolios of C&I and owner-occupied Cree.

Growth was again led by our healthcare vertical and broader strength across our geographic footprint. As a result of organic regulatory capital accretion and stable regulatory Cree balances, our Cree concentration ratio declined to 312% from 317% at June 30, 2026. On a standalone basis, we expect to drive this ratio lower, but acknowledge that a temporary uptick will likely result from expected capital deployment for our pending acquisitions in early 2027. As Ira mentioned, we remain focused on bringing this ratio below 300% over the next few years.

Slide 18 illustrates the consistent growth in our net interest income and net interest margin. The quarter-over-quarter expansion in both metrics was largely the result of higher average loan balances and expanding yields. Average new loan origination yields increased eight basis points during the quarter, while the average cost of newly originated deposit relationships decreased by nine basis points, primarily as a result of lower CD originations relative to the second quarter.

Our balance sheet and business model remain well-positioned to benefit from the existing yield curve backdrop, despite consistent competition on both sides of the balance sheet. We are pleased with the quarter's net interest margin progress and expect further expansion in the fourth quarter of 2026 and beyond. As shown on slide 19, adjusted non-interest income increased nearly $2 million during the quarter, despite a $3 million sequential decline in capital markets revenue.

Growth in our tax credit advisory business and an approximately $2 million benefit from fintech equity valuations were the primary offsets. Deposit service charges increased for the 12th consecutive quarter, reflecting continued expansion of treasury management services across our commercial customer base. We expect tax credit advisory revenue and fintech valuation benefits to normalize in the fourth quarter, while capital markets activities should rebound. We are proud of the substantial growth in core recurring fee income over the past several years, although we acknowledge that strong net interest income growth in the same time has reduced the overall impact on our revenue mix.

Adjusted non-interest expenses declined $5 million from the second quarter, primarily due to lower professional fees, FDIC assessment costs, and technology expenses. Our efficiency ratio declined below 50% one quarter ahead of schedule and reached its lowest level since the third quarter of 2021. This multi-year improvement reflects discipline expense management and operational efficiencies, including from technology and AI adoption. As Ira noted, we endeavor to further utilize AI deployment to help offset traditional expense growth while improving productivity and supporting revenue generation over time. We expect the efficiency ratio to continue declining towards our mid-40% target over the next few years. Criticized and classified loans declined 2% during the quarter and 12% year-over-year to represent 7.1% of loans compared with 7.3% last quarter and 8.8% a year ago.

We also saw a reduction in accruing past due loans driven primarily by lower early stage Cree delinquencies. Nonaccrual loans increased to 0.96% of total loans primarily due to the migration of a single well-secured construction loan.

Net charge-offs increased 28 basis points of average loans from 17 basis points in the second quarter of 2026, primarily due to a single CNI loan charge-off. Year-to-date net charge-offs of 20 basis points sit at the high end of our guidance range, which is now a reasonable expectation for the full year. Our $31 million provision resulted in a modest decline in the allowance coverage ratio to 1.13% from 1.16% at June 30, 2026. The decline reflects, in part, the continued improvement in criticized and classified loans as a percent of total loans and sustained borrower financial performance. Despite the OCI headwind associated with our available for sale securities portfolio and share repurchase activity, tangible book value increased modestly during the quarter despite the OCI headwind associated with our available for sale securities portfolio and incremental share repurchase activity.

Regulatory capital ratios were generally unchanged as strong profitability supported the quarter's loan growth and share repurchase activity. We remain comfortable with our capital positioning in the context of our loan growth expectations and the impact of our pending acquisitions.

To summarize, the third quarter displayed continued progress on the strategic priorities that we have continuously discussed. We've improved the funding base through strong core customer deposit growth and diversified our loan portfolio with continued growth in relationship-based C&I and owner-occupied CRE. We have increased our fee income and controlled our expenses, which has led to a sub-50% efficiency ratio. We have also actively and effectively managed our capital deployment. We continue to focus on improving our profitability and anticipate a strong end to 2026.

With that, I will turn the call back to the operator to begin Q&A.

Absolutely. Hey, Freddie, this is Mark Sager. That loan is actually a land loan. They haven't begun construction on that. It falls within our construction bucket, though, obviously. What brings us comfort is over the last year, we've had substantive paydowns of that facility in order to grant extensions. It is current on interest, but it has matured, and we hadn't reached agreements on the way forward. We have current valuation, which shows substantial value in the land, a number of interested parties interested in the land. So we're confident that we exit this loan without issue.

We still feel that that trend that we've experienced over the last five quarters, we're going to continue to see improvement in criticized classified. Beginning at the end of 2023, we started a process to forward look on any rate resets or maturities 12 months ahead. Historically, we've had great success for the limited population that would be stressed due to rate increase of either resizing those loans, having those refinanced by more aggressive lenders, or through sales of property. Over the past two years, the number of modified loans that we've had to do as an organization has been very small.

Yeah, Fetty, this is Travis. There's no change when we've guided to kind of April 1st is a good assumption for when we'll be able to onboard the deposits after an expected January 1st close. So that's kind of the timeline we're thinking. Between close and the deposit transition, we would still benefit from the chargeback that Blue Vine gets from their current partner bank. So it's not that the economics will be zero, but it'll be effectively break even until we get the deposits and can put them back to work. So I think the April 1st is still a good date to pencil in. We're certainly working to accelerate that as fast as we can.

Thanks.

Hey, Ben.

Yeah, Ben, this is Travis. So, maybe I'll kind of give you, you know, what our expectations are. Maybe I'll start with the pipeline and then kind of talk about how we're contemplating that as it relates to our growth outlook. So the pipeline right now has increased back towards the $5 billion mark that we were at as of March 31st. So obviously March 31st led to a significant loan growth quarter in the second quarter which ate into the pipeline We saw solid growth here in the third quarter but the pipeline rebuilt at the same time So the pipeline remains very strong I would say as we think about modeling growth, we're likely to contemplate a 2027 guide that's similar to where we were coming into the year for loan growth.

So we started with a 4% to 6% loan growth guide, likely to be what we contemplate for next year. I do think rates will eat into new origination activity to some degree, at the same time, it will likely slow the pay down on the back book. So I think those two things may not balance out perfectly, but I think there's offsets there. So being fairly conservative with our loan growth expectations, it feeds into our net interest income guide, but still very strong activity in our business lines and across our geographies. And the other thing on the pipeline is it continues to tilt heavily towards CNI and owner-occupied CRE.

I think our approach has always been, you know, we're willing to invest in opportunities to enhance the franchise, drive future revenue growth and franchise value. But every time we put a dollar out the door, we're looking for as much offset as we can in the background. I think we've been able to execute that consistently over the last couple of years. And that's, again, driven our efficiency ratio below 50%. And I'll say Providence also has an efficiency ratio on a standalone basis below 50%, obviously very small relative to the total, but we're already starting there with something that's consistent with the efficiency ratio we have before any potential cost saves.

On Blue Vine, we've talked about the synergies that we expect to occur over a couple of years. But again, none of this changes the fact that we will invest in our organic opportunities and then work to find offsets through process improvement, the utilization of AI and technology. And I think we've proven our ability to do that.

Thank you.

Yeah, that's correct. I mean, so we've talked about being fairly neutral to the front end of the curve and more exposed to the belly and longer ends. Obviously, there's been significant move higher in those points, which has supported our, I think, partially supported our results this quarter, but also our outlook for the fourth quarter and beyond. So our exit margin for the month of September was 333.

We guided to five to seven basis points of expansion for the third quarter. We obviously exceeded that. We'll guide to another kind of five basis points, call it five to seven basis points of expansion here in the fourth quarter. And it's a result of the interest rate backdrop and our ability to continue to reprice our asset yields higher while preserving as best we can the funding costs.

Yeah, I mean, we're always working towards it. I think this quarter was great because it showed – it gave a little bit more credibility to the 15% guidance that we put out there. I think we can pull that towards the middle of the year, and I think we can exceed it by the end of next year. I think that's kind of implicit in the comment that we made.

And by the way, that's for Valley on a standalone basis and does not contemplate the impact of the potential transactions that we've talked about. Longer term, the transactions could add, call it, 200 basis points to our terminal return on tangible common equity. By the end of next year, it's probably half of that just because of the timing of how these things feed in. But I do think there should be clear credibility to the guidance that we've laid out and our opportunities to outperform.

Thank you.

I think we've said the largest driver of the ACL outlook will be the trajectory of criticized and classified loans. And obviously, over the last year, we've seen a significant reduction in criticized and classified as a percent of total. And that's what supported the reduction you've seen in the ACL. The reality is the gross reduction in the ACL reflecting criticized and classified would be more if it weren't offset by the CNI growth that you call out. So going forward, we continue to guide to something that looks fairly stable on the ACL, as we anticipate continued criticizing classified improvement, and then balancing that with our continued focus on CNI growth, which, to your point, carries a higher allowance.

Yeah, just for the fourth quarter, I would anticipate our tax credit amortization remains in line with the third quarter, which call it $20 million. And then the tax rate to your point should be called 20 to 21%. The one thing I do just want to call out is the 15% tax rate this quarter can't be viewed in a vacuum. it's related to the $4 million quarter-over-quarter increase in tax credit amortization.

So if you want to use last quarter's tax rate, you would need to similarly reduce the gap expense for the tax credit amortization. And I think that the combination of those two factors or the interplay there is kind of being missed. So it's not just like you would take our pre-tax income this quarter and apply a different tax rate. Like those two things, the increased tax credit amortization and the lower tax rate, they occur in conjunction with one another.

Thank you. Thank you.

Yeah, so when we have the guidance page in the deck, I mean, obviously that shows where our 2026 guidance was coming into the year. I think loan and deposit growth, you know, again, our starting point for 2027 is we work to refine our forecast for 2027. that we'll announce official guidance three months from now. But that would be a good starting point. So we're targeting core deposit growth in excess of loans for sure. But again, that does not contemplate the impact of the acquisitions, which should add $3.5 billion of core deposits against about $1 billion of loans. So just the organic progress that we make and then the impact of the acquisitions in 27, it should bring loans to deposits by the end of next year into the low 90s already.

Thank you.

Yeah. So the update as of 930 is there are 2.3 billion, so up $200 million during the quarter, no change to the rate there. And the number of active clients has gone up by 10,000. So that's the 3Q update on BlueVine. And I think that continued kind of $200 million a quarter pace is what we would anticipate. So by the time you bring the deposits over, call it April 1st, you're closer to the 2.7, 2.8 billion of deposits.

Yeah. So as it relates to the immediate opportunity on the inflow of the deposits, I mean, we have about $1.5 billion of brokered deposits that are set to mature in the first quarter of 2027. You know, there may be a slight timing mismatch there between getting the actual deposits from Bluevine in, but we will hold that kind of short to make sure that we can benefit as quickly as possible. The other, we also have about $400 million of FHLB maturities in the first So our primary focus would be optimizing the funding side of the equation, and then anything excess, you know, we'll look to potentially invest in the securities portfolio. But again I think there plenty of opportunity on the brokerage side where we can optimize that in pretty short order post transition In terms of the margin we been kind of looking at it fourth quarter to fourth quarter So the fourth quarter of 25 was 317.

When you shake everything out, it'll be up, call it more than 15 basis points through the fourth quarter of 26. I expect a similar kind of standalone valley margin improvement by the end of 2027. And then I think the acquisitions, as we kind of think about the timing, should add another call it 15 basis points to that math. So I think you're certainly above 350 by the fourth quarter, 27, all else equal, you know, and approaching probably 360 or something like that, again, with what we're facing today with the yield curve.

Yeah, I mean, we certainly retain the flexibility to buy back stock. We've been consistent, though, Matt, in saying that our number one priority is supporting well-funded, high-quality organic loan growth opportunities that may occur in the quarter that we're sitting in or what our outlook is. And again, with Pipeline Strong, I think that's where our number one priority is. We have put incremental capital to work in the two deals that we've announced. But the underlying earnings power of the franchise is driving significant improvement in returns, which is giving us more flexibility around capital allocation. So we remain flexible there. It's fully discretionary. The one thing I would just call out is that I think because of the better earnings power as we model it, our ROTC outlook that we talked about on a standalone basis is not dependent on share repurchases in any way.

So it's a flexible tool that we have and we'll monitor it and manage it. We manage it on a daily basis.

And I think, Matt, just adding one sort of element to that is, you know, there is no pressure to get under 300 by a certain time. It's an important number for us as to where we think about sort of where the valuation of the organization sits. There's no pressure to get there by tomorrow, next quarter, or anything else like that. But we do believe over a long period of time it's going to continue to trend down and well below that 300%.

Thank you.

I think it's one of the driving factors as to why we wanted to really do something with BlueVine is that those clients are really less rate sensitive than what we've seen of any other client segment. When you look at why clients choose BlueVine, it largely has nothing to do with the rate. It's the ease of use of their platform, the ability to look at it from a deposit perspective on their mobile app. Those are the choices from a relationship perspective.

As we think about what that opportunity is in blending it in with Ally, We have strong relationships to advisors from the human element in our organization, a very strong branch network across a lot of geographies. So we think that we'll be able to maintain very low betas in that book and continue to accelerate what that deposit growth is to some point even greater than what BlueVide has been able to do organically on their own.

I think AI has an opportunity, as I talked about last quarter, really to impact much more than just on the expense side. I think we sort of internally think the AI opportunity is probably 65% on the expenses and 35% on the revenue as we think about the additional opportunities from a cross-sell perspective and how we think about valuations on some of those individual relationships. So we feel really positive about the opportunity for AI.

As we've mentioned, it's something that we've been focused on for a very long period of time, making sure the foundation, the data that we have here, what that looks like, the quality of the data, and how we can really begin to leverage it. And so, you know, AI of value isn't just something that we're conceptually talking about. It's something we've already embedded into the financial results of the company. And we think it's going to be an enabler for us to continue to grow the organization with a much stronger positive operating leverage.

Not on a point-to-point basis. The quarter goes on. We typically see fourth quarter inflows in the municipal deposit side that ease a little bit into year-end, but point-to-point there's no significant seasonality you should think about.

Thank you.

Yeah, this is Travis. So, Ryan, we converted the core system of the bank actually three years ago, almost to the day. We got a more modern and mature treasury management platform. The first year after that conversion, we were focused on penetration of the product, which was fairly nascent from our customer base. As we sit today, that penetration is built up towards 60% of our C&I customers use the treasury management platform. So that's supported the growth that you've seen over the last couple of years. The other element, though, that supported that growth has been we've repriced the product higher a couple of times towards market rates where we kind of sit today for the pricing of the treasury management platform, I'd say there's not likely to be another reprice higher going forward, but still certainly opportunity to penetrate the continued customer base and any new customers that come to us on the CNI side.

So still certainly expect growth in the deposit service line, but not to that same pace given the repricing benefits that we had over the last couple of years.

We're not seeing any immediate change in terms of the C&I loan-to-deposit ratio for our customers. You know, there's a couple of differences in the rate environment there, the deposit backdrop today relative to the last rate hiking cycle. And I think that we're, you know, well positioned to kind of continue to preserve CNI deposits that we have. So, you know, we're focused on it. There does tend to be for a new CNI loan, call it a three to six month lag in terms of getting up to the deposit levels that we model.

But I think we've seen that consistent pull through, which has helped support the exceptional core deposit growth we've seen over the last couple of years.

Thank you.

Yeah, thanks, Chris. It's Travis. Long time no talk. We put that NII page in the deck that shows where runoff rates are. Reorigination rates are coming in 150 to 200 basis points higher than where the runoff is on the fixed rate loan portfolio. On the securities portfolio, this quarter, as an example, we saw rates running off in the mid-fours, and new purchases are occurring in the mid-fives. So it's about 100 basis points to pick up on the securities side. and, again, call it 150 to 200 basis points on the loan side.

I think as we talk about Chicago, We had a very strong franchise there as we thought about the middle market, C&I. And the profit franchise is really more about the SMB and consumer opportunity within that footprint. They had a very strong deposit ratio, and we really anticipate continued deposit growth in that market that outpaces what we're doing on the loan side. So that will help with the loan-to-deposit ratio in that area.

As we go into each individual, some of these growth markets, there's always a very strong deposit element as to how we think about it. So they're relationship-focused. Everyone comes with a treasury, a banker associated with each of those individual markets as well. So definitely not just an asset play for us, but a full relationship that has very strong deposit goals as well.

Thank you. Thank you. Thank you.

I just want to thank everyone for your attention and time today, and I really look forward to meeting with you next quarter.

Thank you.