Valley National Bancorp (VLY) Earnings Call Transcript & Summary

Good day, and welcome to Valley's conference call to discuss the acquisition of Bluevine. [Operator Instructions] Please note, this call may be recorded. I would now like to turn the call over to Andrew Jianette. Please go ahead.

Good morning, and welcome to Valley's conference call to discuss our agreement to acquire Bluevine, Inc. The press release and investor presentation accompanying this announcement are available on our website at www.valley.com. Joining me today are Ira Robbins, Valley's Chairman and CEO; Travis Lan, Valley's Chief Financial Officer; and Eyal Lifshitz, Bluevine's Co-Founder and CEO. Before we begin, please note that today's remarks may contain forward-looking statements, and actual results could differ from those statements. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q and 10-K. With that, I'll turn the call over to Ira Robbins.

Thank you, Andrew, and good morning, everyone. I'm excited to join you today to discuss our announced acquisition of Bluevine, a leading nationwide digital banking platform purpose-built for small businesses. As Andrew mentioned, I'm pleased to have Eyal, Bluevine's Co-Founder and CEO, here with us today. This acquisition builds on the significant progress we have made over the past several years. In 2024, we materially derisked the balance sheet and drove a meaningful profitability inflection in '25. 2026 has built on that momentum as we further optimize our funding base. Bluevine accelerates this progress by adding a mature and growing low-cost core deposit franchise that improves our funding mix and reduces our reliance on higher cost wholesale funding. As a result of our organic progress and the strategic acquisitions of Providence and Bluevine, we are establishing 2028 loan to nonbroker deposit ratios and loan-to-deposit targets of 100% and 90%, respectively. Achieving these targets should further improve profitability and enhance shareholder value. Beyond the funding benefits, this transaction advances our other strategic priorities we have outlined over the past several years and positions us to compete more effectively in a rapidly evolving banking landscape. Bluevine adds valuable technology and AI capabilities and significantly accelerates our path to relevancy in small business banking. Combining Valley's relationship focus, broad product suite and balance sheet capacity with Bluevine's industry-leading digital acquisition platform and user experience gives us an immediate right to win in this large fragmented segment. We see significant growth potential in small business banking, and Bluevine improves our position to capitalize on that opportunity. In a higher for longer interest rate environment, we believe that Bluevine's granular low-cost core deposit base becomes even more valuable and provides Valley with a durable funding advantage that will support the replacement of higher cost wholesale fundings over time. Slide 3 of our investor presentation focuses on the tangible near-term benefits of the acquisition. As of June 30, 2026, Bluevine had approximately $2.1 billion of low-cost core deposits on its platform, originated from its nearly 175,000 active small business clients. These deposits are currently held at a third-party partner bank, but will be expected to transition to Valley in the first half of 2027. The attractive rate on this rapidly growing deposit portfolio reflects the value of Bluevine's purpose-built digital offering and leading customer experience for small businesses. Valley's legacy small business franchise is comprised of approximately $1.9 billion of deposits across roughly 9,000 relationships. Bluevine will increase our small business client base by nearly 20x and should meaningfully accelerate our pace of future customer acquisition in this segment. Combining Valley's balance sheet capacity, branch presence and broader product suite with Bluevine's national digital reach and scalable customer acquisition will enable us to more holistically serve small business customers over time. Bluevine will also contribute deep engineering, data and AI capabilities to Valley. Bringing more of that expertise in-house will give us greater control over our client experiences, improve our speed to market, reduce our reliance on third-party providers and create new opportunities to improve efficiency as we scale. Bluevine has invested nearly $200 million to build its technology platform and customer acquisition engine. When combined with the economic value of its existing deposit base and the significant opportunity for future growth, we believe these capabilities more than justify the transaction consideration. The combination of strategic value and financial merit is central to how we evaluated this opportunity. We have consistently said that we would consider acquisitions that accelerate our strategic priorities while meeting our disciplined financial standards. Travis will discuss the financial impact shortly, but we believe this transaction satisfies both tests. Providence and Bluevine have addressed our near-term strategic priorities, and we do not anticipate pursuing additional acquisitions for the foreseeable future. Our capital, our resources and our management attention will be explicitly directed towards integration, value realization and executing on our substantial organic growth opportunities. Over the past decade, Bluevine has developed a purpose-built digital banking platform for small businesses, which combines banking, payments, lending and financial management tools with the proprietary technology and risk infrastructure. Bluevine's platform has earned broad national recognition as a leading digital banking solution for small businesses. As illustrated on Slide 4, these efforts have resulted in a scaled and highly engaged national customer base. As of June 30, 2026, approximately 175,000 active small business platform users have generated $2.1 billion of deposits. Customer accounts and deposit balances continue to grow rapidly. Slide 5 illustrates the rapidly changing banking landscape. Fintechs increasingly want the balance sheet access, stability and credibility that comes with a regulated banking infrastructure, while banks increasingly need proven digital acquisition channels, proprietary technology and modern customer experiences. Rather than waiting for chartered fintechs to compete with us for small business relationships, we are proactively combining Valley's banking foundation with Bluevine's digital growth engine. That is the strategic logic of this transaction, and it is why we expect to be a much stronger and a more relevant small business competitor following this acquisition. Slide 6 highlights Bluevine's nationwide digital reach against the backdrop of Valley's existing branch network. While Bluevine acquires small business clients across the country without a physical branch presence, roughly 40% of those customers already exist in Valley's footprint. This gives us a clear opportunity to deepen those relationships through cross-sell of our treasury management, wealth, insurance, capital markets and relationship-led lending solutions. The opportunity also extends well beyond our physical footprint. Bluevine gives us a scalable way to grow deposits, deepen digital engagement and selectively expand products over time for customers outside of our physical footprint. Together, we can serve small businesses through both traditional and digital means in a way that better matches how clients want to be served today. As you can see on Slide 7, and as I mentioned earlier, we also view this as a transformational step for Valley's technology strategy. The majority of Bluevine's code is AI generated today and approximately 80% of inbound client inquiries are resolved by AI. The team has built its own credit model, its own fraud, its own AML model, all supported by a single data layer that connects core banking and payment systems. Owning these capabilities will give us greater control over our client experiences, more speed in bringing solutions to market and importantly, less reliance upon third-party software providers. Over time, by combining these capabilities with Valley's own emerging AI efforts, all of this should help to accelerate positive operating leverage and accelerate our progress towards a meaningfully lower efficiency ratio. Finally, I want to comment on Bluevine's people. Through our diligence, we spent meaningful time with the Bluevine team and came away with a strong appreciation for their culture, talent and execution mindset. We are delighted to welcome them to Valley and are excited to apply their technology, data and AI capabilities across a broader set of opportunities. I'm thrilled that Eyal will join Valley as Head of Small Business Banking and that Nir, Bluevine's other Co-Founder and CTO, will remain with the combined company. We expect to retain a significant amount of the commercial and engineering talent that has made Bluevine so special and successful today. With that, I'll turn the call over to Travis now to walk through the deposit franchise, the financial terms and our integration priorities.

Thank you, Ira. As shown on Slide 8, Bluevine has built a scaled, digitally gathered deposit franchise that is highly additive to Valley's own funding strategy. As of June 30, 2026, the platform had generated approximately $2.1 billion of active small business deposits, more than double the balance at the year-end 2023. These are granular core deposits gathered nationally without a branch network and supported by a product ecosystem that keeps small business customers engaged across checking, payments, bill pay, lending and other financial management tools. This value proposition has resulted in high customer satisfaction and an attractive relative cost of deposits, which we expect to be fairly stable even in a higher for longer rate environment. On a combined basis, Providence and Bluevine will give Valley a larger, more diversified and scalable low-cost core funding base. This mature digital SMB focus will become Valley's newest specialty deposit vertical, bringing aggregate deposits in these business lines to approximately $15 billion on a pro forma basis. Bluevine's portfolio is granular with an average balance of roughly $12,000 per active customer and approximately 86% customer retention after 1 year. Our specialty verticals have driven differentiated core deposit growth results in recent years. Based on current momentum and Bluevine's digital acquisition model, we expect platform deposits to more than double over the next 3 years. Importantly, that growth is expected to come without an overreliance on rate, reinforcing both the quality of the customer relationships and the efficiency of Bluevine's model as we reduce brokered deposits post transition. With respect to the deposit transition, Bluevine's existing partner banking program will be terminated at the close of this transaction. According to the contractual terms of their existing partner agreement, we expect to transition Bluevine generated deposits to our balance sheet within 3 to 6 months of closing. Once these deposits are repatriated, we intend to use them to replace higher cost brokered funding, which will improve our loans to non-brokered deposit ratio and overall cost of funds. Slide 9 illustrates the combined funding benefits of Providence and Bluevine. In aggregate, we are acquiring nearly $3.5 billion of low-cost core deposits. On a pro forma basis, our loans to nonbrokered deposits and loans to total deposits would decline to 103% and 93% from 107% and 97% at June 30, 2026. We are also establishing 2028 targets of 100% for loans to non-brokered deposits and 90% for loans to deposits. These transactions accelerate the next phase of the structural funding improvement we have been working towards over the last several years. Bluevine also brings a proven lending engine with a single application, 10-minute decisioning and an average FICO score of 729 on short duration small business loans. As of June 30, 2026, Bluevine held a fairly modest $130 million of these loans on its balance sheet. While the addressable market is substantial, our focus will remain disciplined, using lending to deepen relationships that support deposit growth and align with Valley's relationship-led approach across business segments. Turning to the transaction terms, Valley will acquire Bluevine for $340 million with a consideration mix of 75% cash and 25% stock. As Ira mentioned, this aggregate purchase price should be viewed in the context of the nearly $200 million that Bluevine has already invested to develop its industry-leading platform and customer acquisition engine. The strategic value associated with this technology, combined with the economic value of the low-cost core deposits was highly compelling for us. The transaction does not require traditional bank regulatory or shareholder approval and is expected to close early in the first quarter of 2027. As a reminder, we anticipate a 3- to 6-month post-close lag before we can fully transition Bluevine deposits to our balance sheet. During that interim period, we expect a de minimis net earnings impact from the acquisition. As the deposits transition to Valley, we expect the resulting reduction in brokered deposits to provide an immediate funding benefit and support the earnings accretion we will discuss shortly. Our model includes $50 million of run rate pretax cost savings with 50% phased-in for 2027 and 100% thereafter. Modeled synergies primarily relate to shared services, duplicative technology, small business support and marketing spend. Net interest income upside from deposit migration will be partially mitigated by foregone Durbin income as Bluevine transitions from a sub-$10 billion partner bank to Valley. Importantly, our assumptions do not include potential upside from the cross-sell, lending or treasury management opportunities that we have identified. On this basis, we expect the transaction to be approximately 8% accretive to 2028 earnings per share with approximately 5% tangible book value dilution at close and an earn-back period of approximately 3 years. With fully phased cost savings, Valley's pro forma return on average tangible common equity should benefit by between 150 and 200 basis points, accelerating our progress past the 15% target that we have identified for the fourth quarter of 2027. Our CET1 ratio is expected to remain above 10.3% at close, inclusive of the pending Providence acquisition or approximately 11% as adjusted for the Basel III endgame proposal. We believe this acquisition is a compelling use of capital relative to a buyback as it offers an attractive earn-back period with complementary funding and qualitative improvements. Slide 12 summarizes our near-term integration priorities. Our #1 post-close priority is transitioning Bluevine-generated deposits from the existing partner bank to Valley. As our teams execute that transition, we will focus on maintaining an uninterrupted customer experience, sustaining Bluevine's deposit growth momentum and capturing identified synergies without distracting from those priorities. Over the intermediate term, we will focus on strategic opportunities across small business growth, product penetration, risk operations and technology modernization. The combination of Valley's relationship-led model and Bluevine's digital platform should help us deepen customer relationships, reduce friction across the operating model and further improve our efficiency. In short, our integration plan is focused on realizing the funding benefit first, protecting the customer experience throughout the transition and then using the combined platform to drive broader strategic value. With that, I'll turn the call back to Ira.

Thanks, Travis. To summarize, this acquisition strengthens Valley today and positions us better for the future. It improves our funding profile, add the scale of national digital small business platform, expands our technology and AI capabilities and does so within disciplined financial parameters. By combining Valley's Charter, balance sheet, risk discipline, relationship model and broad product capabilities with Bluevine's digital platform, we believe we are creating a stronger and more relevant small business bank. Most importantly, the combination makes Valley more relevant in a banking landscape where clients increasingly expect the strength of a regulated bank with the convenience, speed and personalization of a modern digital platform. We are thrilled about what Valley and Bluevine can build together for small businesses across the entire country. With that, we are happy to now take your questions.

[Operator Instructions] Our first question comes from Feddie Strickland with Hovde Group.

Just wanted to start off and ask, how should we think about Bluevine combined with the Providence acquisition? Is this something that you're thinking about in concert? Or are these 2 discrete thought processes? Just wondering if I can get your thinking on kind of how this all came together.

Thank you for the question. I think we're really trying to address the core funding challenge that we see today at Valley and sort of exacerbating as we think about the banking environment as it continues to move forward. We spent a lot of time over the last few years addressing a handful of outliers when it came to the balance sheet. If you look at sort of where the capital levels were the loan loss coverage we had as well as where the CRE ratios were. So I think the one real significant issue that was an outlier for us was where that loan-to-deposit ratio and what the core funding looked like and then what the cost of that core funding is. So both of them were really addressed with that in mind, and we think it really positions us well to achieve those 90% numbers that Travis outlined in his prepared remarks and really drive a very different funding profile here at Valley.

And should we expect any changes in the capital allocation strategy now with Bluevine or put another way to repurchase I think you addressed that a little bit in your opening remarks. Just a clarification there, if you could.

Yes. No, there's no change to our future capital deployment strategy. As we were thinking about this potential transaction, obviously, this is a use of capital today. However, with the pending Basel III endgame, we did think it was worthwhile to get ahead of that and put capital to work in a way that, as Ira mentioned, enhances the funding profile and trades some capital for earnings. Our model assumes that the buyback continues in line with consensus estimates for '27 and '28. However, if you were to strip the buybacks out, there's no change to the -- there's no material change to the economic outputs and you would just accrete capital faster. Obviously, we remain focused on our return on tangible common equity targets. This transaction is highly additive to those targets. And so as we've discussed, I think, pretty consistently, we need to manage the denominator in the return on tangible common equity as well. And so this does not take us out of the buyback game going forward.

Got it. And just one last one for me real quick, if I could. Can you talk a little bit more about the overall AI strategy and kind of how Bluevine fit into that? And maybe how much that factored into your decision to acquire Bluevine?

I mean, we definitely do not model any of it into any of the economics that we put forth. I think there's really 2 interesting things from a synergistic perspective here. I've been in banking a very long time. A lot of people talk about revenue synergies when they look at deals. Most of the time, they definitely do not incorporate them into them. And likewise, we have in here, that's the cross-sell that would come out of something like this. For us, there's really a lot of operational synergies here as well, and we do not model those, but we do believe the AI is a significant opportunity for us as we think about some of those operational synergies. Just to give you a couple of quick examples, 80% of the clients that reach out to their customer care center at Bluevine are resolved by AI agents. To put that into perspective, that's around 2% at Valley. When Bluevine does its enhanced due diligence on some of their AML and KYC clients, they do at a cost of about $20. It cost us about $500. And that's a direct reflection of their ability to leverage AI. So we think there's going to be significant operational synergies that come into Valley. And a lot of it's based on the AI work that Bluevine and Eyal and his team have actually done there. We think we're really positioned ourselves as an industry leader here just on our own. And this is going to only amplify our ability to really recognize a lot of the improved economics that are going to come from AI within the entire industry. So we're really, really excited about that. But once again, I'll just remind you, we do not include any of those synergies in any of the economics that we're putting forth today.

Our next question comes from David Chiaverini with Jefferies.

So it's clear that there's more to the Bluevine business than the deposit rate being offered. Nonetheless, so you mentioned that the deposit rate should be stable in a higher for longer environment. To put a finer point on it, what type of deposit beta should we expect on this business in a rate hiking cycle?

David, this is Travis. So we modeled this very conservatively, and we effectively locked in a spread on the deposits of between 250 and 300 basis points. However, their achieved betas historically have been in the 20% to 30% range, depending up cycle or down cycle. And so we do think there's additional upside there. As we say in our prepared remarks, I mean rate is not what they lead with, obviously, given the technology platform that they've delivered and how they acquire customers. And so we would anticipate in a higher for longer environment that there's actually incremental value to Valley.

Great. And you also mentioned about deposit growth should double over the next 3 years. Should we expect that growth to be linear over the next 3 years? I'm thinking about how to think about the 8% accretion in 2028.

Yes. I think you can assume between $200 million and $300 million of deposit growth per quarter, and I think that's the number that would kind of accelerate. So where we stand out of the gate to be kind of towards the lower end there. And as we ramp up with Bluevine integration, I think you would see that kind of migrate higher. So from an end-of-period perspective, we have penciled in over $3 billion at transition, so call that early April, if you want to pick the midpoint of our comment there, a little bit less than $4 billion of balances by the end of '27 and around $5 billion by the end of '28.

Our next question comes from Chris McGratty with KBW.

Travis, just to come back to the comment before about the buyback, you're comfortable with where Street buybacks are. Would that imply you're also basing the 8% off of the consensus '28, which is about $1.75, which would put you a pro forma about $1.90. Is that what you're assuming? Okay. Perfect. And then on the ROE, maybe you could expand. I think you had previously said 15% by the end of '27. And so I guess, are you -- I want to make sure I get those numbers right. So that would be penciling in kind of 16.5% or 17% for '28. Is that right?

Yes, that's right. So I mean our stand-alone fourth quarter '27 return on tangible common equity target was 15%. We said Providence would add about 30 basis points to that. And we think that Bluevine adds all in when it's fully baked, 150 to 200 basis points on top of that. By the fourth quarter '27, we won't have all the cost saves out. It's probably towards or below the lower end. But you should be -- that 15% target we gave you should be 16% plus at this point and then growing into the high teens thereafter.

Our next question comes from Timur Braziler with UBS.

For Bluevine, is the expectation that entity remains largely independent in terms of loan production, deposit generation? Or is that going to be more broadly integrated into the Valley model?

I think from a client acquisition perspective, the focus is to let them continue to really do what they do. As I mentioned earlier, there's a lot of operational synergies that we believe Valley can really recognize. Eyal is coming here. He's going to run the entire small business portfolio for Valley. So that's just not the online digital piece, but that's also the traditional bankers that we have. So while we anticipate them definitely keeping the name running as an independent entity, we believe there's going to be massive synergies as to how we think about the ability to really scale even Valley's own business. And we believe that Eyal is going to be able to amplify the growth that they have within their portfolio.

Okay. And then maybe could you talk about the asset side of the equation here in terms of the type of production that they do and the appetite to put more of that on the Valley balance sheet?

Yes, Timur, it's Travis. So they have about $130 million of on-balance sheet loans today. However, they have a variety of forward flow agreements, and they sell a lot of their production for a gain. We assume that, that remains fairly constant. So the growth in on-balance sheet loans is fairly modest. We do anticipate -- we'll continue to sell some of the production into the forward flow agreements that are in place today. So that will support fee income. The loans -- the risk-adjusted returns on the loans have been very strong historically, but this is certainly a deposit play, not on-balance sheet loan play.

Okay. And then just last for me on Slide 9, where you call out the loans to core deposits, '28 target of 100% pro forma for the 2 deals there at 103%. Is the expectation that you get to that 100% organically? If so, maybe give us a stair step there? Or does that involve potentially more down the line?

It does not include more M&A. So we've kept ourselves busy with the 2 deals we've announced in the last 1.5 months. So it does factor in, obviously, the close and integration of those deals and then additional progress thereafter, but it does not factor in additional M&A. And as Ira said in his prepared remarks, we're out of the M&A game for the foreseeable future. These are 2 highly strategic and financially compelling deals that we have, and we focused on integration, execution and organic growth.

Our next question comes from Dave Rochester with Cantor.

Congrats on the deal.

Thank you.

So I was just curious on the 175,000 new customers, you mentioned that you're not looking to grow the, I guess, the loan portfolio based on the production that they have today. And I guess I'm just wondering why could that not be at least at some point, additive to your loan growth going forward? You mentioned that they were -- the risk-adjusted returns were there, but it sounds like you're planning on selling more of that product going forward.

Historically -- so Bluevine actually started with a focus on the lending side and over the last couple of years has transitioned to the deposit focus that you see today that's resulted in the very attractive deposit originations that they posted. While the loans are attractive from a risk-adjusted return perspective, I mean, obviously, we have our credit appetite that will continue to drive the majority of the loans that we would on balance sheet across the franchise. So as we've talked about historically, loan growth is not a problem for Valley. It's funding that loan growth. And so while the loans that will come from Bluevine is modest in size and will be -- we're willing to continue, it will not become an outsized part of the portfolio in aggregate.

And then you mentioned a couple of times now that as rates go up, deposit costs are expected to remain stable in this arm. Is it the granularity of the deposits that helps that out -- the low granularity or the small size of the deposits? Or is it something else you mentioned the extra value add from the platform? If you can just go into that a little bit more detail, that would be great.

I think maybe just take Bluevine out of it for a specific second here. This is a segment that we've been focused on for a long period of time now. We believe that it's a fragmented segment. We believe that our clients are less price sensitive here and more experience sensitive. And the Bluevine model has really proven that out when you look at what they're paying. The clients really want a different type of user experience. They want an ability to have a cash flow management platform that really provides an ease of use for them. So this is a segment that we believe is really attractive. It inures to a lower price sensitivity, which has a lower beta associated with it, and we think that's going to continue. So it's a segment that we've been targeting, and this really accelerates the ability to get into that based on user preference of how these clients behave is really the main driver as to why we think this is going to be a lower beta product as we continue to go into a higher interest rate environment.

I think just specifically to Bluevine, I mean the user experience here is, I think, why customers choose to partner with them. There was a good article ironically in the American Banker last week that talked about the utilization of AI in banking and with Bluevine specifically as one of the companies that is differentiating themselves from traditional banks in terms of their ability to grow customers. And again, that customer growth is primarily based on the user experience technology platform that they've been able to build that add value to the clients that, "bank with them."

Great. Very nice. Maybe just one last one. If you guys can just provide some additional background on the deal? How did this come together? Why was now the time for Bluevine to sell? And then why was Valley the right partner for this?

Yes. I think there's a lot of different things that we think about. From a strategic perspective, once again, this is a segment that we've been targeting. There's a lot of different reasons as to why Bluevine really looked to sell. Eyal here, maybe you want to speak to a little bit as to sort of what was in your thought process as to you were going down the journey, but this was a company, a founder that we had known for a very long period of time as well.