Valley National Bancorp ($VLY)

Good day, and thank you for standing by. Welcome to the Valley National Bancorp First Quarter 2026 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, Andrew Jianette, Investor Relations. Please go ahead.

Good morning, and welcome to Valley's First Quarter 2026 Earnings Conference Call. I'm joined today by CEO, Ira Robbins; and CFO, Travis Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release and presentation. Please also note Slide 2 of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. 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. Valley delivered another strong quarter with net income of approximately $164 million or $0.28 per diluted share. Excluding certain noncore items, adjusted net income was $169 million or $0.29 per diluted share. Despite traditional first quarter headwinds, including elevated payroll taxes and a lower day count, adjusted pre-provision net revenue increased to $253 million during the quarter, providing a strong jumping off point for the rest of the year. . While Travis will provide additional detail on the financial performance, I wanted to spend my time discussing strategic execution and long-term value creation. We have spent the past few years deliberately reshaping this organization. We have strengthened our balance sheet and upgraded our operating model while supporting incremental investments in talent, technologies and capabilities that we believe will be impactful over the long run. The cumulative impact of those efforts has become increasingly evident in our recent financial results. Just as importantly, these enhancements have positively impacted our daily operations and ways of working. Strategically, our focus is consistent and clear. First, we are building a higher quality and increasingly resilient funding franchise. Our emphasis on core deposit generation is not just about short-term pricing advantages. We are focused on winning primary operating relationships, deepening engagement across our client base and creating a stable funding engine that can support our growth aspirations across cycles. The combination of scalable specialty deposit verticals, enhanced treasury management capabilities and an improving client experience has enabled us to better compete across markets and channels. Secondly, we are pursuing diverse relationship-focused loan growth. We are intentionally allocating capital towards businesses, geographies and industry verticals where we see durable demand and strong risk-adjusted returns. This includes business banking and middle market opportunities in our high-quality markets as well as specific niches like health care, where we have a differentiated value proposition. To fund the strategic growth, we have remained disciplined about selectively exiting lower-return transactional clients that do not align with our future strategic focus. This is not about maximizing short-term growth. We are building a relationship-focused portfolio that we believe will perform consistently across economic environments. Thirdly, we continue to focus on operating leverage and scalability. Many of the investments that we have undertaken over the last few years, including our core conversion, data infrastructure enhancement and organizational redesign were made with a long-term lens. As a result, we are increasingly able to grow deposits, loans and revenue faster than our fixed cost investments and without adding unnecessary complexity. We view this as a critical advantage for a regional bank that operates in an underserved size range, which still compete regularly with upmarket institutions. That brings me to value positioning around artificial intelligence, which we believe represents a meaningful inflection point for the banking industry. Valley's approach to AI reflects a balance between our pragmatic relationship-led culture and the acknowledgement that these technologies can enable us to reimagine how work is done across our company. We believe these rapidly accelerating capabilities can augment the productivity of our associates, enhance decision-making, improve operational efficiency, and most importantly, position Valley to better serve our diverse client base. Our dedication to improving the granularity, consistency and infrastructure around our data over the last few years has been a key underpinning in our ability to effectively utilize AI tools today. We invested early in AI talent and advanced analytics, and have embedded certain capability into our operating model in the wake of our core conversion. Already, AI is helping bankers prioritize opportunities and better understand client needs. We already utilized AI to improve access to our internal knowledge base to rethink legacy back-office processes, including card service requests, certain elements of underwriting and risk monitoring to accelerate data analytics and software development. Specific use cases implemented to date include a customer-facing voice AI agent that proactively contact past due auto loan customers to motivate payment, fraud tools to verify transaction legitimacy and to prioritize suspicious activity alerts and AI enhancements to our sales process to optimize the next best product offer. These are small examples have a much broader effort to unlock our associates to spend more time doing what they do best, building relationships and delivering high-value advice. We expect the capabilities will continue to translate into higher productivity, better risk outcomes and a more consistent client experience less friction, all while preserving the human element that defines our brand. Looking forward, our priorities remain consistent. We plan to continue to selectively invest in growth, maintain our balance sheet discipline and deploy capital thoughtfully. We are confident that the foundation we have built positions Valley to navigate uncertainty, capitalize on opportunities around us and deliver sustainable returns over time. With that, I will turn the call over to Travis to walk through the financial results in more detail.

Thank you, Ira. I wanted to start by giving a brief update on our 2026 financial expectations. As a result of continued strong core deposit growth, solid loan demand in our markets and a favorable yield curve backdrop, we believe that annual net interest income growth will trend towards the higher end of our previously provided range. We expect more meaningful acceleration in the second half of the year with no significant change to our expectations for noninterest income, noninterest expenses or credit costs, we believe there is modest upside to our previous guidance range and existing consensus estimates. From a balance sheet perspective, we continue to believe that our CET1 ratio will remain towards the higher end of our target range. Slide 12 illustrates the execution of our capital strategy during the quarter. We generated over 30 basis points of regulatory capital in the period. Over half of this supported well-funded organic loan growth, and we used roughly 1/3 of our capital generation to buy back stock. Relative to last quarter, slightly more capital was used for the buyback. Slide 13 illustrates the strong momentum in our deposit gathering efforts. During the quarter, we increased direct customer deposits by over $900 million, which enabled us to pay off nearly $300 million of maturing higher-cost brokered deposits and $350 million of higher cost FHLB advances. As a result of the strong direct deposit growth, loans to nonbrokered deposits improved to 106% from 107% last quarter and 112% a year ago. Total deposit costs declined 18 basis points during the quarter, reflecting proactive reductions in core customer deposit costs and the funding rotation I just mentioned. We remain laser-focused on improving our funding profile to further derisk our balance sheet and drive continued profitability improvement. We anticipate the total deposit growth will be towards the high end of our 5% to 7% guidance range for the year. Turning to Slide 16. Total loans grew nearly $700 million or 5.5% annualized during the quarter. Owner-occupied CRE, particularly within our health care specialty vertical continues to contribute to our growth as regulatory CRE declined modestly. C&I loans grew nearly $150 million during the quarter, reflecting strength across existing geographies and business lines as well as contributions from newly onboarded talent. We anticipate that loan growth for the year will be between the midpoint and high end of our previous 4% to 6% range. Slide 19 illustrates the fourth consecutive quarter of net interest income expansion, which occurred despite day count headwinds associated with the first quarter. This increase was the result of solid loan growth, core deposit generation and repricing dynamics on both sides of the balance sheet. Net interest margin was flat from the fourth quarter, which, combined with our continued repricing tailwinds positioned us well to achieve the year-end margin guidance that we laid out previously. Despite the expected normalization of noninterest income from the fourth quarter, we posted strong first quarter results as compared to 1 year ago. On a year-over-year basis, noninterest income was up 18% driven primarily by capital markets and deposit service charge revenues. These results are in line with our expectations, and we believe set the stage for further improvement throughout the year. Turning to Slide 22. Reported noninterest expenses increased to $310 million in the first quarter from $299 million in the fourth quarter. On an adjusted basis, however, noninterest expenses were effectively flat as seasonal payroll tax headwinds were largely mitigated by modest reductions in other compensation costs, professional and legal fees and adjusted FDIC insurance expense. As a result of our cultural focus on expense control, Valley's efficiency ratio declined to 53.1% in the first quarter from 53.5% in the fourth quarter and 55.9% a year ago. We continue to believe that positive operating leverage will accelerate throughout the year, which is expected to result in an efficiency ratio trending towards 50% by the end of 2026. Slide 23 illustrates our asset quality and reserve trends. Nonaccrual and accruing past due loans each declined modestly during the quarter, primarily as a result of positive migration of CRE out of each bucket. Net charge-offs as a percentage of total loans declined to 14 basis points from 18 basis points last quarter and the modest uptick in provision expense reflected the quarter's strong loan growth. Allowance coverage remained generally consistent around 1.2%, and we do not anticipate material changes to this level throughout the year. Turning to Slide 24. Tangible book value increased approximately 1% during the quarter as solid retained earnings growth was partially offset by an OCI headwind associated with our available-for-sale securities portfolio. Regulatory capital ratios declined modestly as a result of strong loan growth and our stock buyback activity. Based on our preliminary analysis, we estimate that regulatory capital ratios would increase between 80 and 100 basis points under the proposed Basel III standardized approach. Until those rules are formalized, we continue to anticipate that our CET1 ratio will remain towards the higher end of our targeted guidance range. With that, I will turn the call back to the operator to begin Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Manan Gosalia with Morgan Stanley.

My first question is on the NII side. You're pointing to the higher end of the NII guide, strong deposit growth already, strong loan growth. Can you talk about some of the inputs around the NII outlook today versus your outlook in January, the ways in which you can drive funding costs lower even if we don't get more rate cuts?

Yes. Thanks, Manan. This is Travis. Relative to where we were coming into the year, we had assumed 2 Fed cuts as of 12/31. Obviously, those are out of the forecast. But as we've said pretty consistently, we're neutral to the front end of the curve. So the elimination of those cuts in the model is not overly impactful to our NII outlook. We are more exposed to the belly and longer end of the curve, and there's been some migration higher there, which has been incrementally helpful. From a deposit cost perspective, even if we're unable to materially reduce core customer deposit costs in a vacuum, we still have what we view to be pretty significant tailwinds from the structural location of higher-cost wholesale funding into lower cost core. And that's what I think has given us so much confidence about the margin trajectory that you've seen play out over the last year or 2 and why we continue to have confidence through the end of the year and into 2027.

That's really helpful. And then, Ira, maybe for you, you spoke about investing in AI early and the benefits of that to drive going forward. Are there any areas where you think you need to accelerate the investment spend there? Or is a lot of the investment spend going to be self-funded from here? So if you can just help us with how to think about the expense outlook this year and next year and how we should think about operating leveraging forward?

I think it's a significant opportunity for us and really for the entire industry as to how we think about how we service clients from an operating expense perspective and then also how we enhance the revenue side of it as well. I think for us, when we think about the expense that would go to it, we've always been very mindful of what the efficiency ratio is within the organization and how we self-fund a lot of what we've done here. We've spent about $450 million on CapEx in the last 7 to 8 years versus a $50 million number in the 7- to 8-year cumulative period before while still maintaining a very efficient organization. When I became CEO, I think we were at 3,350 employees and $20 billion in size. Today, we're 3,607 employees and $64 billion in size. So having a more efficient organization, the more we can put that obviously provides an opportunity to really enhance the AI spend as well as other opportunities within the organization. Just over the last year, we declined about 100 employees within the organization. And as we think about the reduction in some of those roles, we're definitely enhancing the opportunities and reinvesting some of that back into AI that we think is going to be a lot more productive moving forward.

Our next question comes from the line of Feddie Strickland with Hovde Group.

I was just wondering if you could talk about the competitive landscape on the retail deposit side, maybe how that's changed and whether that's really shifted its broad expectations and more cuts seem to fizzle out?

Yes. Thanks, Feddie. This is Travis. Look, it does remain competitive out there for, I'd say, consumer deposits. I mean, as rates have kind of backed up, you see it in the offered rates that are posted in branches and online. I would just say, for us, I mean, obviously, the consumer element is a component of our anticipated deposit growth but the majority does come from the commercial side, and that would include small business and business banking in that as well. There, we're competing with the relationship, the service model that we have, the treasury platform that we can provide. So obviously, it will always be an element of how you compete for deposits, but it's not the only one. And I think that's what's enabled us to differentiate ourselves from a deposit growth perspective while also driving down costs.

Great. And just on the Common Equity Tier 1 guide. You mentioned it in your opening remarks, but can you just refresh us on capital priorities and does that CET1 direction mean fewer buybacks or simply more capital generation? Or are you taking into account the Fed moves there? Just wonder if you can talk a little bit more about buybacks relative to the CET1 ratio?

Yes, thanks. We've been pretty consistent that we have this range or target range of 10.5% to 11% on CET1, but throughout 2026, we anticipate staying at the higher end of that range. I think one key element, I mean, for us, the #1 priority for capital utilization is to support high-quality, well funded loan growth. And as we've seen kind of good activity in the first quarter and the pipeline is building well, we anticipate, as we said, that loan growth will trend towards the higher end of our range. We want to be able to support that. So we bought back 4 million shares this quarter in aggregate, it was about $52 million of capital we utilized for the buyback. I would anticipate that pulls back a little bit because as we look at the loan growth opportunities for the next couple of quarters, we want to make sure that we're preserving the capital to support that. So we anticipate remaining active to some degree, but it wouldn't surprise me if it's a little bit less than what the first quarter was on the buyback.

Our next question comes from the line of David Chiaverini with Jefferies. .

Brooks Dutton on for Dave this morning. With your CRE concentration ratio trending lower to 3.29%, what is the long-term target for this metric? And how does that influence you guys 4% to 6% loan growth for the remainder of 2026?.

Yes. I think we were very diligent within the last 2-ish years in identifying a certain runoff portfolio really was transactional for us. So they didn't really bring the deposit relationships that we were looking for. So those 2 or 3 clients continue to run off, which create capacity for a lot of our loan growth within the organization. I think when we think about absolute getting on 300% as an absolute number is a longer-term priority for us, and we think that we're trending there. But there's really very little pressure from an external perspective that we feel that we need to accelerate that. These are good quality loans, but I think maybe just getting the return hurdle that we're looking for. So for us, it really becomes how do we rotate the profitability of the clients from certain under ROI clients into higher ROI clients. And that's really what's driving how we think about the runoff of the free portfolio. .

Great. And then just on fee income, there's lower capital markets activity this quarter. Can you just talk about your run rate expectations for 2026 as we progress to the year?

Yes, thanks. We did indicate on the fourth quarter call that fee income in general was about $7 million elevated in a variety of ways. One of that was $4 million or $5 million of elevation from a soft perspective in the fourth quarter. So that normalized as expected. The $10 million in capital markets in general is a good starting point, and we anticipate that we see growth throughout the rest of the year.

Our next question comes from the line of Janet Lee with TD Cowen.

For loan growth, is the -- more growth coming from nontransactional CRE and then still pretty robust growth in C&I there. Should we expect the mix -- should we expect more of growth to also come from CRE in the future quarters versus what you expected in the prior quarter? Or how should we think about the mix of loan growth as we head into the rest of 2026?

Yes. Janet, maybe I'll start, and Gino can add some commentary in terms of what we're seeing in the pipeline. But coming into the year, we had guided to about $2.5 billion of loan growth of which $1 billion was C&I, $1 billion was CRE and $500 million was consumer and resi. Within that $1 billion of CRE, we anticipated a couple of hundred million would be regulatory CRE. So investor in multifamily. As you saw in the first quarter, right, that was a slight decline. I would anticipate maybe that we see a little bit of regulatory CRE growth throughout the year, but the majority will remain in kind of owner occupied in C&I with support from the consumer areas as well. So maybe Gino, what you're seeing across the market? .

I'll just add, we continue to invest in new talent and primarily with C&I talent, upmarket C&I business bankers as well that are focused on C&I and deposit-rich businesses. Our pipeline -- C&I pipeline is up $1 billion since the end of the year. So we expect to see continued C&I growth throughout 2026, both because of the investments we made and because our clients continue to invest. We have relatively robust economies. We're in affluent markets, whether that's Coral Gables, Tampa, Morristown, Manhattan Garden City, all of those markets remain strong and robust in our clients despite the noise out there and some of the headwinds from input costs, our clients continue to remain confident and we continue to invest and we're supporting them.

That's helpful. And your credit was very stable this quarter, but your criticized and classified loans were up a little bit, driven by C&I special mentioned loans. Could you provide some color on the trends you're seeing and do you still affect the trajectory of criticized and classified to decline from here? Or should it stabilize over the near term?

Janet, it's Saeger. The really stabilization of criticized in the first quarter is just a normal phenomenon of year-end financial collection and some migration. We do anticipate that we will still see a decline in the criticized throughout the year in noting we had a big decline in Q3 and Q4, and we still have an expectation for the year to be down. .

Our next question comes from the line of David Smith with Truist Securities.

Can you give us a sense of where new loans are coming on the books today and how spreads have trended over the quarter, given everything that's going on?

This is Travis. New loan yields declined modestly. I think it was 6.75% last quarter, it was maybe 6.55%, 6.60% this quarter. We're seeing modest spread compression in certain asset classes on the commercial real estate side. I think that led to a little bit more runoff in the regulatory prebook than maybe we had anticipated coming into the year. But spreads have remained generally stable in most of our target portfolios. It obviously remains competitive for high-quality customers that we're banking. But I do think we've reached an air pocket from a size perspective, where we're one of very few banks remaining in this size category that can offer all the products and services of a large bank with the high-touch service and quick response and credit underwriting of more community-oriented bank. I think that's playing well for us to be able to grow without necessarily seeing spreads collapse. .

And did you have the spot deposit rate for March 31?

Yes. Interest-bearing spot deposit cost was 2.95% million versus 3.02% in December, all in was 2.26% spot deposit cost versus 2.32% at December 31, so down 6 basis points from the end of December to the end of March. .

Our next question comes from the line of Anthony Elian with JPMorgan.

This is Mike Pietrini on for Tony. So I guess I'll start on NIM. I guess, how are you guys thinking about NIM trending for the rest of the year? I know you guys mentioned coming into the year that the 3.30% mark was sort of what you expected? How do you guys see that trending?

Yes. So coming into the year, we had anticipated a slight reduction in margin in the first quarter and then building up to that 3.30% level by the fourth quarter. The reality is we posted a better starting point. And so I would anticipate that there's some upside to that 3.30% fourth quarter '26 target that we've laid out. Again, I think the funding profile is better at 3.31% than we had maybe anticipated. The interest rate backdrop remains supportive of the margin expansion. And we still have the structural tailwinds that we outlined on the net interest income side of the deck, showing the fixed rate asset repricing and then the fixed rate liability repricing as well. So when you add it all up, I think we feel better about the margin guide that maybe we saw coming into the year, even though coming into the year was strong as well.

Great. And then on loan growth, now you guys sort of guiding to the mid- to high end of that range, the 4% to 6% range. I guess, what categories do you feel more encouraged on now than you did before? Or just any color on the expected growth trajectory of any of the different categories over the rest of the year? That would be great. .

Our pipeline remains very robust. It's basically double what it was a year ago. And it is primarily concentrated in C&I and health care. We've got a very terrific health care franchise with experience -- very experienced people. And that business continues to grow. We do have a reasonable amount of CRE demand that is offset by the runoff of the nonregulatory book. And so we expect -- and also its robust growth across all of our geographies, whether it is Florida, New York, New Jersey. And even in our growth markets, we're seeing good growth in Illinois and L.A., et cetera. So we expect a very robust originations here.

Our next question comes from the line of Matthew Breese with Stephens Inc.,

Maybe a quick one on expenses first, just given some of the moving pieces, severance, et cetera, look at a starting place for the second quarter on salary expenses is $150 million the right place to be, any other moving parts there?

Matt, I think that's right. And I would just say, so the first quarter payroll tax impact was about a $7 million headwind. That declined by about $4 million in the second quarter. At the same time, our merit bonuses only went into place kind of mid-March, so there is no real impact from that in the first quarter. So those 2 things effectively balance out. If you take the severance away from the compensation line, I think that's a good starting point. The only element and this moves around quarter-to-quarter is we did see some higher insurance costs in that line in the first quarter. So the -- it's possible that we could outperform from that perspective, but I don't think that would be overly material.

Okay. And one thing I haven't heard a lot about what I've heard a lot of peers talk about is just the extent you're seeing payoffs and prepayments. First, maybe just your thoughts on that? Are you seeing that as well but be able to offset it? And then secondly, is the prepayment penalty income going into the NIM? And I would just love to get some sense for how that's trended and if it's expensive? And are we modeling too much of it right now and just wanted your thoughts there.

Yes. I don't think -- first of all, it does go through our NII, although it's not an overly material number. Prepayments this quarter declined to about $1.2 billion. They've been running at around $1.4 billion for the last couple of quarters. So we saw a slight decline in prepayment activity, but it's been fairly consistent when you look back over 5 or 8 quarters or so. So I don't think it's been a material moving piece in terms of balances for the NII. .

Okay. And can you remind us of what the accretable yield that's flowing through the margin is?

Yes, it's like $10 million this quarter, which has been consistent. It's about $4 million on the security side and $6 million on the loan side. .

Okay. And I think that was what it was last quarter 2?

Yes, this quarter -- excuse me, yes, it was $9.5 million this quarter. It was $10.9 million last quarter, so a slight decline. .

Okay. And then last one for me, just on asset quality. The big areas of concern for the industry, I would love your thoughts on NDFI, not that you have a ton of it and then office commercial real estate, just of kind of color and if you're seeing any sort of green shoots there or anything that's keeping you up at night? That's all I had.

Matt, it's Mark Saeger. NDFI has never been a big portion of our portfolio. We have about 2.6% of the portfolio in NDFI compared to 7% for our peers. That number for us also, we mentioned in the past. We had a focus on capital call facilities out of our fund finance group. Those are exceptionally well structured to entities with a strong history and a very strong institutional LP base. So we view that as safe lending. But yes, as you mentioned, it's a small part of our portfolio. As it relates to the office portfolio, we have that breakout in our deck. We continue to be very granular in that space, diversified by geography more suburban than urban. And we definitely are seeing more rational transactions happen in the office space. If it hasn't hit bottom in all markets, it's close to bottom, and we're seeing new lease-up activity, a reduction in subleasing in the majority of our markets. So not actively growing that portfolio, but our concerns on that portfolio have definitely abated.

It's Gino too. I will only add that in the last 2 quarters has been record leasing in New York City. And so at record rents, especially your Class A properties, you can see upwards of over $200 a square foot in rent. So some of the concerns about Montani and other things that are happening. Just not materializing with corporations in their leasing strategies at least.

[Operator Instructions] Our next question comes from the line of Christopher McGratty with KBW.

Travis, going back to the capital, just to push a little bit on the buyback. I mean your ROE going in the right direction, generating more capital. Can you do both the high end of growth and and buybacks or maybe it's more of a back half of the year as you kind of talk about the near-term loan growth. I guess what's the hesitation especially with the Basel III proposal?

Yes. I don't think that there's any hesitation. I just think we have a very robust pipeline, and we want to make sure that we're well positioned to support that loan growth, Chris. So again, we bought back $50 million of stock in the first quarter, something in that $40-ish million, $40 million to $50 million range. I still think is reasonable. The average price we bought it back was below where the market is today. So that's another element that plays into it. We will remain active in the buyback. I just indicated that I think it will be a little bit lighter than the first quarter. .

Okay. That's better. And then Ira, I didn't hear M&A or strategic you mentioned at all, maybe a view there, if there was a change.

Yes. I mean from an M&A perspective, I don't think anything has really changed. I think from a historical perspective, it's been important for us to remain a shareholder friendly and to do what's in the best interest of the shareholders. And I don't think that's ever going to change here. .

And I'm currently showing no further questions at this time. I would now like to hand the conference back over to Ira Robbins for closing remarks.

I just want to thank everyone for the interest and look forward to speaking to you next quarter. Thank you. .

This concludes today's conference. Thank you for your participation. You may now disconnect.