Valley National Bancorp (VLY) Earnings

Management highlights

- Strategic execution: Building a higher quality and resilient funding franchise by focusing on core deposit generation, winning primary operating relationships, and creating a stable funding engine. Pursuing diverse relationship-focused loan growth by allocating capital to areas with durable demand and strong risk-adjusted returns, and selectively exiting lower return transactional clients. Focusing on operating leverage and scalability with long-term investments. - AI approach: Balancing pragmatic relationship-led culture with AI to augment productivity, enhance decision-making, improve operational efficiency, and serve diverse client base. Early investment in AI talent and analytics, with specific use cases like customer facing voice AI agent, fraud tools, and AI enhancements to sales process.

Guidance

- Annual net interest income growth is expected to trend towards the higher end of the previously provided range with more meaningful acceleration in the second half of the year. Anticipate modest upside to previous guidance range and existing consensus estimates. Total deposit growth is towards the high end of the 5% to 7% guidance range for the year. Loan growth for the year is between the midpoint and high end of the 4% to 6% range. Efficiency ratio is expected to trend towards 50% by the end of 2026. CET1 ratio is expected to remain towards the higher end of the target range.

Segment performance

Net income was approximately $164 million or 28 cents per diluted share. Excluding certain non-core items, adjusted net income was $169 million or 29 cents per diluted share. Adjusted pre-provision net revenue increased to $253 million during the quarter. Total loans grew nearly $700 million, or 5.5% annualized during the quarter. Owner-occupied CREE, particularly within healthcare specialty vertical, contributed to growth as regulatory CREE declined modestly. CNI loans grew nearly $150 million. Total deposit costs declined 18 basis points during the quarter. Net interest income expanded for the fourth consecutive quarter despite day count headwinds. Non-interest income was up 18% year-over-year driven by capital markets and deposit service charge revenues. Reported non-interest expenses increased but adjusted non-interest expenses were flat. Efficiency ratio declined to 53.1%. Non-accrual and accruing past due loans declined. Net charge-offs as a percentage of total loans declined. Allowance coverage remained generally consistent. Tangible book value increased approximately 1% during the quarter.

Analyst Q&A

• Q: On NII side, talk about inputs around NII outlook versus January, ways to drive funding costs lower even if no more rate cuts.

  A: Travis said elimination of Fed cuts in model not overly impactful to NII outlook as neutral to front end of curve and more exposed to belly and longer end. Deposit cost has tailwinds from structural rotation of higher cost wholesale funding into lower cost core.

• Q: On AI investment, areas to accelerate spend or self-funded.

  A: Ira said AI is significant opportunity. They've been mindful of efficiency ratio and self-funding. Declined employees and reinvesting in AI.

• Q: On retail deposit competitive landscape.

  A: Travis said competitive for consumer deposits, majority deposit growth from commercial side including small business and business banking with focus on relationship and service model.

• Q: On common equity tier one guide, capital priorities and buybacks.

  A: Travis said CET1 target range 10.5% to 11%, staying at higher end. Priority is to support high-quality loan growth, bought back 4 million shares this quarter, anticipate buyback pulls back a bit to preserve capital for loan growth.

• Q: On CRE concentration ratio long-term target and influence on loan growth guide.

  A: Ira said long-term priority to get under 300%, rotating profitability from under ROI clients to higher ROI clients.

• Q: On fee income run rate expectations for 2026.

  A: Travis said fee income normalized from fourth quarter, $10 million in capital markets as starting point, anticipate growth throughout the year.

• Q: On loan growth mix, future growth from CRE vs CNI.

  A: Ira and Gino said pipeline robust, primarily in CNI and healthcare, expect continued C&I growth due to investments and client confidence in robust markets.

• Q: On expenses, second quarter salary expenses.

  A: Travis said first quarter payroll tax headwind declines in second quarter, merit bonuses mid-March no impact in first quarter, severance and insurance costs considered.

• Q: On prepayments, NIM, accretable yield, asset quality.

  A: Travis said prepayment activity declined slightly, NIM trending with upside to 330 target, accretable yield $9.5 million this quarter. Mark Sager said NDFI small portion of portfolio, office portfolio concerns abated with rational transactions and new lease-up activity.

• Q: On capital, buyback direction and M&A.

  A: Travis said will remain active in buyback, a bit lighter than first quarter. Ira said no change on M&A, remain shareholder-friendly.