Valley National Bancorp Q2 FY2026 earnings call

Strategic Progress & Core Financial Results

• The firm delivered strong progress against its strategic priorities: customer deposit growth (particularly non-interest-bearing balances), disciplined diversified loan growth concentrated in C&I and OOCRE, and expanding fee income in absolute terms and as a share of total revenue.
• Q2 2026 reported net income was ~$171 million (29 cents per diluted share); adjusted net income was ~$173 million (30 cents per diluted share). Adjusted pre-provision net revenue rose 6% quarter-over-quarter to 1.64% of average assets, the highest level since Q4 2022.
• The efficiency ratio improved to 52.1% from 53.1% Q1 and 55.2% year-over-year, with expenses as a percentage of average assets remaining below peer levels.

Core Deposit Growth Strategy

• Diversified commercial and consumer funding channels are a key competitive advantage as industry deposit competition intensifies. The firm focuses on winning new commercial relationships via service and platform capability, not just rate, driving strong non-interest-bearing deposit growth.

AI & Digital Transformation Strategy

• Management estimates that effective AI adoption can structurally lower bank efficiency ratios by ~500 basis points, and Valley aims to be an industry leader in AI implementation.
• Structural advantages supporting the AI strategy include: Valley Ventures (direct exposure to the AI/tech startup ecosystem for talent and tech access), international/technology banking relationships with VC funds and early-stage Israeli tech firms expanding to the U.S., and a partnership with Bank Leumi providing insight into leading cyber, fraud, and risk management practices.
• AI is integrated into the broader operating model to improve productivity, strengthen risk management, enhance client experience, and enable scalable growth. Year-to-date, the firm has captured $15 million in annualized expense savings from AI, offset by only $3-$4 million in new AI-related expenses.

Capital Deployment

• The firm maintains a balanced approach to capital allocation: prioritizing organic high-quality loan growth, followed by shareholder capital returns, while retaining balance sheet flexibility.
• In Q2, $81 million was returned to shareholders via common dividends and repurchase of 1.5 million shares. Reduced buyback activity reflected exceptional loan growth during the quarter; the firm will adjust buyback activity based on near-term loan growth expectations.
• Regulatory capital ratios remain comfortable: the Common Equity Tier 1 (CET1) ratio is 10.7%, within the firm's target range, and strong organic capital generation supports ongoing growth and capital return aspirations.

Credit Quality

• Criticized and classified assets declined to 7.3% of total loans from 8.1% quarter-over-quarter and 9% year-over-year, driven by improving trends in the CRE portfolio. Net charge-offs were $22 million (17 basis points of average loans), up from $18 million (14 basis points) Q1. The provision for credit losses was $29 million, up from $21 million Q1, primarily due to strong C&I loan growth. The allowance for credit losses as a percentage of total loans declined modestly to 1.16% from 1.18% Q1, reflecting the reduction in criticized assets.

Valley National Bancorp is a commercial-focused banking institution, with performance broken down by core business segments as follows:

• Loans: Total loans increased by $1.6 billion in Q2 2026, representing 13% annualized growth. Growth was concentrated in commercial and industrial (C&I) and owner-occupied commercial real estate (OOCRE), with 12% annualized C&I growth and less than $100 million growth in non-owner-occupied regulatory commercial real estate (CRE). Regulatory CRE concentration as a percentage of risk-based capital declined 12 percentage points to 317% from 329% quarter-over-quarter.
• Deposits: Direct customer deposits grew $1.1 billion, including $300 million in non-interest-bearing deposits, $200 million in interest-bearing non-maturity deposits, and $600 million in retail CDs. The firm added $200 million in incremental broker deposits to fund loan growth timing mismatches and rotated $700 million in floating rate balances to brokered CDs. Total deposit costs were unchanged quarter-over-quarter at 2.29%, up just 2-3 basis points from Q1 due to CD promotions. Deposits contributed 87% of total revenue.
• Net Interest Income: Tax-equivalent net interest income increased to $488 million, up $16 million quarter-over-quarter and $55 million year-over-year. Tax-equivalent net interest margin expanded 3 basis points quarter-over-quarter to 3.2%, up 19 basis points year-over-year.
• Non-Interest (Fee) Income: Total non-interest income increased $4.9 million quarter-over-quarter to $73.7 million, contributing over 13% of total revenue. Capital markets revenue rose $2.6 million, and wealth management/trust fees rose $1.6 million, driven by higher volumes in loan syndications, tax credit advisory, and swap activity tied to higher CRE origination volumes.

• Management maintains the full-year 2026 outlook, with upward revisions to gross loan growth and fee income guidance: gross loan growth is now expected to be at or somewhat above the high end of the prior 4% to 6% range, and 2026 fee income growth is expected to migrate toward the high end of the prior 6% to 9% range.
• Guidance for deposit growth and net interest income remains unchanged from the upward revision announced in the prior quarter's call.
• The firm continues to expect continued earnings growth and profitability improvement through the remainder of 2026 and into 2027.
• Net interest margin is expected to exit 2026 in the low to mid 330s, unchanged from prior guidance, with 5-7 basis points of NIM expansion expected in each of the final two quarters of 2026. Continued NIM expansion is projected through the end of 2027, with ongoing tailwinds expected beyond 2027.
• Charge-offs and provisions for credit losses are expected to remain in line with prior guidance for full-year 2026.
• The efficiency ratio target of 50% or lower by the end of 2026 is maintained. Management expects the efficiency ratio to continue declining beyond 2026, with AI adoption expected to deliver an additional 500 basis points of long-term improvement.
• The 15% return on tangible common equity (ROTC) target is still expected to be achieved by the beginning of 2028, unchanged from prior guidance.

• Intensifying industry-wide deposit competition creates upward pressure on core deposit costs, particularly on the consumer side.
• Modest spread compression has been observed in the CRE lending market, creating ongoing competitive pressure on loan yields.
• Higher interest rates could potentially dampen future loan growth, though management does not expect this to materially impact Valley's 2026 loan growth outlook at current expected rate levels.
• There is a lag of 3-6 months between originating new C&I loans and realizing the associated expected deposit balances, which can create temporary funding mismatches between loan and deposit growth.
• A modest uptick in non-accrual and past due loans was recorded in Q2, though management noted most non-accrual loans remain well-collateralized and overall credit trends are positive.

Q: Fee income was very strong this quarter, with current run rate above guidance. Is capital markets, a volatile segment, expected to step down from Q2 levels? / A: Only interest rate swap income, tied to commercial real estate originations, was slightly elevated in Q2 due to pull-forward of closings expected in Q3, equaling just $1-$2 million in temporary excess volume. All other fee lines including deposit service charges, loan syndications, tax credit advisory, and insurance showed consistent, sustainable growth that remains on track to meet full-year targets. (218 chars)

Q: Can you share details on the positive trends driving upgrades and declines in criticized and classified CRE assets? / A: Most of the improvement comes from properties that were previously downgraded while in transition for lease-up. We are now seeing robust market conditions across most CRE asset classes, including office, with strong sponsor support. Properties that were expected to perform are meeting lease-up targets, leading to upgrades and payoffs, and we expect this positive trend to continue. (287 chars)

Q: How will AI and new capital regulations impact your 15% target ROTC? / A: AI is expected to drive 500 basis points of total benefit split ~65% from lower expenses and ~35% from higher revenue. We have already captured $15 million in annualized expense savings from AI implementations, offset by just $3-$4 million in new AI-related expenses, delivering real ROI today. AI will accelerate progress toward the 15% ROTC target, but hitting the target does not rely on AI benefits. (292 chars)

Q: What is the expected trajectory of loan growth after the exceptional Q2 pace, and will core deposits catch up to close the current growth gap? / A: Full-year loan growth will hit the upper end of the 4-6% guidance range, with Q2's exceptional pace pulled forward from expected closings. H2 2026 growth will return to the 10% annualized C&I, mid-single digit aggregate growth trend. There is a 3-6 month lag between C&I origination and full deposit realization, so the current timing gap will close over the next two quarters, allowing for continued reduction in higher-cost brokered deposits. (331 chars)

Q: How do you balance strong loan growth against funding pressures and net interest margin trends? / A: Core deposit growth has been consistently strong: $4.5 billion in new core deposits over the past 12 months, and $8 billion over the past eight quarters. In Q2, the firm originated $1.3 billion in new non-CD core deposits at a blended 1.66%, down from 1.78% last quarter. $2 billion of 4.1% yielding brokered CDs and $1.4 billion of 4.7% yielding fixed rate loans will mature in H2 2026, creating repricing benefits that support ongoing margin expansion even amid competitive deposit markets. (342 chars)