Earnings Call Transcript - VLY Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q2 2025 Valley National Bancorp Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Travis Lan. Please go ahead.

Travis P. Lan, Speaker

Good morning, and welcome to Valley's Second Quarter 2025 Earnings Conference Call. I'm joined today by CEO, Ira Robbins; and Chief Credit Officer, Mark Saeger. Before we begin, I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley.com. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Additionally, I would like to highlight Slide 2 of our earnings presentation and remind you that comments made during this call may contain forward-looking statements relating to Valley National Bancorp and the banking industry. Valley encourages all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and the factors that could cause actual results to differ from those statements. With that, I'll turn the call over to Ira Robbins.

Ira D. Robbins, CEO

Thank you, Travis. In the second quarter of 2025, we reported net income of $133 million or $0.22 per diluted share, with adjusted net income of $134 million or $0.23 per share. This shows an increase from $106 million and $0.18 per share on both reported and adjusted bases from the previous quarter. The growth in adjusted earnings indicates strong momentum in both net interest income and noninterest income, along with a reduction in loan loss provisions. Our profitability ratios, including return on average assets and return on tangible shareholders' equity, continue to rise and are on track to meet our full-year guidance from January. Beyond the numbers, I am very proud of how consistently we have executed across the strategic priorities that define our long-term value. This quarter's presentation adds qualitative details about the initiatives that have driven this progress. I want to take a moment to elaborate on those priorities. First, deposit growth and funding transformation. Over the last 12 months, we have added over 105,000 new deposit accounts, leading to around 8% core deposit growth. Consequently, our dependence on indirect deposits has decreased from 18% to 13%. This was achieved alongside a reduction of 51 basis points in our average cost of deposits for the second quarter of 2025 compared to the same quarter in 2024. Since 2017, we have increased commercial deposit accounts by an average of 11% per year. These outcomes are no coincidence; they result from intentional investments in talent and technology, targeted market penetration, and expanding our specialty verticals. Our capability to attract and retain relationship-based deposits in a competitive market is a significant advantage, and we are committed to maintaining this momentum. Second, commercial loan diversification. Since 2017, we have expanded our Commercial and Industrial (C&I) portfolio at a 19% compound annual rate, including nearly 15% growth over the past 12 months. This results from disciplined, relationship-driven growth in some of the most dynamic commercial markets in the country. Our geographic reach, alongside certain nationwide specialty sectors like health care and fund finance, allows us to be selective and impactful. We have specifically focused on these sectors due to their attractive risk-adjusted returns. Valley has been involved in the health care C&I space for nearly 20 years and has never experienced a loss on any Valley-originated health care C&I loans during this period. While we have historically been active in this area, we are now increasing our efforts as we leverage our technology banking capabilities. Similar to our experience in health care, we have never recorded a loss on a capital call loan. Third, developing durable, high-quality fee income. Noninterest income has grown at a 12% annual rate since 2017, more than double that of our peers. Importantly, the makeup of that income has significantly improved. Volatile revenue from residential loan sales accounted for just 3% of total noninterest income in the second quarter of 2025, down from 20% in 2017. We are focusing our growth strategies on capital markets, treasury management, and tax credit advisory services. These are scalable, client-focused businesses that strengthen relationships and enhance our earnings stability. Together, these strategic priorities are transforming Valley into a more diversified, efficient, and valuable institution. We operate in markets with significant growth potential, and we have created a platform that is better prepared to seize these opportunities. Our balance sheet is strong, our profitability metrics are improving, and our short-term goals align with our long-term vision. While these strategic efforts have substantially enhanced Valley's value proposition, I am pleased that we have achieved this without sacrificing our financial performance. Over my tenure as CEO, we have increased cumulative tangible book value with dividends by over 105%, which is about 15% higher than the peer median. Yet, we acknowledge that there is still a considerable gap between the quality of our franchise and our share valuation. We believe that ongoing execution of our strategy will help narrow that gap over time. With that, I will hand it back to Travis to discuss the quarter's financial highlights. After his comments, Mark, Travis, and I will be available for your questions.

Travis P. Lan, Speaker

Thank you, Ira. Before we dive into the quarter's results, I'd like to provide an update on our full year 2025 guidance. We continue to expect approximately 3% loan growth for the year, consistent with our prior update. Given the loan growth is trending toward the lower end of our original guidance, we are refining our net interest income growth estimate to a range of 8% to 10%. Our outlook for noninterest income remains unchanged at 6% to 10% growth, supported largely by the areas that Ira just mentioned. We are lowering our noninterest expense growth guidance to a range of 2% to 4%, reflecting our ongoing focus on cost discipline and operating leverage. From a credit standpoint, we are tightening our net charge-off expectations to $100 million to $125 million for the year and are refining our provision estimate to approximately $150 million for the full year. In aggregate, these modest directional adjustments are expected to result in full year earnings per share that remains broadly in line with current consensus estimates. Turning to Slide 8, we delivered another strong quarter with $600 million of core customer deposit growth. This was driven by a combination of continued growth in commercial noninterest-bearing deposits and promotional CD offerings. From a pricing perspective, we were able to largely mitigate competitive pressures through disciplined management of our back book. Our cumulative total deposit beta during the recent rate decrease cycle stands at 51%, which has supported consistent net interest margin expansion over the last 5 quarters. Slide 10 further highlights the transformation of our deposit base since 2017. Commercial deposits have nearly quadrupled and our delivery channels have become significantly more efficient. A key driver of this transformation has been the success of our differentiated specialty verticals, which now contribute over $12 billion of deposits to our franchise. These verticals include international and technology, our online delivery channel, and our private banking business, among others. As we continue to leverage these verticals and align our product offerings with client needs, we anticipate sustained deposit momentum. Turning to Slide 11, gross loans increased at an annual pace of 6%, led by strong growth in C&I and indirect auto lending. C&I loan growth was particularly robust, fueled by activity in our fund finance and health care verticals as well as contributions from our teams in Florida, New Jersey, and Chicago. Fund finance and health care collectively contributed roughly 60% of the quarter's net growth in C&I. While we expect C&I growth to moderate somewhat, we remain confident in our ability to selectively attract high-quality relationships to the bank. CRE runoff slowed this quarter as a result of higher origination activity with respect to our targeted relationship-driven clients. As of June 30, 2025, our CRE concentration ratio has declined to 349% from 474% at the end of 2023, surpassing our year-end target ahead of schedule. Slide 12 reinforces the consistency of our C&I growth since 2017, which reflects both our disciplined team building and our ability to capitalize on market disruption. Our national specialty platforms, including fund finance and health care, continue to provide valuable diversification. In early 2024, we added a seasoned syndications team, enhancing our ability to structure and lead larger transactions for upmarket clients. These capabilities, combined with our expanded treasury and capital markets offerings, continue to provide attractive growth opportunities for Valley. Slide 14 shows a 3% sequential increase in net interest income driven by continued net interest margin expansion and growth in average earning assets. This marks our fifth consecutive quarter of NIM improvement supported by our asset repricing tailwind and disciplined deposit cost management. The interest rate backdrop, combined with additional asset repricing opportunities, remain supportive of further NIM expansion throughout the year. We also delivered strong noninterest income growth this quarter. Capital markets activity picked up meaningfully with increased swap volumes tied to CRE originations and growth in both FX and syndication fees. Deposit service charges also rose significantly, reflecting additional penetration of our treasury platform and enhanced pricing. Slide 16 illustrates the long-term trajectory of our fee income. Since 2017, we've grown fee income at a 12% CAGR, more than double the peer median. And as Ira mentioned, we've improved the quality of that income. Our capital markets, treasury, and tax credit advisory businesses are now core contributors to a more stable revenue stream. Turning to Slide 17, adjusted noninterest expenses grew modestly, primarily due to merit-based salary increases, which took effect late in the first quarter and higher incentive accruals during the second quarter. Professional expenses also normalized from unusually low levels in the first quarter. Despite these modest headwinds, our efficiency ratio improved to 55.2%, the best level since the first quarter of 2023, driven by strong revenue growth and continued cost discipline. Slide 18 illustrates our asset quality and reserve trends. Nonaccrual loans remained generally stable during the quarter, while accruing past dues increased to 40 basis points of total loans. Roughly two-thirds of this increase was related to a pair of CRE loans, which are no longer past due. Net loan charge-offs and loan loss provisions both declined from the first quarter, in line with our expectations. We continue to anticipate further credit normalization and a decline in both provision and charge-offs throughout the remainder of the year. Similar to this quarter's results, we anticipate general stability in our allowance coverage ratio going forward, all else equal. Turning to Slide 19, tangible book value increased as a result of retained earnings and a favorable OCI impact associated with our available-for-sale securities portfolio. While our total risk-based capital ratio declined due to the redemption of $115 million of subordinated debt, other regulatory capital ratios improved. We remain extremely well capitalized relative to our risk profile and have ample flexibility to support our strategic objectives. With that, I will turn the call back to the operator to begin Q&A.

Operator, Operator

Our first question is from Chris McGratty with KBW.

Christopher Edward McGratty, Analyst

Travis, maybe start with you, you talked about the margin continuing to expand. Can you speak to the ability to maintain deposit pricing given the competitive nature in the growth outlook? I think you had talked previously about maybe getting over time to like 3.25%. Any changes to the way you're thinking about the cadence of margins?

Travis P. Lan, Speaker

No, I don't think there is. I mean, we still expect the margin to increase as the year progresses and into 2026 as well. This increase is driven by a combination of asset repricing tailwinds and general stability on the deposit side. We've noticed that competition for new deposits has picked up recently. However, we still have the structural opportunity with our $6.5 billion of brokered deposits to reprice those lower over time. For example, in the third quarter, we had $1.2 billion of brokered deposits with an average cost of $510 million, and we've been replacing that with brokerage. There is still a pickup, but we believe there is an opportunity to replace it more with core deposits. This quarter, we added over $1 billion of new deposits at a blended rate of 2.77%. That gives you a sense of the opportunity we have on the funding side.

Christopher Edward McGratty, Analyst

Okay. You said at 3.77% or 4.77%, sorry, I missed that.

Travis P. Lan, Speaker

New deposits were over $1 billion at a blended rate of 2.77%.

Christopher Edward McGratty, Analyst

Okay, great. And then the charge-off guide, I think it implies a decent step down in the charge-offs in the back half of the year. I may be interested in comments about new nonaccrual formation in the quarter, a little bit of a tweak in the reserve and then your comments about stability and visibility in the credit.

Mark Saeger, Chief Credit Officer

Yes. I think if we point to stabilization on nonaccruals that we saw this quarter and also I want to point out, for the first quarter, we had flat criticized level of assets. That's after 2 years of some migration. It's consistent with what we were seeing in the fourth quarter and first quarter, where we saw the growth in criticized really diminished materially. We point to the stabilization that we're seeing within the real estate market as the primary driver. And in a world where the economic outlook continues to be consistent with what we're seeing today, we would expect that, that trend continues on the criticized. And the guidance we had given was an expectation for charge-offs and reserve levels to provision levels to be higher at the beginning of the year, and that's consistent now with our guidance that we're showing through the end of the year.

Operator, Operator

Our next question is going to come from the line of David Smith with Truist Securities.

David Charles Smith, Analyst

There's been a lot of activity in the broader technology and software sector in recent months, both for the industry itself as well as seemingly in banks interested in banking the space with more intensity. I was curious if you could speak to the competitive landscape there and how you're adapting Valley for this environment?

Ira D. Robbins, CEO

It's a great question, David. We had actually looked to get into the business 5 to 6 years ago from an organic perspective. And we went through a strategic initiative looking at not just what the relationship managers needed to do and what that target client was, but really the infrastructure that was required from a treasury service solution, the credit piece that comes with it. And it was really a significant build is what we had identified at that time. We were fortunate enough with the BLU's acquisition back in 2022 to be able to acquire a really experienced team that has a lot of connectivity to the Israeli market. Right now, I think they have well over 50% of the market share if anything from Israel coming to the United States really goes through Valley. So a real strong connectivity there, but really an infrastructure that we can leverage. So what you're seeing now is the ability to expand that into the domestic space. So the infrastructure is already there. The incremental knowledge that's really needed to bank that space already exists within the organization. So we're really excited about the continued focus that we're seeing and the growth in that market, and we think we'll definitely get our fair share.

David Charles Smith, Analyst

And then just staying on the topic of markets. I know the New York Metro area and regulated multifamily isn't as big a part of your portfolio as it once was. But any thoughts you have about the developments in the mayoral race and how that could affect your portfolio here?

Mark Saeger, Chief Credit Officer

So this is Mark Saeger. Yes. We don't want to preempt the voters of New York on who will actually be the mayor. But based on our forward-looking we do think that potential pressure would continue only to be on the rent stabilized. We've mentioned in the past, a very small part of our portfolio, $600 million in total, very granular portfolio for us, a $6 million average loan size, and our average yield on that portfolio is 4.87%. So we don't have concerns. We feel we're adequately provisioned on that portfolio. We'll point out what we've mentioned in other calls, we've always underwritten in that space to in-place leases and NOI coverage. So an inability to increase in the future, we don't believe will have a material impact on our portfolio.

Operator, Operator

Our next question is going to come from the line of Manan Gosalia with Morgan Stanley.

Manan Gosalia, Analyst

I wanted to start on the loan growth this quarter. Apologies if you've already covered some of this, but the C&I loan growth was particularly strong this quarter. Can you talk about what you're seeing and hearing from borrowers? How much of this growth is coming from the environment improving versus the actions you guys have taken?

Ira D. Robbins, CEO

I would love to say that it's all the actions that we've taken and the infrastructure that we've built, but I think client sentiment definitely has an impact upon that as well. I think we've done a really good job in providing the right treasury solutions that we need, providing the right credit appetite, and just the internal relationships that are required to really grow in some of the segments that we've expanded into fund banking as well as health care. That said, I think from what we see with our clients, there still seems to be real positivity in how they are individually thinking about the market. The C&I pipeline, I believe, is at 30% higher than where it was last quarter. So we're continuing to see really strong growth coming out of that segment today. I know there was a lot of noise regarding tariffs previously. I think we really bank a unique client that really is that small to midsize business that has the agility to really capitalize on what happens with tariffs and some of the uncertainties. So when we look at an environment like we're staring at today, where there's increased volatility and increased uncertainty, we think the types of clients that really look to Valley for their financing needs are the ones that are going to be the beneficiaries of this environment.

Travis P. Lan, Speaker

I would just add on to that, Manan. Specific to this quarter, we grew C&I a little bit over $700 million. About 30% of that growth came from each fund finance and health care C&I. So 60% in total was related to those two specialty areas. The additional 40% was primarily tied to activity in Florida, Chicago, and New Jersey.

Manan Gosalia, Analyst

Got it. Really helpful. And then maybe pivoting over to credit. Any more color on what drove the increase in the past dues this quarter? And what gives you the confidence in the credit outlook that you laid out in the slide deck?

Mark Saeger, Chief Credit Officer

No, absolutely. Again, I think we mentioned, but the increase in delinquencies was driven by three credits. Two of those credits at approximately $100 million are already cleared. We had one $39 million property sale and paid off in full. The $60 million credit has been brought current for the July payment. We were in the midst of negotiating a modification for that customer. And the other remaining delinquency is a matured loan where the borrower hasn't agreed with our extension terms but has received an alternative financing opportunity, and we expect this quarter for that to be resolved. Then I would also point again to, yes, stabilized criticized level and nonaccrual levels. So we do think that these were just unique situations on the delinquency.

Operator, Operator

Our next question is going to come from the line of Matthew Breese with Stephens Inc.

Matthew M. Breese, Analyst

I wanted to touch on deposits first. The 8% quarter-over-quarter growth in CDs, what was the blended price on those? And then Ira, I appreciate your comments on quality deposit improvements. But I guess I'm thinking about this in the context of deposit costs being high to begin with and up quarter-over-quarter. And so I guess my question is with all the new hires and investments, you're growing C&I, which is better for deposits. I guess I just fear there'd be more opportunity to reduce deposits. Maybe you could help me out there.

Travis P. Lan, Speaker

Yes, Matt, this is Travis. To begin, there is quite a bit of variability in the deposit numbers. The increase in CDs resulted from two factors. First, we had some promotional CDs in the market, as we typically maintain at least one promotion at any time, leading to about $400 million in retail CD growth. Additionally, brokered deposits increased by $100 million, despite a reduction in brokered ICS one-way buy, which transitioned to now money market and savings, and was substituted with brokered CDs. When reviewing our deposits from quarter to quarter and noting the decline in now money market and savings, it's important to highlight that customer balances remained stable to slightly increased, although we did experience runoff in ICS one-way that was compensated by brokered CDs. There's also a timing discrepancy with loan growth this quarter, which was exceptionally robust, especially in the C&I sector. Core deposit growth was strong too, but it did not keep pace with the loan growth we experienced. For the upcoming quarters, we expect loan growth to soften to around 1% on a quarterly basis, and we have favorable deposit conditions to support that on a core level, along with continued repricing benefits on the brokerage side. To reiterate my earlier comments in the Q&A, we originated net new deposits this quarter totaling $1.8 billion at a rate of 2.77% for our customers. Furthermore, we have $1.2 billion of brokered deposits maturing this quarter at a rate of 5.10%. We are seeing a combination of positive factors on the deposit side, tied to the current interest rate environment and the repricing of lower rates, alongside structural advantages from the continued growth of core deposits. We find ourselves in a unique situation coming out of the inverted curve, indicating that margins are poised for an upward turn. We are experiencing asset repricing benefits on both the asset and liability fronts, and that's quite unusual.

Ira D. Robbins, CEO

And I think, Matt, just from the strategic, I mean, from my mind, I think the puts and pulls in each individual quarter are definitely important and make a difference for what that NIM looks like. But my mind really goes to some of the more strategic initiatives that we've done and the different verticals that we've gone into and the ability to really have some pricing power within those individual verticals as we continue to expand some of those relationships. I think about the number of accounts and the growth that we've seen. I mean if you go back to when I've taken over as CEO, we've grown commercial accounts 11% consistently on an annualized basis. We've been able to grow consumer accounts, I think, 2% to 3% on a consistent annualized basis. So I think those are things that really drive long-term strategic value, the capabilities that we have within our treasury platform really begin to get differentiated versus some of our peers. So I think there really are the foundational strategic elements that support a lot of the tailwinds that we're describing today when it comes to the deposit initiatives. And I do believe, over a longer-term basis, that those costs will come down to more peer-like numbers. That said, considering we are operating in a very challenging New York market from a deposit perspective versus some of our peers that may be operating in the Midwest or some other geographies, I do believe there is more pricing difficulty or competitiveness in our markets. But we have a right to win for these deposits. And we do believe that, that right is really showing up in the number of accounts that we continue to add every single year.

Matthew M. Breese, Analyst

Got it. Okay. And then I guess I had two others, if you will indulge me. The first one is just, Ira, you had mentioned in your opening comments a disconnect between fundamentals and valuation. Could you talk about a potential buyback? I mean, how much flexibility do you have capital-wise to do that understanding the CRE concentration is still a bit elevated?

Ira D. Robbins, CEO

I think we have a lot more flexibility today than we've ever had in my time being at Valley, whether that's been CEO or really working in the finance area. So I think that in itself, I think, is a wonderful ability to have some flexibility that we haven't had before. That said, I think there are organic growth opportunities for us. So it really becomes a balance of whether we're generating accretion through the buyback versus more sustainable long-term value creation through some of the organic initiatives that we've done. So I think that really becomes more of a balance than really where that CRE ratio is. We feel very, very comfortable with where the CRE ratio is with where the trajectory is. So I don't really think that's an impediment at this point. It really is more on the organic side. I think we talked about a year ago or at the beginning of the year, of some of those performance metrics that we wanted to get to, right, 1% by the end of the year. We talked long term about where that 15% ROTCE number should look for us. We do see a pretty clear path to get to those numbers. And I think those are really driving initiatives for us.

Matthew M. Breese, Analyst

Yes. And that's my follow-up, 1% ROA by the year that's intact. What does that look like in 2026? And when you get to that 15% ROTCE, that's all I had.

Ira D. Robbins, CEO

I think those are what we're focused on, right, because I think there is, in my mind, a disconnect with where that multiple is. And obviously, there's an overhang on the stock still with where that CRE ratio is which is fine. I think it's important for us to continue to make sure that we're driving performance that supports more peer-like multiples. For us, it's getting to that 1% at the end of the year, which when you look at the trajectory of where the NIM is and the guidance we're giving on where the reserve goes or assuming where the provision goes, I mean, those don't take a lot of math to really get to those overall numbers. When you then extrapolate that and continue it forward, we're running between $12 million to $17 million a quarter in incremental net interest income growth. As Travis has alluded to earlier, those are tailwinds that we don't think are going to disappear for some time. I mean, it's not too difficult to easily forecast by a certain part of next year, 12% to 12.5% ROTCE and then getting closer to that 15% in '27 is really where we think we're going to end up. And there is a real clear comfortable glide path towards that.

Operator, Operator

Our next question is from Jared Shaw with Barclays.

Jonathan Rau, Analyst

This is Jon Rau on for Jared. Could you maybe just talk a little bit about the competitive environment in New Jersey and if there's been any shift in sentiment among I guess New Jersey-based customers versus New York, just given the mayoral race there? Any impact on sentiment or demand?

Ira D. Robbins, CEO

I think it's a great question, right, because we have borrowers that play in both spaces. I think there is a little more of a wait and see as to where they're going to allocate some of their capital into where they want to begin to invest into. That said, I think the families that we tend to bank are really more long-term generational families. And for them, there may be going to be a buying opportunity or an investment opportunity in New York based on what happens with the mayor race. So these are families that have much more longer-term views of what New York City is. And I think we probably share in that sentiment from a long-term perspective, we are still optimistic about New York.

Travis P. Lan, Speaker

I would just add that this quarter, I highlighted New Jersey as experiencing strong commercial and industrial growth. However, as the quarter progressed, the pipeline in New York expanded. Currently, the New York commercial and industrial pipeline is quite strong as we enter the third quarter. Activity in the boroughs and Long Island seems to be developing well. While Mark addressed the question regarding the mayoral race in relation to rent-regulated multifamily, it's clear that the commercial environment in New York remains quite robust.

Jonathan Rau, Analyst

Okay. Perfect. And then just on looking further ahead to like 2026 loan growth, how much of a headwind is the CRE runoff going to be just in terms of dollars or just percentage for the year?

Travis P. Lan, Speaker

Yes. As we head into 2026, I don't anticipate CRE will be a headwind from a dollar perspective. I mean, I would think that our CRE balance has stabilized as we get towards the end of 2025 here and would anticipate kind of low single-digit growth in CRE in 2026 as we think about it today.

Jonathan Rau, Analyst

I guess with taking that into account with C&I growth you've seen, any indication on what total loan growth could be for 2026? Is like a mid to high single-digit number too?

Travis P. Lan, Speaker

We haven't provided any 2026 guidance yet as we talked about the 3% loan growth guide for 2025. I mean, keep in mind that, that will include a couple of quarters of CRE runoff, if you were to neutralize that and kind of plug that in for 26. I think you probably get to something that's closer to 5% total loan growth. But again, we have not yet provided any 2026 guidance.

Operator, Operator

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

Ira D. Robbins, CEO

Thank you, Michelle. And more important, thank you to all of you for joining us today. We appreciate the interaction and look forward to talking to you next quarter.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.