Valley National Bancorp (VLY) 2025 Q3 法說會逐字稿

Hello, and thank you for standing by. Welcome to Valley National Bancorp's third-quarter 2025 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Andrew Giannetti. Please go ahead, sir.

Good morning, and welcome to Valley's third-quarter 2025 earnings conference call. I am 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. 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 strong results in the third quarter, reporting net income of approximately $163 million or $0.28 per diluted share. This is up from $133 million or $0.22 last quarter and represents our highest level of quarterly profitability since the end of 2022. This performance reflects a significant operating momentum that has been building in our organization. This quarter's results were highlighted by robust core customer deposit growth, continued momentum in net interest income and fee income, disciplined expense control and a meaningful reduction in credit costs.

Our balance sheet remains extremely strong, and we have achieved many of our stated profitability goals ahead of schedule, including annualized return on average assets being above 1%. Valley is well positioned in the current environment. In 2024, we enhanced our balance sheet and are now leveraging this strength to improve our profitability and franchise value. Today, I'm thrilled to formally introduce our new commercial and consumer banking leaders who we believe will help accelerate the next phase of our evolution and success. Gino Martocci joined Valley in March as President of Commercial Banking, bringing extensive experience from M&T Bank, where he led national commercial and CRE banking efforts.

Gino played a key role in M&T's growth and has already contributed his market knowledge, network and strategic insight to support our commercial franchises further development. In September, Patrick Smith joined as President of the Consumer Bank, following leadership roles at Santander, Capital One and other large financial institutions. Patrick will oversee retail, consumer and small business sectors, drawing on a notable record of growth and execution. Gino and Patrick are already making an incredible impact by enhancing our customer acquisition efforts, talent base and strategic operating model. Their expertise helps position Valley to further leverage our strong foundation and accelerate our strategic initiatives.

Before passing the call to Travis, let me highlight a few of the key areas of sustained momentum. First, ongoing growth in core deposits and funding transformation. Over the past 12 months, we've added nearly 110,000 new deposit accounts, which have contributed to nearly 10% core deposit growth. Targeted investments in products, technology and talent, especially in commercial and specialty lines have driven this progress. Consequently, indirect deposits as a percent of total deposits dropped from 18% to 11%, the lowest level since the third quarter of 2022.

This has been achieved alongside a 56 basis point reduction in our average cost of deposits since the third quarter of 2024. We continue to actively manage deposit pricing in the back book and expect to benefit from lower deposit costs in the fourth quarter and into 2026. Secondly, non-interest income. Excluding volatile net gains on loans sold, non-interest income has grown at an annual rate of 15% since 2017, 3x faster than public traded peers in our size range. We spoke last quarter about our focused efforts with respect to treasury management and tax credit advisory opportunities.

These initiatives collectively contribute roughly $3 million of incremental revenue during the third quarter. The success of our treasury management demonstrates our effective combination of technology and talent. The implementation of an upgraded platform following our core conversion two years ago, coupled with expanding our expert sales team has resulted in nearly $16 million of incremental deposit service charge revenue on an annualized basis since the third quarter of 2024. Thirdly, the resilience of our credit performance. Consistent with our guidance, we saw a significant reduction in net charge-offs and provisions during the third quarter.

We expect to sustain these levels again in the fourth quarter. At the start of 2024, Valley was notably CRE-heavy in a challenging environment. However, differentiated underwriting and credit management have limited aggregate CRE losses to just 57 basis points of average CRE loans over the last seven quarters. Although 2024 CRE charge-off rates were beyond our internal standards, loss rates have remained far below larger banks, more pessimistic stress test forecast. From a C&I perspective, we continue to focus our growth efforts on traditional small business and middle market opportunities in our well-known geographies and established specialty verticals.

As I mentioned last quarter, we have specifically targeted the health care C&I and capital call line areas, given their compelling risk-adjusted return profiles. We've been active in both verticals for some time, and we have never taken a loss on a Valley originated health care C&I or capital call on. I am extremely proud of our organization's achievements over the past few years, and I'm highly optimistic about our future prospects. The bank continues to demonstrate exceptional momentum with respect to customer growth, talent acquisition and profitability. We have set ambitious goals for ourselves and are confident that continued execution of our strategic initiatives will deliver substantial value to our associates, shareholders and clients.

With that, I will turn the call over to Travis to discuss this quarter's financial highlights. As Travis concludes his remarks, Gino, Patrick, Travis, Mark Saeger and I will be available for your questions.

Thank you, Ira. Slide 9 illustrates our continued core customer deposit growth momentum. We gathered about $1 billion of core deposits during the quarter, which enabled us to pay off approximately $700 million of maturing brokered deposits. Brokered deposits now comprise 11% of our total deposit base, representing the lowest level since the third quarter of 2022. Roughly 80% of the quarter's core deposit growth came from commercial clients, reflecting our proactive business development efforts and the continued success of our treasury management sales efforts.

The relative stability of average deposit costs during the quarter masked a 7 basis point reduction in spot deposit costs from June 30 to September 30, which positions us well heading into the fourth quarter. Turning to slide 12. Gross loans decreased modestly on a spot basis due to targeted runoff in transactional CRE and the C&I commodity subsegment, which was acquired from Bank Leumi USA in 2022. Commodities payoffs accelerated during the third quarter, leaving a modest $100 million of C&I loans left in this business line at September 30. CRE loans made to more holistic banking clients increased during the quarter, supported by the conversion of construction projects to permanent financing.

Other C&I activity slowed from the second quarter's exceptional pace of growth. Average loans increased 0.5% during the quarter. The pipeline is rebuilt, and we anticipate solid origination activity as the fourth quarter progresses. New origination yields were stable during the quarter at around 6.8%. Average loan yields improved 7 basis points on a linked quarter basis due to the fixed rate asset repricing dynamic that we have previously discussed.

As a result, our cumulative loan beta stands at 21% for the current cycle. Slide 15 illustrates the second consecutive quarter of 3% net interest income growth. NIM improved for the sixth consecutive quarter aided by asset repricing and sequential growth in average non-interest deposits. While excess cash held during the quarter weighed on our margin by an estimated 3 basis points, we are on track to achieve our above 3.1% NIM target for the fourth quarter of 2025. We expect that net interest income will grow another 3% sequentially in the fourth quarter.

The current interest rate backdrop, combined with anticipated fixed rate asset repricing remains supportive of further NIM expansion in 2026. Non-interest income continued its strong momentum this quarter. Deposit service charges saw continued growth as we expanded the penetration of our commercial client base with our robust treasury management platform. Wealth management was also strong, lifted partially by our tax credit advisory business. We anticipate that fourth quarter fee income will be generally stable within the range of the last two quarters.

Turning to slide 18. Adjusted non-interest expenses declined modestly, driven by lower compensation, occupancy and FDIC assessments. These improvements were partially offset by higher third-party spend. Professional fees are expected to remain at this modestly elevated level, but total expenses should remain flat or only marginally higher in the fourth quarter as compared to the third quarter. Our efficiency ratio continues to improve, and we anticipate further progress as we generate additional positive operating leverage in the fourth quarter of 2025 and into 2026.

Slide 19 illustrates our asset quality and reserve trends. Non-accrual loans increased during the quarter, primarily due to the migration of a $35 million construction loan. It was in the 30- to 59-day past due bucket at June 30. We anticipate resolution of this credit with no incremental impact, but from a timing perspective, it necessitated migration to non-accrual. On a combined basis, total past dues and non-accrual loans as a percentage of total loans declined 9 basis points from June 30 to September 30.

Net charge-offs and loan loss provisions saw meaningful declines during the quarter, consistent with our prior guidance. We foresee general stability in 4Q, implying improved 2025 guidance relative to the range of our prior expectations. Slide 20 emphasizes our cumulative commercial real estate charge-off experience since early 2024, affirming the effectiveness of Valley's distinctive underwriting and credit management practices. Despite the relative challenges of 2024, cumulative losses remained far below the adverse forecast of DFAST eligible banks. Turning to slide 21.

Tangible book value increased as a result of retained earnings and a favorable OCI impact associated with our available-for-sale portfolio. Regulatory capital ratios continue to increase, and we utilized around $12 million of capital to repurchase 1.3 million common shares during the quarter. We remain extremely well capitalized relative to our risk profile and have ample flexibility to support our strategic objectives and sustain the strong momentum that we are experiencing.

With that, I will turn the call back to the operator to begin Q&A. Thank you.

(Operator Instructions) David Smith, Truist Securities.

Could you speak to the competitive backdrop, just given the decline in C&I loans and some of that was commodities driven and the increase in deposit costs for the quarter on average? I think I understood there was a decline on the spot deposit rate, but just help us unpack what's happening on a competitive basis driving some of those trends and what you -- how you're expecting them to revert in the fourth quarter and the coming year?

Yes. Thanks, David. This is Travis. Maybe I'll start on the deposit cost side, and Ira and Gino can chat a little bit about the competitive environment from a loan perspective. So to your point, spot balance or spot deposit cost declined from 630 to 930 by 6 basis points.

I'll tell you, quarter-to-date, we're down another 7 basis points from a spot perspective. So when you factor all that together, I think the beta relative to the 25 basis point cut in late September. It's consistent with what we've modeled. I would just say quarter-to-date, since 9/30, we paid off another $500 million plus of additional brokerage at a rate of $450 million. The environment for new deposit relationships remains competitive.

We originated $1.4 billion of new deposits this quarter at 2.9%. That compares to $1.8 billion in the second quarter at 2.8%. So the competitive environment for new relationships is still there. I would just say we have continued opportunity on repricing the back book, which were effective with during the quarter. So I think as we enter the fourth quarter, I mean, deposit costs will come down. And I think there's more opportunity as we head into 2026.

Thanks, Travis. This is Gino Martocci. As it relates to the competitive landscape, we continue to see very strong demand both in C&I and CRE. There is ample liquidity in the marketplace. Banks are -- and non-banks are fighting pretty hard for loans. And we have some -- seen some decline in spreads. But our pipeline remains very strong, and we continue to add loans and then add clients.

Okay. And then just on capital, stock is barely 1x tangible right now, and you've got 11% CET1 and TC almost 9%. Just with loan growth expectations, about 1% for the next quarter, how are you thinking about the buyback opportunity against conserving capital for longer-term organic growth ambitions?

Yes. I think over the last couple of quarters, we've talked about a near-term CET1 target of around 11%. And the reality is, given our risk profile, we'd be very comfortable in a range below that, call it, 10.50% to 11%. Historically, we've thought about the buyback in the context of repurchasing shares that we issue for incentive purposes. But to your point, I mean, based on the progress that we've made, the outlook that we have and the incredible confidence that we have in investing in ourselves, I do think that the buyback will be an increasing source of capital deployment going forward.

Feddie Strickland, Hovde Group.

Just wanted to ask on the geography of CRE and C&I. I think you've got a majority of C&I outside the Northeast at this point. As you look at your pipeline today, do you expect to continue to have more business coming from outside the Northeast and inside the legacy Northeast footprint?

So our originations for the quarter and actually for the last year really reflected 1/3, 1/3, 1/3 in the Southeast, 1/3 of the Northeast in certain of our specialty businesses. So as it relates to CRE, Florida franchise remains very strong, and we expect to see slightly more originations down there, but it's pretty evenly split amongst the geographies.

Maybe I'll just add to that, Feddie. I think as you know, we've spent a lot of time investing into the Florida footprint. We went into Florida, I think, back in 2014 with the acquisition of First United Bank, we then acquired a couple of other banks in that footprint. I think in the aggregate, it's about $4 billion to $5 billion of commercial assets that we acquired. Today, we sit with commercial assets that are well north of $15 billion.

Right from a loan perspective, it's one of our largest geographies. That's $10 billion of organic growth in just a 10-year window, I think represents really the foundation and footprint that we have in that Florida area. An unbelievable set of lenders and unbelievable set of bankers there and obviously very strong markets. And we continue to really make sure that we're focusing on letting that be a more sizable piece of what our franchise is. So as we think about the growth projections that we've outlined.

Obviously, as Gino said, we're seeing strong contributions coming from the specialty and coming from the Northeast as well. But we feel really strong and confident in the growth numbers are largely a function of what we're seeing in the Florida footprint as well.

I appreciate that. And just one more for me. I just want to ask on the fee side. How should we think about the capital markets business and the insurance businesses in particular over the next quarter or so? It seems like capital markets has held up pretty well. Insurance will have some seasonality. Just within the guide, obviously, how should we think about those businesses?

Yes, I would anticipate general stability for the fourth quarter, general stability in both areas. I think heading into 2026, there is definitely momentum on the capital market side. So just as a reminder, for us, Capital Markets is three businesses. It's our syndications business, our FX desk and our swaps desk.

The swap activity tends to be more tied to commercial real estate originations, which have picked up over the last couple of quarters and helped support revenue there. FX has been a long-term growth trend for us as we continue to expand our commercial client base and the folks that utilize that offering. So I think there's good tailwinds definitely on the capital market side.

Anthony Elian, JPMorgan.

Can you provide more color on the increase in non-accrual loans? I know you called out the construction loan that migrated to non-accrual but no further impacts, but I would love to hear more on the commercial real estate loans that migrated?

Certainly, yes. Again, this is Mark Saeger, Anthony. The increase primarily driven by the $135 million loan, while it's in construction bucket, I'd note that it's really a land loan. So really strong value there. The borrowers in the midst of a refinance to take us out.

We don't anticipate any issues with that at all on a go forward. The other primary migration into non-accrual is based off of updated appraisals. What I would note is that 50% of our non-accrual portfolio is current on payment. So there's just some appraisal valuation and consistent with our to go there, but that is a much higher percentage of paying non-accruals than we've seen in the portfolio in quite some time. Our overall view of the real estate market is we're starting to see definitely positive activity even within the office market and the real estate portfolio.

I'd point to the improvement in our criticized assets for the quarter after a stable second quarter, and that improvement really came from approximately 2/3 of payoffs in refinance at par and about 1/3 upgrade. So we're definitely seeing positive movement in the real estate market.

And then my follow-up, on your commercial real estate concentration fairly well below the 350% level now at 337%. Looking ahead, how low do you think you can take that level? And at some point, would you expect to actually grow CRE balances?

Thanks. This is Travis. So look, I think we are targeting growth in CRE. I think we're looking at low single-digit growth for 2026 and beyond, but as a result of capital growth, that ratio would continue to decline. I mean for us, the next kind of guidepost is 300%.

I think you're probably there at the end of '26, early '27 and then continuing to grind lower over time. And again, that's just our own focus on ensuring that we're diversifying the balance sheet. And candidly, when you look at our peer group and the set of peers that are above us from a size perspective, I mean, we do remain somewhat of an outlier. So it's something that we've been focused on. We've made a ton of progress on. But at this point, we expect the CRE balances will stabilize and begin to grow and then allow that capital to build to drive the next leg down in the ratio.

Manan Gosalia, Morgan Stanley.

A question for Gino. Where do you see the biggest white space for Valley what areas are you most focused on? And which subsegments or geographies do you think you need to invest most in? I recognize that you're focused on health care C&I and capital call, but maybe if you can talk about opportunities outside of that? And maybe same question for Patrick, although that might be an unfair question. I know you've only been there for a month now.

Yes. Thanks for the question. As Ira mentioned, the Florida franchise is an incredible differentiator from my perspective. It's had sustained momentum and growth for many years now, and that growth continues. It's now $15 billion franchise.

It's largely organic. And there's considerable opportunities ahead for that. In addition to that, I think Valley has an opportunity to go upmarket in C&I. And in fact, we're adding some upmarket C&I lenders more in that $150 million to $500 million revenue space than Valley traditionally played in. We're actually onboarding five senior bankers who are building out their teams currently.

In addition, I really see a tremendous opportunity for Valley and Business Banking. But currently, we didn't sell it into that book as much in the deposits as we could have. And we have a real opportunity to do that. And I think we can gain significant deposits from that book. And as part of that effort, we're going to build out a professional. We're going to expand our professional services book to focus on law firms, accounting firms, medical and dental practices and the deposit profile of those companies is extremely good.

So we think that going upmarket C&I is a real differentiator for us as well because there's a real void left by the larger institutions and regional banks that are consolidating away. Valley's attention to their relationship, their responsiveness is frankly superior to the super regional banks and was rewarded by our customers. So as I mentioned, we're bringing on seasoned bankers. They're going to build out teams. We're doing it in every geography.

We're adding business bankers as well. And we went through the efficiency exercise in order to create that capacity. So there's a number of opportunities, I think, for Valley to grow in 2026 and beyond.

This is Patrick. First of all, let me say that I am incredibly enthusiastic about what I've seen so far in my first few weeks at Valley. And to your question, I'd add a few points. One is small business. I've been conducting an evaluation of our small business segment, and I'm excited about the opportunity we have to really grow in this segment.

We've been underpenetrated and small business. And we have a real opportunity to grow organically in that segment across our footprint. So we've been adding experienced small business bankers and enhancing our product set to go after that opportunity. So I think it's a wonderful opportunity for us. We've already added eight bakers in principally in Florida and New Jersey to take advantage of the opportunity.

The other one I'd say quickly is that we have -- we have an opportunity to organically grow deposits from a retail perspective in our branches. Our branches have been positioned historically in support of our commercial business. as we pivot more toward a focus on or add a focus on retail, there's a real opportunity for us to grow our small business -- I'm sorry, retail franchise through our branches. And so we have a really good branch network across our footprint. That's an incredible opportunity.

And then finally, I'd echo what Gino said, which is we are acquiring really strong talent across the retail bank, and I expect us to continue to do that, and that's going to be a core driver as it is in commercial of our retail franchise growth.

That's great. I really appreciate the thorough response here. Maybe a follow-up for Ira and Travis. So you're beating your expense guide. You're clearly investing and there's clearly some more white space to invest in.

How should we think about the expenses as we go into 2026 how much of these investments are already in the run rate versus how much do you think you need to accelerate that spend? And I guess I'm asking from the point of view of as NIM expands further from here, should we expect that you can drop most of those benefits to the bottom line? Or are there areas where you'd want to invest as we go into next year?

Yes, thanks. From an expense perspective, I mean, we undertook over the last couple of months an efficiency exercise where we tried to unlock savings in some of the back office and corporate service areas that could be reinvested in the front office that Gino and Patrick have talked about. So this is all baked into the near-term expense guide that we provided for the fourth quarter.

And I'd just tell you as we begin to kind of pencil out 2026, I mean, I don't think there's any reason to move ourselves off of a low single-digit expense growth rate for that year as well. So our goal is to invest in revenue-generating talent that's going to enhance franchise value and ensure that we're dropping the majority of that revenue growth to the bottom line.

Maybe I'll just talk about sort of in my mind where we sit from sort of positive operating leverage. And I'll maybe take a step backwards and go where we were before the regional banking challenges that we had in 2023. But if you go back to June of '23 in that period of time, we had 3,957 associates across our entire footprint. Today, we're 3,624, so a contraction of 333 associates, about 8.5% over that period of time. Just once again, taking a step back, in 2022 at the end, we had a return on tangible common of 17.20%, right?

So obviously, a lot of focus on continuing to grow the organization and delivering returns for our shareholders that we think are appropriate, and we definitely believe that we'll get back to. Obviously, we had to sort of recalibrate how we thought about investing into the organization in 2023 based on some of the external challenges that happened with SVB and Signature, et cetera. And then obviously, our refocus on commercial real estate based on what happened with NYCB and a few others at that point in time.

So we feel really strongly that we've made the cuts necessary to really open up the ability for us to reinvest back into revenue in this organization. And as Gino alluded to, as Patrick alluded to, you're going to see continued hiring within the organization and really a growth trajectory that's going to get us back to return on tangible common numbers that we think we've delivered before and more in line with where the higher performing peers are.

So we don't believe we're going to need to really add on a lot of incremental expenses that we've created space for that. And we are really, really confident in the positive operating leverage that we're going to be able to generate here.

Chris McGratty, KBW.

Travis, going back to your comment about the CRE book troughing and growing low single digit. How do you think about the impact at low rates, lower rates will influence that, I guess, that statement?

Yes. Look, I think we assume, obviously, in our loan growth guide, some amount of payoffs consistent with our loan growth -- or excuse me, with our rate forecast. So it's in there and look to the degree that rates are significantly lower than we anticipate payoffs would accelerate. There's no doubt, and then we'd end up kind of on the lower end of our guidance range for loan growth. But what I would say is when you look at -- we took 2024 off effectively from a CRE origination perspective, which is a period of time in which I think the highest yield in CRE loans were put on.

So I don't really think that we have maybe the headwind that others do in terms of potential impact of lower rates on payoff activity. I mean, we still have a fixed rate loan portfolio that's yielding in the mid-4% to 5%. And so you got to pull rates down pretty significantly before you'd see a significant acceleration of payoff activity. So I'm not saying it's not a factor, but I just think we're a little bit more insulated than maybe other lenders would have been.

I would add that lower rates will also drive some transaction volume. Our pipeline is $3.3 billion today in total C&I and CRE. That's up from $2.1 billion in 2024. And it's much more -- so it's more of a 50-50 CRE, C&I where it was more like 60-40 up until this quarter. So we're seeing good momentum in C&I and CRE and the payoffs are here, but -- and the liquidity in the marketplace, but we're effectively building our pipeline.

That's helpful. And I guess my follow-up, Ira, is more of a strategic question. seems very clear that buying back your stock at book value is the right move. Is there a scenario where you deviate and consider inorganic at these levels?

Look, I think let me just start with, there really is no change to how we think about M&A across the organization. for us, I would say, being shareholder-friendly and focusing on shareholder is the primary focus of how we think about anything when it comes to capital allocation across the organization. Obviously, as you know, we've done a handful of M&A acquisitions over a period of time.

And there's always been a focus on what that tangible book value dilution would look like and what the return to the shareholder is going to be as we think about sort of capital deployment as we continue to move forward. I think as Travis has alluded to, we're sitting at a pretty significant discount to where our peers are we feel really confident in the trajectory of where the earnings profile is. And when you're sitting at 1% on tangible book, it seems like a pretty good use of capital to me.

I would just add, Chris, just from an M&A perspective, I mean, we -- as you can hear in Gino's voice and Patrick's voice, like we have an incredible organic opportunity set ahead of us. And so our primary focus is supporting the growth that we'll generate organically. I would say more M&A in the system is good for us, right? It creates additional disruption that we can capitalize on. And through the investments that we're making in the talent, we're working to position ourselves to capitalize on that.

Dave Rochester, Cantor.

You mentioned NIM expansion in 2026. That makes a lot of sense. And without trying to nail you down to a range right now, how are you thinking about what a more normalized NIM level could look like, just given the forward curve and then everything you guys are doing on the remix of CRE and the other work on the funding side?

Yes. Look, I think, I mean, for legacy Valley, which would have been CRE-heavy and over reliance on wholesale funding, that normalized NIM probably would have been $2.90 to $3.10. I think if you look back over time, that's where you would see them fall most of the time. Look, I think structurally, the balance sheet has already improved materially with the increase in C&I and the enhancement of the core funding base. And I would say now a more normalized margin for value is probably be closer to $3.20 to $3.40.

I think, as I said in my prepared remarks, I have high confidence we'll be at $3.10 or above in the fourth quarter. And I think you can pencil out another 20 basis points of expansion from the fourth quarter of '25 to the fourth quarter of '26, which gets you kind of within that more normalized range. And I think there's additional upside as we further enhance the funding base because none of what I just described includes any growth in the composition of non-interest deposits. And I think we have a real opportunity there. So look, I think we got a lot of tailwinds heading into 2026, and we look forward to executing on.

Great. And on the effort to go upmarket, where are you in the innings of that hiring in that effort hiring underwriters as well along with the senior bankers? And then when are you expecting to be really hitting the ground running on that effort when we start to see the boost in growth from that?

So we've had a lot of traction in hiring both senior people and underwriters thus far. We wanted to get them in here so that we can hit the rear and running in January really and really all through 2026. I think you're going to see some real momentum in more upmarket C&I and in business banking, frankly, for next year. And we are -- which inning, I think we're probably owing in the second or third inning at this point, but momentum has been strong. And people have a willingness to come to Valley. It's got a good perception in the marketplace, and we're just excited about the opportunity.

And it seems like that boost to growth could be pretty substantial, right? I mean, how are you guys quantifying that?

Maybe just before we get into it, I think, look, there's obviously headwinds in different quarters as you look at this quarter, the unused line or usage changed. There was the commodity headwind that we had. So we've had strong contribution as you think about sort of what the C&I growth has looked like for an extended period of time. We do believe, obviously, as you think about sort of the new hires that are coming into the organization on the commercial side, but there'll be a lot of strength there. And maybe just reiterate real quickly what Patrick said also.

I mean, SMB has been a solid performing vertical for us. But we're really leveraging that up as you think about the people that are coming in. And these are known people to Patrick, known to the market that we've been in. So it's really across the board as to how we think about what loan growth is going to look like. Obviously, as we talked earlier, there's potential headwinds when it comes to interest rates and CRE runoff and everything like that.

But as Gino said, we're sitting with a $3.3 billion pipeline today. That's like $1.2 billion more than where we were about a year ago. I mean, that's unbelievable. So we think the tailwinds there for loan growth in addition to the fact that Gino's still hiring and Patrick's still hiring.

Yes. We're pending out mid-single-digit loan growth expectation for 2026. So call it at a range of 4% to 6%. I think the more hirings that you get done, you get to the upper end of that for sure. And I think if you zoom out and think about where Valley has been, we've been a high single-digit, low double-digit loan grower in our history.

Now a lot of that's been driven by high single-digit CRE growth. And to the point we've made before, we expect CRE growth will pick up, but we're not going to return to that level. And so think about low single-digit CRE growth, low double-digit C&I growth, contributions from consumer, I think that's how you begin to get to that 4% to 6%. The other thing I would add on the hires is these are not transactional lenders and we're talking about holistic bankers that are bringing deposits as well. We haven't talked yet on the call about the significant deposit growth that we saw this quarter, but core customer deposits were up $1 billion.

It's a significant annualized pace. It's due to a variety of factors. It's very broad-based. But part of it was this is the first year we've incentivized our bankers more on deposit growth than loan growth. And so I think that's paid off significantly.

David Smith, Truist Securities.

Just thinking a little bit longer term now. You did 11.6% adjusted drops in the third quarter. Guiding to operating leverage with cost of credit improving this coming quarter, and it sounds like pretty decent operating leverage next year as well. The cost of credit can stay controlled like you think. Can you just give us the latest on how you're thinking about profitability improvement over the next year or two in the context of your 15% goal?

Yes. So there's no change to our 15% ROCE target. I think we're pretty confident we can effectively achieve it by late '27, early '28. As you think about where we're starting in rough numbers, we have a 350 basis point gap to close in that period of time. 75% of that's going to come from net income expansion based on all things we're talking about mid-single-digit loan growth, margin expanding into the high 330s, continuation of high single-digit fee income growth and low single-digit operating expense growth and to your point, normalized credit costs.

Under those assumptions, you get pretty close to the 15%. The delta is going to be with that backdrop, you're going to build excess capital dramatically. I think that leads into the buyback conversation we've already had today. So I think those are the factors that we think about. But again, we think that we have high confidence in the target on that timeline. And I do think there's also some flexibility in the levers that we'll get there because, ultimately, the environment isn't going to play out the way that we model it to. But we have flexibility to ensure that we achieve that.

Matthew Breese, Stephens.

Travis, I want to go back to a comment you had made. I just want to clarify, I thought you had said maybe kind of normalized loan growth in the 4% to 6% range. Is that accurate, did I hear that right? Is that a good bogey for 2026?

Yes.

And then alongside that, maybe just help us out with the deposit growth alongside that and the outlook. And is there a potential we might see a further lowering of the loan-to-deposit ratio in '26?

Yes. I think that's part of our plan, Matt. So we would anticipate that deposit growth will exceed loan growth loan-to-deposit ratio today is 96.4%. I mean, over time, we'd love to get that to 90%. There's no time line on that expectation.

But I think each year, we'd make progress. it doesn't mean it's a straight line down. I mean, you may have quarters where it bumps around a little bit, but we've made a lot of progress and have a lot of momentum. The other thing that we think about from a funding perspective is loans to non-brokered deposits today is 108% and that should be closer to 100% for sure. So we would need to obviously grow core deposits in excess of loans to continue to make progress there.

But again, based on some of the efforts that we've undertaken, I would just add, I talked about the incentive plans with our bankers incentivizing deposit growth. The treasury management capabilities that we have has been another key driver there. So that's been significant as well.

Got it. All right. And then my last one, Italy feels a bit out of tune given all the positive and optimism on the organic front, but it feels like the M&A deal window is open, and I heard your comments loud and clear Ira on focusing on organic, but I did want to get your sense on our thoughts on all strategic alternatives, including maybe a potential sale because the big bank M&A window appears open as well. I haven't seen that in a while, and I just would love your thinking there, what would type -- will drive that type of outcome?

I'd I just go back to the one committed shareholder first, right? And I think that's how we need to think about anything that happens in this organization.

Jared Shaw, Barclays.

This is Jon Rau on for Jared. Maybe looking at the CRE side of things, it sounds like there's a pretty good capacity for these borrowers to refinance away from Valley and I suppose on the banking system. Is there any some set of CRE borrower that's having a little more difficulty in finding that alternative capital source? And then particularly, if there's any insight on how that would look for like rent-regulated multifamily? Know I suppose they're small there, but for you, but just any color would be helpful.

So Jon, Mark Saeger again. As I mentioned, we're actually seeing really positive trends in the office space with stabilization there, really some rational transactions. So I think you hit the nail on head. The only other segment that continues to be a little stagnant is that rent stabilized in New York. But as you mentioned, it's a very small part of our overall portfolio.

We have just around $600 million that has more than 50% rent stabilized, very small portion of our overall portfolio, not a growth portfolio for us. We weren't competitive in that market because we offer a lower loan amount traditionally and requires stronger in place debt service coverage or lower level and why that portfolio continues to perform for us. But it's still an area that we're watching on a go forward.

Okay. Perfect. That's helpful. And then just looking at expenses, it sounds like professional fees are still expected to remain elevated in the fourth quarter. Does that continue into 2026 and is what's driven the increase in the last two quarters?

Yes. I would expect it remains at the current level for the fourth quarter and into 2026, at least for the first half of the year. As part of the efficiency exercise, we've utilized consultants to help us enhance our operating model and organizational design. So those are temporary dollars that we have to spend. But again, we've offset it with the savings that we've generated in the compensation line and elsewhere.

Okay. Great. And then just last one for me, that land loan that the borrowers refying away from you. There's -- just wanted to confirm there's no loss expected on that thought process.

We have more than adequate value there, no loss anticipated.

Jon Arfstrom, RBC Capital Markets.

Mark, maybe for you, what do you think the timeline is for non-accrual balances to start declining? I know you feel comfortable, but just curious on your thoughts on that topic.

So I would point, right, it's hard to talk about a time line on resolution of some of these items other than the one that I just mentioned, which we do think has a short-term resolution. But a point kind of to the strength that we're seeing in the CRE market, the reduction in criticized, I think that will also translate in some resolution on especially that 50% of our non-accruals that are continuing to pay current. So I don't anticipate a material inflow on a go-forward basis, but it may take some time to see some of those CRE-loans finance out.

Yes. Okay. That's helpful. I appreciate that. Just kind of bigger picture, it looks like it's a good quarter.

I'm just curious if you guys feel like this is a new floor for EPS for the company. And I'm especially curious, I guess, if you feel like this is a more normalized provision as we look forward.

Yes. I think that's absolutely true. So I mean, just the progress that we've made, I mean, part of the overhang coming out of the liquidity crisis is on the funding side. I think we've done a lot of work over the last two years to rectify that, which has enhanced our net interest income, obviously. We still have a significant fixed rate asset repricing tailwind behind us.

As we head into 2026, we have $1.7 billion of loans that are coming off from a fixed perspective at a rate of around 4.75 that creates significant opportunity and supports the margin expansion that we've talked about. From a credit perspective, I mean, I think we all anticipate here that you need to see normalized charge-off rates in '26. So call that around 15 basis points, give or take and a generally stable reserve. So when you factor that all together, I think you are seeing -- this provision level is effectively sustainable from my perspective within a given range.

Janet Lee, TD Cowen.

On deposits, when I look at specialized deposit growth over the past quarter, that's about $700 million. It looks like a lot of that is going into replacing indirect deposits. You mentioned deposit growth should be picking up at a -- should be growing at a faster pace than loan and with the incentivized structure change. I guess that's going to help. If I look at the pace of deposit growth from the specialized deposits, I guess, more specifically on other commercial and small business, could -- is this the area where you expect a lot of your deposit growth to come from? Could it continue to grow at the $2 billion pace per year that you reported over the past year?

Thanks, Janet. This is Travis. I think that it is an area of focus for sure. This quarter, we had $100 million of specialty deposit growth within the bucket you're describing came from health care clients. I mean, there's still momentum there.

We had $200 million between HOA cannabis and our national deposits group. So those are kind of specialty niches that we bank. That was $300 million of growth this quarter. But broad-based across the franchise, whether it's in the branch network, which is a combination of consumer and commercial deposits as well as the other commercial bucket that you're talking about. I mean, there was significant growth in all of our markets.

New Jersey was up $200 million commercial. New York up $150 million commercial. These are deposits, floored up $150 million commercial. So there's significant tailwind and momentum across the franchise. So I think specialty deposits should grow at an above average rate, but it's not the only source of growth that we have.

Got it. And you made your point clear about that 4% to 6% loan growth over the intermediate term in 2026. So in terms of over the near term that had 3Q headwinds from commodities, C&I payoffs, can I consider that as temporary? And there's -- or is there any parts of bank gloomy or within value that you might want to run off?

No. I think that's temporary. It was a dynamic unique to this quarter. I think if you zoom out over the last six months, that gives you a better sense for some of the pace of growth. I think total loans are up 2.5% annualized in that time line, but that includes some additional headwinds from CRE runoff.

So look, I think from a given quarter, loan growth may move around a little bit based on the timing of closings. But I think you'd see more significant momentum if you zoom out a little bit.

Steve Moss, Raymond James.

Maybe just circling back to the loan pipeline here with the $3.3 billion pipeline, just curious what's the coupon on those new originations?

This is Travis. So this quarter, new origination yields were 6.8%, which was consistent with last quarter. I'd say the pipeline yield is similar or slightly lower because benchmark rates are lower. We saw some spread tightening earlier this year. So that's fairly consistent, maybe a little bit more now, but that's kind of where we sit.

Okay. And then on the expansion moving upstream into larger loans, just kind of curious how do we think about pricing for those types of loans will be relatively tighter? And are you thinking about them being syndicated? Just kind of curious. Any color you can give there.

Valley has always been done loans of this size. They just haven't had the focus on it. And we're just going to -- we're going to more intently focused on it and bringing in talent that's done this before. The pricing tends to be a little thinner and we're building out our syndication. We continue to build out our syndications platform.

We will want to originate these loans and sell them. The pricing, as you know, it tends to be 1.75% to 2.25%, more or less. And we wouldn't play much below that amount. So -- and then the relationships tend to be fulsome, deposits, fees, opportunities for capital markets, et cetera. So we see it as a driver of profitability going forward.

Okay. Great. I appreciate that color there. And then just on the criticized and classified, I think I heard that they went down. Just kind of curious if you could quantify the level of decline and also wondering if substandards declined this quarter.

So yes, we had a $100 million reduction in criticized in total for the period. Again, I mentioned that was through not just upgrades, but payoffs in financing out, which is positive. I'll have to get back on the -- specifically on that substandard component.

Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.