Executive Summary / Key Takeaways

• Valley National Bancorp is executing a strategic transformation focused on diversifying its balance sheet away from commercial real estate concentration and growing higher-returning commercial and industrial (C&I) and consumer loan portfolios.
• Significant investments in technology, including a core conversion and new Treasury platform, are enhancing operational efficiency, service capabilities, and driving growth in fee income, providing a competitive edge in key commercial segments.
• Recent financial results demonstrate progress, with net interest income expanding due to lower funding costs and strategic asset/liability management, while expense control remains a focus despite investments.
• Credit quality metrics are being proactively managed, with the Allowance for Credit Losses (ACL) increasing due to portfolio mix shifts and conservative provisioning, though management anticipates a normalization of credit costs in 2025.
• The company is targeting continued profitability improvement in 2025, forecasting growth in net interest income and controlled expenses, supported by a strengthening capital position and a strategic focus on core customer relationships.

A Regional Bank's Strategic Evolution

Valley National Bancorp operates as a prominent regional bank across a diverse geographic footprint, including key markets in New Jersey, New York, Florida, California, Alabama, and Illinois. With a history marked by strategic growth, including significant acquisitions like the 2022 Bank Leumi USA transaction, Valley has consciously evolved its business model over the past seven years. A central theme of this evolution has been a deliberate pivot towards greater diversification, moving away from a heavy concentration in certain asset classes and geographies that characterized its earlier profile. This strategic shift has yielded tangible results, notably contributing to a doubling of tangible book value, inclusive of dividends, over this period, outpacing many regional banking peers.

This transformation is not merely a shift in loan mix but a comprehensive effort to build a more resilient and profitable franchise. Valley's competitive positioning is rooted in its established regional network, offering deep local market knowledge and relationship banking. However, it operates in a landscape dominated by larger national players like PNC Financial Services Group (PNC) and regional powerhouses such as Regions Financial Corporation (RF), Fifth Third Bancorp (FITB), and KeyCorp (KEY), all vying for market share in lending, deposits, and wealth management. These larger competitors often possess greater scale and invest heavily in broad digital capabilities. Valley differentiates itself through targeted investments in specialized services and technology aimed at enhancing its core strengths and competing effectively in its chosen niches.

Technological Foundation and Competitive Edge

Central to Valley's strategic evolution is its commitment to leveraging technology to drive efficiency and enhance customer service. A significant milestone was the completion of a core conversion in October 2023. This foundational technological upgrade was not just about cost synergies, but critically, it enabled a substantial enhancement in product offerings and service capabilities, particularly within the Treasury Solutions suite for commercial clients.

The formal rollout of a new Treasury Solutions service and pricing model in mid-2024, directly facilitated by the core conversion, has already shown positive early results. This platform augments talent with a streamlined operating model and technology designed to better serve commercial clients, leading to increased deposit service revenue. For instance, deposit service revenue saw a 27% increase on an annualized basis in the second half of 2024 compared to the same period in 2023. Furthermore, clients utilizing the enhanced treasury product saw their deposit balances increase by approximately $0.5 billion between the third and fourth quarters of 2024.

Valley has also invested in enhanced FX capabilities, which have contributed to fee income growth, showing over 50% growth in annualized run rate FX fees in the second half of 2024 compared to the prior year period. These technological advancements in Treasury and FX directly support the strategic goal of growing fee income and deepening commercial client relationships.

Beyond client-facing technology, Valley Bank recently partnered with Finley Technologies to launch a Credit Management System. This post-origination loan platform is designed to automate, grow, and monitor the bank's credit portfolio operations, including securities-based and syndicated loans. The stated goal is to deliver a fully digital experience and improve service delivery and efficiency for middle and back-office teams, potentially without requiring additional personnel.

While larger competitors like PNC and FITB may boast broader digital platforms and higher R&D spending, Valley's targeted technology investments aim to create specific competitive advantages in its core commercial and specialized lending segments. The enhanced Treasury platform allows Valley to compete more effectively for commercial deposits and fee income, while the Finley partnership seeks to improve internal operational efficiency in credit management. These efforts are crucial for Valley to maintain and grow market share against rivals leveraging scale and extensive digital reach.

Strategic Pivot and Balance Sheet Transformation

A defining strategic imperative for Valley has been the proactive management and reduction of its commercial real estate (CRE) concentration. This has involved a multi-faceted approach, including limiting new originations of certain transactional CRE loans (like non-owner occupied and multifamily loans to single-product borrowers), encouraging runoff through normal repayment activity, and executing strategic asset sales. The company successfully reduced its CRE loan concentration ratio to approximately 353% at March 31, 2025, down from 362% at December 31, 2024, and significantly lower than the 474% at the end of 2023. The stated goal is to reduce this ratio below 350% by December 31, 2025, and the company now expects to reach approximately 375% by the end of 2025, an acceleration from its prior intermediate-term goal of 400%.

Simultaneously, Valley is strategically focused on growing its commercial and industrial (C&I) and consumer loan portfolios. C&I loans grew by $218.8 million, or 8.8% on an annualized basis, in the first quarter of 2025. This growth is driven by relationship-focused lending to middle-market businesses across its footprint and in nationwide businesses. The consumer portfolio, particularly indirect automobile loans, also saw strong growth, increasing by $140.2 million, or 29.5% on an annualized basis, in Q1 2025. Management expects continued momentum in these areas, which carry different risk profiles and contribute to balance sheet diversification.

Enhancing the deposit base is another critical component of the strategy, particularly reducing reliance on higher-cost wholesale funding. Valley has focused on growing core customer deposits through its branch network, specialty verticals, and enhanced commercial services. Non-interest bearing deposits increased by $199.9 million in Q1 2025, and savings, NOW, and money market deposits increased by $108.6 million, enabling the repayment of $726.5 million in indirect customer CDs during the quarter. Core deposits represented a significant 72.9% of average interest-earning assets in Q1 2025. The company continues to open new accounts, adding over 25,000 in Q4 2024 alone, with over 10,000 being non-interest bearing. Planned new branches in strategic locations like Beverly Hills, CA, and Staten Island, NY, aim to further bolster core deposit gathering.

Financial Performance and Credit Management

Valley's financial performance in the first quarter of 2025 reflects the ongoing execution of its strategic initiatives amidst a dynamic economic backdrop. Net income for Q1 2025 was $106.1 million, or $0.18 per diluted common share, an increase from $96.3 million, or $0.18 per diluted common share, in Q1 2024. This improvement was primarily driven by a $26.6 million increase in net interest income and a $3.7 million decrease in non-interest expense, partially offset by a $17.5 million increase in the provision for credit losses and a $3.1 million decrease in non-interest income.

Net interest income benefited from lower interest rates on most interest-bearing deposit products and additional interest income from investment security purchases, despite lower yields on adjustable-rate loans. The net interest margin expanded to 2.96% in Q1 2025, up 17 basis points from 2.79% in Q1 2024, largely due to a 29 basis point decline in the cost of total average deposits, partially offset by a lower yield on average interest-earning assets.

Non-interest expense decreased year-over-year, primarily due to lower technology, furniture and equipment expense ($5.6 million decrease) and FDIC insurance assessment fees ($5.4 million decrease, partly due to a $7.4 million special assessment in Q1 2024). These decreases were partially offset by higher amortization of tax credit investments ($3.8 million increase) and other expenses ($3.3 million increase, including a $2.9 million loss on OREO sale and costs related to a credit default swap).

The provision for credit losses for loans increased to $62.7 million in Q1 2025 from $45.3 million in Q1 2024. This increase reflects higher quantitative reserves allocated to commercial real estate loans, the reserve build required for continued C&I loan growth, and the impact of loan charge-offs. Net loan charge-offs totaled $41.9 million in Q1 2025, down from $98.3 million in Q4 2024 but up from $23.6 million in Q1 2024. Q1 2025 charge-offs included $24.1 million related to two non-performing C&I relationships, primarily due to fraud, which management described as unique situations not indicative of systemic softness.

Asset quality metrics showed some stabilization. Non-accrual loans decreased to $346.5 million (0.71% of total loans) at March 31, 2025, from $359.5 million (0.74%) at December 31, 2024. Accruing past due loans (30+ days) decreased significantly to $51.7 million (0.11%) from $99.2 million (0.20%). The Allowance for Credit Losses (ACL) for loans increased to $594.1 million (1.22% of total loans) at March 31, 2025, from $573.3 million (1.17%) at December 31, 2024. This increase reflects the CECL methodology, which incorporates economic forecasts (Moodys Baseline with downside weighting), portfolio mix shifts (higher C&I), and specific reserves. Management anticipates the ACL could migrate towards approximately 1.25% by year-end 2025, driven by C&I growth and credit trends.

Competitive Landscape and Strategic Positioning

Valley operates in a highly competitive banking environment where scale, efficiency, and technological capabilities are key differentiators. Compared to larger peers like PNC and RF, Valley has a smaller national footprint but leverages its deep regional presence and relationship banking model. While PNC and FITB may have broader digital platforms and potentially faster transaction processing, Valley's targeted technology investments in Treasury Solutions and credit management aim to provide competitive service levels and internal efficiency in its core commercial segments. The success of the new Treasury platform in driving deposit service revenue and commercial account growth demonstrates Valley's ability to compete effectively in specific niches through tailored technology and service.

In lending, Valley competes directly with peers across commercial, CRE, and consumer segments. The strategic shift towards C&I and owner-occupied CRE is a response to both risk management goals and competitive dynamics, seeking growth in areas where relationships and specialized expertise can provide an edge against competitors focused on transactional lending. The competition for high-quality commercial loans is noted, leading to some spread compression, but Valley believes its geographic diversity and specialized business lines (like healthcare, fund finance) offer levers to manage this. On the deposit side, competition from other banks and non-bank alternatives is a constant factor. Valley's strategy of leveraging its branch network, specialty verticals, and technology-enhanced commercial services is its primary approach to attract and retain core customer deposits, aiming to reduce reliance on potentially more rate-sensitive wholesale funding.

Valley's competitive advantages lie in its established regional brand, particularly in the Northeast and Florida, its relationship-based banking model, and its growing capabilities in specialized lending and fee-based services enabled by recent technology investments. However, it faces vulnerabilities related to its smaller scale compared to national banks, a potential lag in broad digital innovation compared to tech-forward peers, and the impact of macroeconomic factors on its loan portfolio and funding costs. The company's strategic positioning is focused on capitalizing on its regional strengths and targeted investments to drive profitable growth and enhance shareholder value despite these competitive pressures.

Outlook and Guidance

Valley's outlook for 2025 is centered on building upon the balance sheet strengthening and strategic initiatives undertaken in 2024. Management anticipates continued profitability improvement, driven by expected growth in net interest income and controlled operating expenses.

For 2025, Valley expects total loan growth to be within the low end of the 3.0% to 5.0% range, citing competition for high-quality commercial loans and potential impacts from tariffs on business investment as factors. Net interest income growth is projected to fall within the low end of the 9.0% to 12.0% range compared to 2024, primarily due to the lower anticipated loan growth and continued lending spread compression. However, management expects the net interest margin to increase throughout the year, supported by declining funding costs and the repricing tailwind from fixed-rate assets.

Non-interest expense growth is expected to be towards the low end of the initial guidance range, reflecting ongoing expense control efforts and efficiency gains from technology investments. The effective tax rate is anticipated to be in the 23.0% to 25.0% range for the remainder of 2025.

From a credit perspective, management is confident that the peak in provision expense has passed. They anticipate net charge-offs and provision will compare favorably to 2024 levels, with the ACL ratio potentially migrating towards 1.25% by year-end 2025, reflecting portfolio mix shifts rather than broad credit deterioration. Management aims to achieve an exit ROA above 1% by the end of 2025, working towards longer-term ROE targets above 15% and ROA above 1.20%.

Conclusion

Valley National Bancorp is in a period of strategic transformation, actively reshaping its balance sheet and business model to enhance profitability and resilience. The company's focus on reducing CRE concentration while growing C&I and consumer lending, coupled with significant investments in technology to improve efficiency and service, forms the core of its investment thesis. Recent financial results demonstrate tangible progress in expanding net interest income and controlling expenses, even as credit costs have been impacted by portfolio shifts and conservative provisioning.

While facing a competitive landscape with larger, more technologically advanced peers, Valley is leveraging its regional strengths and targeted tech capabilities to carve out profitable niches and deepen customer relationships. The outlook for 2025 points towards continued improvement in key financial metrics, supported by a strengthening capital position and a clear strategic roadmap. Investors should monitor the execution of the loan growth strategy, the ability to continue reducing funding costs, the realization of efficiency gains from technology, and trends in asset quality as key indicators of Valley's success in achieving its stated profitability targets and enhancing long-term shareholder value.