Executive Summary / Key Takeaways

• Strategic Transformation Driving Profitability: Valley National Bancorp is executing a multi-year transformation, shifting its balance sheet composition, enhancing its funding base, and leveraging technology to drive significant profitability improvements, culminating in its highest quarterly net income since late 2022 in Q3 2025.
• Fortified Funding and Margin Expansion: Aggressive core deposit growth, particularly from commercial clients, and disciplined deposit cost management have substantially reduced reliance on indirect deposits and are fueling consistent net interest margin expansion, with management targeting a normalized NIM of 3.20% to 3.40% by late 2026.
• Diversified Loan Growth and De-risking: The company is strategically diversifying its loan portfolio, reducing Commercial Real Estate (CRE) concentration while achieving robust growth in Commercial & Industrial (C&I) and prime indirect auto lending, supported by specialized verticals like healthcare and fund finance with strong credit performance.
• Operational Efficiency and Technological Edge: Investments in an upgraded treasury management platform and enhanced FX capabilities are yielding tangible, quantifiable benefits in non-interest income and operational efficiency, contributing to positive operating leverage and supporting a long-term Return on Tangible Common Equity (ROTCE) target of 15%.
• Clear Path to Enhanced Shareholder Value: With a strong capital position, declining credit costs, and a clear strategic roadmap, Valley National Bancorp is poised for sustained earnings growth and improved shareholder returns, including potential for increased share repurchases, despite a current valuation disconnect.

A Regional Powerhouse Forges a New Path

Valley National Bancorp (NASDAQ:VLY) stands as a deeply rooted regional bank, founded in 1927, that has embarked on a profound strategic transformation to redefine its market position and enhance shareholder value. Operating primarily through its Consumer Banking, Commercial Banking, and Treasury and Corporate Other segments, VLY has cultivated a strong presence in key U.S. markets, notably northern and central New Jersey, the New York City metropolitan area, and Florida. This regional focus, coupled with a deliberate strategy of diversification and technological investment, forms the bedrock of its evolving investment thesis.

The banking industry currently faces a dynamic landscape characterized by fluctuating interest rates, evolving regulatory scrutiny, and an accelerating pace of technological change. Broader industry trends, such as the surge in AI and data center development, are creating new demands for infrastructure financing, presenting both opportunities and challenges for banks to adapt their lending and operational models. In this environment, VLY's strategy is to leverage its established regional networks and personalized service to capture market share, while simultaneously building out advanced digital capabilities to compete with larger, more technologically advanced institutions.

VLY's competitive landscape is multifaceted, encompassing both larger national players and other regional banks. Major competitors like JPMorgan Chase (JPM) and Bank of America (BAC) benefit from immense scale, diversified revenue streams, and superior technological infrastructure, often leading to stronger cash flow generation and higher efficiency ratios. Regional peers such as PNC Financial (PNC) and Citizens Financial (CFG) also present formidable competition, particularly in overlapping geographic markets, with PNC demonstrating a balanced digital and branch strategy. VLY's latest TTM Net Profit Margin of 15.14% and Operating Profit Margin of 17.94% indicate solid profitability in its core operations, though these metrics generally lag the higher efficiency and profitability often seen in larger, more diversified banks like JPM and BAC, which benefit from economies of scale.

VLY differentiates itself through its deep regional expertise and a commitment to relationship-based banking, particularly in its commercial and wealth management segments. This allows for a more tailored approach to client needs, fostering strong customer loyalty and potentially enabling more efficient local operations. The company's diverse service offerings, including specialized insurance and trust services, further strengthen customer retention and provide a competitive edge in integrated financial solutions. However, VLY's regional focus inherently limits its scale compared to national players, potentially leading to higher per-unit costs and increased vulnerability to localized economic shifts.

Technological Edge and Operational Transformation

A cornerstone of Valley's strategic evolution is its significant investment in technological differentiation, particularly evident in its treasury management platform and enhanced FX capabilities. The company completed a pivotal core conversion in October 2023, which laid the foundation for a robust new treasury platform. This platform is not merely an upgrade; it represents a core differentiated technology that offers tangible benefits. The implementation of this upgraded platform, coupled with an expanded 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. This quantifiable benefit demonstrates the platform's ability to deepen commercial client relationships and generate recurring fee income.

Beyond treasury services, VLY has also made strategic investments in enhancing its foreign exchange (FX) capabilities. These advancements have yielded strong returns, with the annualized run rate for FX fees increasing by $4 million, representing over 50% growth, in the second half of 2024 compared to the second half of 2023. This highlights VLY's commitment to leveraging technology to create scalable, client-centric businesses that enhance earnings resilience. The "so what" for investors is clear: these technological advancements are not just about modernization; they are direct drivers of competitive advantage, enabling VLY to attract and retain commercial deposits, grow non-interest income, and improve its overall efficiency ratio, which management anticipates will continue to improve into 2026. This digital edge allows VLY to offer services that rival larger institutions, while maintaining its personalized regional approach.

Strategic Evolution and Diversified Growth

Valley's strategic narrative is one of deliberate transformation, moving beyond its historical Commercial Real Estate (CRE) concentration to a more diversified and resilient business model. The company has made significant strides in strengthening its balance sheet, notably reducing its CRE concentration ratio from 474% at the end of 2023 to 337% by September 30, 2025, surpassing its year-end target ahead of schedule. This reduction was achieved through targeted runoff of transactional CRE loans and strategic bulk sales of performing commercial real estate loans in late 2024.

Concurrently, VLY is aggressively expanding its Commercial & Industrial (C&I) and consumer lending portfolios. The C&I portfolio has grown at a 19% compound annual rate since 2017, with nearly 15% growth over the last 12 months (as of Q2 2025). This growth is fueled by disciplined, relationship-driven efforts in dynamic commercial markets and specialized nationwide verticals. Notably, VLY has specifically targeted healthcare C&I and capital call lines in the fund finance market, areas where it boasts a track record of never incurring a loss on originated loans. These segments contributed approximately 60% of the net C&I growth in Q2 2025. The company is also making a concerted effort to move upmarket in C&I, targeting businesses with $150 million to $500 million in revenue, and expanding its professional services to attract high-quality deposits from law firms, accounting firms, and medical practices.

On the consumer front, prime indirect auto loans increased 17% in 2024, representing super prime loans with a low loss history. The Consumer Banking segment's average interest-earning assets increased by $910.3 million in Q3 2025 compared to Q3 2024, driven by strong automobile loan growth and residential mortgage expansion. The company is also reprioritizing retail delivery and customer acquisition, particularly in its New Jersey and Florida branch networks, and is actively adding small business bankers. These initiatives are designed to foster organic deposit growth, with core customer deposits increasing by $1 billion in Q3 2025, primarily from commercial clients. This robust deposit gathering has allowed VLY to reduce its indirect deposits to 11% of total deposits, the lowest level since Q3 2022.

Financial Performance and Outlook

Valley National Bancorp's strategic initiatives are translating into tangible financial improvements. Net income for Q3 2025 reached $163.4 million, or $0.28 per diluted common share, marking its highest quarterly profitability since the end of 2022. This represents a significant increase from $97.9 million, or $0.18 per diluted common share, in Q3 2024. The year-over-year increase in Q3 2025 net income was primarily driven by a $35.7 million increase in net interest income and a substantial $55.9 million decrease in the provision for credit losses.

Net interest income (NII) on a tax-equivalent basis grew to $447.5 million in Q3 2025, up $35.7 million from Q3 2024. This NII growth is a direct result of higher yields on new loan originations, increased average loans and taxable investments, and disciplined deposit cost management. The net interest margin (NIM) on a tax-equivalent basis expanded for the sixth consecutive quarter, reaching 3.05% in Q3 2025, up 19 basis points from 2.86% in Q3 2024. Management expects NII to grow another 3% sequentially in Q4 2025, with further NIM expansion into 2026, targeting a normalized margin of 3.20% to 3.40%.

Non-interest income is also a growing contributor, with capital markets income increasing by $3.5 million in Q3 2025 year-over-year, driven by higher volumes of interest rate swap and loan syndication transactions. Service charges on deposit accounts saw a $3.9 million increase in Q3 2025, reflecting the success of the treasury management platform. While total non-interest expense increased by $12.5 million in Q3 2025 year-over-year, primarily due to higher professional and legal fees related to business model enhancements and increased amortization of tax credit investments, management anticipates total expenses to remain flat or only marginally higher in Q4 2025, with low single-digit expense growth expected for 2026. This focus on cost discipline is expected to drive further improvements in the efficiency ratio.

From a credit quality perspective, net loan charge-offs and loan loss provisions saw meaningful declines in Q3 2025, consistent with management's guidance. The allowance for credit losses (ACL) for loans totaled $598.6 million, or 1.21% of total loans, at September 30, 2025. Management anticipates general stability in the allowance coverage ratio going forward, with net charge-offs and provisions expected to continue comparing favorably to 2024. Non-accrual loans increased to $421.5 million in Q3 2025, mainly due to a single construction loan migration and two smaller non-performing CRE loans, though 50% of the non-accrual portfolio is current on payment. Management remains confident in the collectability of these loans, citing strong collateral values and ongoing resolution efforts.

VLY's capital position remains robust, with a Common Equity Tier 1 (CET1) ratio of 11% at September 30, 2025, well above regulatory minimums. The company repurchased 1.3 million shares of common stock in Q3 2025 at an average price of $9.39, demonstrating a commitment to shareholder returns. Management has reiterated its long-term ROTCE target of 15% by late 2027 or early 2028, with an ROA above 1% by the end of 2025, supported by mid-single-digit loan growth (4-6%) in 2026 and continued margin expansion.

Risks and Challenges

Despite the positive momentum, Valley National Bancorp faces several risks. The broader macroeconomic environment, characterized by U.S. tariff policy instability, geopolitical strains, and elevated recession risks, could impact loan demand and credit quality. While VLY believes its direct exposure to tariff-sensitive businesses is modest, prolonged economic uncertainty could still affect its commercial clients. Interest rate sensitivity remains a key concern, as unexpected shifts in the yield curve could impact net interest income. Competition for deposits remains intense, potentially challenging VLY's ability to maintain low funding costs, especially against larger banks with extensive digital offerings. Regulatory changes and compliance costs, particularly in a dynamic banking environment, could also pressure profitability. Furthermore, the inherent uncertainty in material estimates, such as the allowance for credit losses, means actual results could differ significantly from projections.

Conclusion

Valley National Bancorp is in the midst of a compelling transformation, strategically repositioning itself as a more diversified, efficient, and profitable regional bank. By leveraging its strong regional presence, investing in cutting-edge treasury management and FX technologies, and executing a disciplined approach to balance sheet optimization, VLY is building a resilient franchise. The company's consistent net interest margin expansion, robust core deposit growth, and strategic loan diversification, particularly in high-performing C&I verticals, underscore a clear path to enhanced profitability.

With a strong capital base and a management team focused on operational excellence and shareholder value, VLY is well-positioned to achieve its ambitious financial targets, including a 15% ROTCE by late 2027 or early 2028. While macroeconomic headwinds and competitive pressures persist, VLY's strategic initiatives and technological differentiators provide a solid foundation for sustained growth. Investors looking for a regional banking story defined by strategic execution and a clear trajectory towards improved returns should closely monitor VLY's continued progress in driving positive operating leverage and capitalizing on its evolving competitive advantages.