Valley National Bancorp (VLY) Q1 2026 earnings review
Core Funding Engine Powers Through Margin Plateau
Valley National Bancorp delivered a clean Q1 2026, headlined by a remarkable collapse in deposit costs. While headline Net Income reversed sequentially—falling 16% to $163.9 million, largely because Q4 benefited from an $11.4 million discrete tax refund—the underlying operations are accelerating. Net Interest Income (FTE) grew to $472.8 million as management aggressively shed high-cost brokered deposits. The strategic pivot away from non-owner occupied CRE towards C&I and owner-occupied loans is working, bringing the CRE concentration ratio down to 329%. Management is highly confident, upgrading full-year guidance for loan and NII growth to the high end of their previous ranges.
🐂 Bull Case
Valley's cost of total average deposits plunged 18 basis points sequentially to 2.27%. This allowed the bank to shed $278.5 million in brokered deposits while replacing them with $955 million in direct customer deposits.
Guidance for NII and fee income was pushed to the high end of their respective ranges, while expense guidance remained flat. This mathematically ensures accelerating positive operating leverage through the rest of the year.
🐻 Bear Case
After four consecutive quarters of impressive growth, Net Interest Margin plateaued at 3.17%. Downward repricing of adjustable-rate loans is beginning to offset the benefits of falling deposit costs.
While net charge-offs halved YoY, total non-accrual loans remain stubbornly stable at $432.6 million (0.85% of loans), requiring continued monitoring in the commercial space.
⚖️ Verdict: 🟢
Bullish. Valley is executing flawlessly on its funding transformation. By replacing hot money with core deposits, they have insulated the balance sheet. The upgrade in full-year guidance confirms that the structural improvements made in 2025 are sustainable.
Key Themes
Deposit Mix Transformation
Accelerating. Valley's primary profit driver is its changing funding mix. Direct customer deposits surged $955 million, allowing the bank to actively run off $278.5 million in higher-cost indirect (brokered) deposits. Consequently, the overall cost of interest-bearing liabilities dropped 24 basis points sequentially. This structural shift is the main reason Net Interest Income grew despite fewer days in the quarter.
C&I and Owner-Occupied CRE Leading Growth
Accelerating. The targeted transition away from transactional real estate is yielding results. Commercial and Industrial (C&I) loans grew $142.6 million (5.2% annualized), while owner-occupied CRE drove overall CRE growth. Meanwhile, non-owner occupied CRE was intentionally shrunk by $67.3 million. This strategic mix shift lowered the CRE concentration ratio to 329%, down from 333% last quarter.
AI Integration Moves to Production
Valley explicitly highlighted its transition to becoming an "AI-Native Organization." Management is deploying specific tools including Agentic AI for credit underwriting (to automate elements of the underwriting process and reduce manual steps) and Autonomous Voice AI for auto loan payment reminders. This indicates a shift from conceptual AI planning to measurable operational deployment aimed at long-term expense control.
Net Interest Margin Plateau
Stable/Decelerating. After expanding impressively throughout 2025 (2.96% to 3.17%), the Net Interest Margin (FTE) remained perfectly flat sequentially at 3.17%. The yield on average interest-earning assets declined by 17 basis points to 5.39%, driven by the downward repricing of adjustable-rate loans in the current macro rate environment. If loan yields fall faster than deposit costs going forward, NII growth will face severe headwinds.
Expense Creep and Severance Costs
Accelerating. Non-interest expense rose $10.5 million sequentially to $309.9 million. While partially driven by normal seasonal payroll taxes, the quarter also included a $5.1 million increase in severance charges and a $4.8 million bump in FDIC insurance assessments. Consequently, the efficiency ratio remained relatively sticky at 53.10% (vs 53.49% in Q4), preventing the full revenue beat from dropping to the bottom line.
Sticky Non-Accrual Loans
Stable. While net charge-offs improved dramatically (down to $17.5M from $41.9M a year ago), total non-accrual loans remain stubbornly elevated at $432.6 million, virtually unchanged from $433.9 million in Q4 2025. Although management notes they are well-secured, the failure to clear these from the balance sheet ties up capital and requires elevated allowance coverage.
Other KPIs
Stable. The ACL represents 1.18% of total loans, essentially flat compared to 1.19% in Q4 2025. The Q1 provision of $21.2 million roughly matched the $17.5 million in net charge-offs, indicating management believes the current reserve level is sufficient despite the macroeconomic backdrop.
Decelerating. Down slightly from 10.99% in Q4 2025, but still sitting comfortably at the high end of management's 10.5% - 11.0% target range. The slight dip was driven by the aggressive repurchase of 4.0 million shares for $52 million during the quarter.
Decelerating. Dropped from 13.06% in Q4 2025, largely due to the normalization of the tax rate. However, it remains significantly above the 8.11% recorded a year ago in Q1 2025.
Guidance
Accelerating. Management upgraded their expectation from a flat 4-6% to the mid/high end of the range, reflecting strong Q1 execution (+5.5% annualized) and a robust C&I pipeline.
Accelerating. Upgraded from the base 5-7% range. This signals management's confidence in their retail and commercial deposit gathering initiatives, which will further support the phase-out of brokered funds.
Accelerating. The upward revision confirms that the spread between falling deposit costs and loan yields remains highly favorable for the bank through the remainder of the year.
Stable. No change to prior guidance. Combined with upgraded revenue guidance, this mathematically implies an expectation for stronger operating leverage and a declining efficiency ratio in the coming quarters.
Key Questions
Margin Ceiling
NIM was flat at 3.17% this quarter as adjustable-rate loan repricing offset funding cost improvements. Do you view 3.17% as the near-term ceiling, or are there remaining levers to push NIM above 3.20% by year-end?
Brokered Deposit Floor
Indirect customer deposits are down to $5.1 billion. Is there a strategic floor for brokered deposits that you intend to maintain for liquidity purposes, or will you continue to run this balance down towards zero as direct deposits grow?
AI Implementation ROI
You highlighted specific AI deployments like Agentic AI for underwriting and Voice AI for collections. Can you quantify the expected expense savings or capacity increases from these initiatives in the 2026 run rate?
Non-Accrual Resolution
Despite a sharp drop in net charge-offs, non-accrual loans remained flat at $432 million. What is the timeline and strategy for actively resolving these legacy non-performing assets to free up capital?