Prepared remarks
Good day, and thank you for standing by. Welcome to Q2 2026 Valley National Bancorp Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Andrew Jianette. Please go ahead.
Good morning, and welcome to Valley's Second Quarter 2026 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 and presentation. 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, and actual results may differ from those statements. 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. Our second quarter results illustrate continued progress against our strategic growth priorities. We delivered strong customer deposit growth, including meaningful growth in noninterest-bearing balances. We generated diverse loan growth concentrated in C&I and owner-occupied commercial real estate. And we continue to expand fee income in both absolute dollars and as a percentage of revenue. We remain focused on strengthening our value proposition by scaling our relationship-oriented commercially focused model across our markets and business lines. While the quarter's growth was encouraging, our focus remains on the quality, durability and strategic value of the relationships that we attract. We believe continued execution against these priorities will support stronger returns over time. This execution translated into strong financial performance for the quarter. Net income was approximately $171 million or $0.29 per diluted share. Excluding certain noncore items, adjusted net income was approximately $173 million or $0.30 per diluted share. Adjusted pre-provision net revenue increased 6% from the prior quarter and at 1.64% of average assets reached its highest level since the fourth quarter of 2022. Deposit growth remains central to our strategy. We believe that our diversified commercial and consumer funding channels are increasingly critical as deposit competition intensifies across the industry. By expanding our commercial banking talent and driving greater adoption of our treasury platform, we expect to continue to win relationships based on service, capability and value, not simply based on rates. These efforts directly contributed to nearly $300 million of noninterest-bearing deposit growth during the quarter. On the asset side, our focus in C&I and owner-occupied commercial real estate continues to drive strong loan growth and greater portfolio diversification. C&I growth was broad-based during the quarter with contributions from New York, Florida, Chicago and our specialty health care and fund finance verticals. These efforts also support our noninterest-bearing deposit growth as we continue to target disciplined, well-funded commercial relationships that can contribute to our sustained profitability improvement. Fee income was another area of strength. Sequential growth was driven by high-quality, sustainable businesses, including capital markets and tax credit advisory. Within capital markets, we continue to see a strong pipeline of Valley-led syndication opportunities, while swap activity has benefited from higher commercial real estate origination volumes. These fee-based capabilities are an important part of our commercial value proposition. And based on performance to date, we remain on track to achieve our 2026 growth objectives. As we discussed a bit last quarter, technology and artificial intelligence are becoming increasingly important to our ability to further scale our franchise. From a macro perspective, we believe that banks that can effectively adopt AI have the potential to structurally shift their efficiency ratios lower by around 500 basis points. At Valley, we intend to be an industry leader, and we are excited about the progress that we have made to date. As shown on Slide 9 of the deck, we believe that Valley has several structural advantages that support our AI strategy, including Valley Ventures, our international and technology banking business and our relationship with Bank Leumi in Israel. Valley Ventures gives us direct exposure to the start-up ecosystem and access to emerging talent and technologies. Our international and technology banking team provides deep relationships with venture capital funds and early-stage technology companies, including businesses expanding from Israel into the United States. Additionally, our relationship with Bank Leumi gives us additional visibility into leading practices in cyber, fraud and risk management. We have a robust team of AI practitioners focused on sourcing use cases and aligning solutions from these relationships that I just mentioned. Importantly, our AI strategy is embedded in our broader operating model and is intended to support productivity, risk management, client experience and scalable growth. As we look ahead, our priorities remain consistent and clear: continue to grow core deposits, deepen commercial relationships, generate more diversified loan and fee income growth and improve operating efficiency to translate our progress into stronger returns. We expect our continued commitment to these areas to drive further shareholder value over time. With that overview, I will now turn the call over to Travis to walk through the financial results and our outlook in more detail.
Thank you, Ira. Based on our first half results and the continued momentum that we are seeing, we are maintaining our strong outlook for 2026. We now expect gross loan growth at or somewhat above the high end of our range and believe that fee income will also migrate towards the high end of our expected range. Our outlook for deposit growth and net interest income is unchanged from the upwards revision announced on last quarter's call. We expect continued earnings growth and profitability improvement throughout the remainder of the year and into 2027. Turning to capital deployment. We continue to balance organic growth, capital returns and balance sheet flexibility during the quarter. We returned approximately $81 million to shareholders in the form of common dividends and the repurchase of 1.5 million shares. The quarter's reduced buyback activity was the product of our exceptional loan growth, and we will continue to toggle our buyback appetite in the context of near-term loan growth expectations. We remain very comfortable with our regulatory capital ratios. Our ability to support substantial loan growth, repurchase shares and reduce our regulatory CRE as a percentage of risk-based capital by another 12 percentage points during the quarter demonstrates our flexibility and the value of our accelerating organic capital generation. Slide 14 illustrates the quarter's strong deposit growth. Direct customer deposits increased $1.1 billion during the quarter, including nearly $300 million of noninterest deposit growth, $200 million of interest-bearing nonmaturity deposits and $600 million of retail CDs. While core deposit growth remained extremely strong during the quarter, we did utilize $200 million of incremental brokered deposits to fund the temporary timing mismatch resulting from our high-quality loan growth. We also strategically rotated nearly $700 million of floating rate NOW balances to brokered CDs within our indirect deposit portfolio. Total deposit costs were effectively unchanged from the first quarter and remained meaningfully lower than 2.67% a year ago. We remain focused on growing high-quality direct deposits and continuing to improve our funding profile over time. Slide 17 details the $1.6 billion increase in loans during the quarter, equating to around 13% on an annualized basis. Incremental growth continues to be focused in our C&I and owner-occupied CRE portfolios. And as Ira mentioned, we saw specific strength in the New York, Florida and Illinois markets and our health care vertical during the quarter. Regulatory CRE, which excludes owner-occupied loans, grew less than $100 million during the quarter. As a result of our strong organic capital accretion and our successful subordinated debt issuance in May 2026, our CRE concentration ratio declined to approximately 317% at June 30 from 329% at March 31. In general, our loan portfolio continues to evolve in line with our strategic priorities as we replace low-value transactional CRE with relationship-based C&I and owner-occupied CRE loans, which are contributing deposits to the bank. Net interest income on a tax equivalent basis increased to $488 million, up approximately $16 million from the first quarter and $55 million from the year ago period. Net interest margin on a tax equivalent basis expanded 3 basis points linked quarter to 3.2% and was up 19 basis points from the second quarter of 2025. The linked quarter increase in net interest income reflected higher average loan balances and higher yields on new loan originations and investment securities. These benefits were mitigated somewhat by the cost of carrying excess subordinated debt between our issuance of $500 million in May and the redemption of our $300 million callable notes in June. We estimate that this dynamic weighed on net interest income by around $2 million during the quarter. Noninterest income increased $4.9 million to $73.7 million and contributed over 13% of our total revenue during the quarter. The linked quarter increase was driven primarily by a $2.6 million increase in capital markets revenue and a $1.6 million increase in wealth management and trust fees. The fee growth reflected higher transaction volumes within loan participations and syndications and tax credit advisory services. We continue to view fee income as an important part of our business model evolution. Our enhanced treasury management platform, capital markets capabilities, tax credit advisory activity and broader commercial product set are giving us more ways to deepen relationships and generate additional high-quality and sustainable noninterest income. As mentioned earlier, we now expect 2026 fee income growth to be towards the higher end of our previously announced 6% to 9% range. Reported noninterest expense was $311 million, up approximately $1 million from the first quarter. Adjusted noninterest expense increased by $5 million as lower compensation costs were offset by higher FDIC expense, third-party spend associated with our operational transformation efforts and incremental costs related to the quarter's strong growth in fee income results. Our efficiency ratio improved to 52.1% from 53.1% in the first quarter and 55.2% a year ago, and expenses as a percent of average assets remains well below peer levels. As Ira mentioned, we remain focused on driving positive operating leverage, including through the continued use of technology and AI tools to support productivity, improve process consistency and reallocate capacity towards higher-value activities. We expect our efficiency ratio will continue to improve as we drive additional revenue growth and control operating expenses in the remainder of 2026 and beyond. Despite a modest uptick in nonaccrual and past due loans during the quarter, we saw a significant reduction in criticized and classified assets on both a sequential quarter and year-over-year basis. As detailed on Slide 25, criticized and classified assets now stand at 7.3% of total loans versus 8.1% a quarter ago and 9% last year. The continued improvement reflects improving underlying trends within our CRE portfolio, which has led to upgrades out of special mention and substandard classifications in addition to traditional payoff activity. Net charge-offs totaled $22 million or 17 basis points of average loans compared with $18 million or 14 basis points last quarter. The provision for credit losses for loans was $29 million compared to $21 million in the first quarter. The higher provision was due in part to the strong loan growth, particularly within the C&I category. Our allowance for credit losses for loans declined to 1.16% of total loans from 1.18% at March 31. This modest allowance coverage reduction is reflective of the criticized and classified asset reduction I just mentioned. For the remainder of 2026, we continue to expect charge-offs and provisions in line with our prior guidance. Tangible book value increased nearly 8% on an annualized basis. Our CET1 ratio of 10.7% remains within our previously stated target range and our successful issuance of new subordinated notes net of redemptions bolstered total risk-based capital during the quarter. Our current capital levels provide appropriate flexibility to support our growth and capital return aspirations going forward. In summary, the second quarter demonstrated continued progress against the strategic priorities we have outlined: stronger core deposits, more diversified relationship-based loan growth, improving net interest income and margin, sustainable fee income growth, expense discipline and balanced capital deployment. We are pleased with the momentum in the business and remain focused on delivering continued profitability improvement through the remainder of the year. With that, I will turn the call back to the operator to begin Q&A. Thank you.
Questions and answers
Just wanted to touch on fee income. It seems like a really strong quarter there, and the guide seems pretty positive. If we continue at this level, it looks like you probably exceed the guide. Is the expectation that some of the more volatile lines like capital markets likely step down from the high point in the second quarter?
Yes, Feddie, this is Travis. No, I think there's good consistency and continued growth opportunity. The one element that you kind of referenced within capital markets is our interest rate swap income, which is heavily tied to commercial real estate originations. As you saw, the second quarter loan growth was extremely strong and included some pull forward from things that we may have expected to have closed in the third quarter. So I do think the swap income element was slightly elevated. Maybe that equates to $1 million or $2 million in aggregate. But other than that, I think you still see continued growth in deposit service charges; loan syndications were strong; tax credit advisory was strong as well; and insurance picked up. So I think there are other elements, but I do think the interest rate swaps is the one that may have been slightly elevated during the quarter.
All right. Great. And if I could just switch gears to credit. Great to see the criticized and classifieds start to decline again. You mentioned some positive trends in CRE driving some of that. Can you provide any more detail on maybe what some of those trends are and really what you're seeing to drive some of these upgrades?
Absolutely, Feddie. So in general, the feel of our CRE clients is that the market continues to be robust in all asset classes for the most part, including office; we're starting to see positive progress in lease-up in office. Our portfolio upgrades and payoffs were primarily associated with some assets that were in transition and in lease-up and were downgraded. We had strong sponsor support. We had expected those properties to perform and lease up, and we are seeing that, and that's contributing to our payoffs and our upgrades. And again, we feel that there's room in the portfolio to continue to see that positive trend in criticized assets.
Great. If I could squeeze in one more on credit. Can you just talk about the agentic AI for underwriting? Just curious if you have any example of how that works and what parts of the process you see the most opportunity to speed up underwriting without compromising on the quality of the underwriting?
Sure, absolutely. To be clear, for us, we're in an exploration and examination phase. We don't have agentic AI in our core analysis right now, but traditional proven financial statement spreading and rent roll population within our core systems are things we are employing now. We're highly invested in examination to continue to expand those capabilities, although not employed in core decisioning yet.
This is Travis. I would just add that like most AI use cases, the manual work can be automated, but it doesn't change the oversight and approval and governance that's around those AI efforts. So elements, to Mark's point, have already been embedded, but it's not occurring in a vacuum with no human oversight. It's shifting roles and responsibilities somewhat.
Travis, the focus on a lot of the mid-caps this quarter in the regionals has been the accelerating loan growth, but a little bit of funding pressures. Interested in how you're thinking about that dynamic of growth versus margin as you go into the back half of next year? And then secondarily, do you have the spot price on the deposits?
Yes. The expectation for rates has changed somewhat since we came into the year. We've talked about being effectively neutral to the front end of the curve from a rate sensitivity perspective. I think we still see that playing out. For us, we have some differentiated opportunities because we still have $5 billion of brokered deposits. Over the last 12 months, we've generated about $4.5 billion of new core deposits. That's $8 billion over the last eight quarters. So we're seeing the core deposit growth trend be consistent and expanding. In the remainder of this year, we have $2 billion of brokered CDs coming off at a rate of 4.1% and $1.4 billion of fixed rate loans at 4.7%. When you think about the repricing benefits of both of those items, it gives us good confidence in the margin outlook. I don't think there's any argument that deposit competition is heating up, but I do think that's occurring more on the consumer side. Much of our focus has been on commercial deposit growth opportunities. This quarter, excluding CDs, we originated $1.3 billion of new deposits at a blended rate of 1.66%. Last quarter, excluding CDs, that number was $800 million at 1.78% — so we had some CD promotions out there that helped us generate volume. But exclusive of that, we're actually seeing our ability to generate new deposits at lower rates. All that's supportive of our margin guidance through the rest of the year. From a spot deposit perspective, the rate was 2.29% as we exited June. Part of that was elevated from March by 2 or 3 basis points because of the CD promotions that we had in the market.
Okay. Great color. And Ira, I want to make sure I heard the AI discussion right. I think the comment was 500 basis points. I think that was either operating leverage or an efficiency comment. I guess I'm more interested in how the role of AI plus the role of capital and smarter regulation is going to impact perhaps that mid-teens ROTCE that you've been talking about for some time.
Yes. I think there's tremendous opportunity on both sides of the balance sheet when we think about the AI implications. When we think about the composition of that 500 basis points, in my view it's more along the efficiency ratio, probably around 65% coming from expense and around 35% coming from revenue. As we think about resource deployment, whether capital or human, that's where those allocations come from. On the expense side, we think about gearing ratios and implications across frontline and support areas. We're already seeing the elimination of certain software across the organization, reduction in specific expenses and an improvement in efficiency. On the revenue side, we believe we can get a larger share of wallet based on enhancements with data and analytics and the ability to provide critical value-add information to our clients, which should be differentiating and give us additional revenue opportunities as well. We're looking at deploying capital associated with it. For the year-to-date, we've seen about $15 million, plus or minus.
Yes. All in, we have $15 million of saves in the expense run rate against about $3 million or $4 million of AI associated expenses that are new, whether it's headcount or vendor spend.
So for us, it's not just in an exploratory phase. There's actually a real ROI that's already coming from it, and we think it's going to be enhanced, and that will help us get to the 10% ROTCE that we targeted. But as Travis has talked about before, there's not a reliance upon AI to get to the 15% ROTCE number.
Could you talk a little bit more about your loan and deposit pipelines and how you're thinking about the timing and drivers of growth over the rest of the year? The guidance implies deposits outgrowing loans by about $400 million for the full year. But through the first half, loans have been about $400 million ahead of deposits. Is there any seasonality or timing for either of those lines we should be thinking about? And then secondly, as core deposits catch up to loans, should we expect meaningful improvement in deposit costs as you're running brokered down?
On the loan growth, we're running 9% on an annualized basis this quarter, but over the last 12 months it's been around 10% growth in C&I and mid-single-digit aggregate loan growth. I would expect the second half of the year to look more like what we've done over the last 12 months than the exceptional quarter we had. We've been hiring on the commercial side; those efforts resulted in a growing pipeline coming into the second quarter, and we saw very strong pull-through. The pipeline is down about $1 billion from March 31 to June 30, but remains a couple hundred million dollars ahead of where it was coming into the year. Seasonally, the third quarter is typically a little bit slower with summer vacations, and you see acceleration in the fourth quarter toward year-end. When we revised the loan growth guidance higher, we said at or somewhat above the high end of the 4% to 6% range. I think that's accurate and not a material change relative to our average loan expectations for the year. On the deposit side, we've been growing about $1 billion a quarter in core deposits. As we put on C&I loans, there is somewhat of a lag to achieve the deposit expectations that come with those loans. For example, loans originated in January had generated about 10% of the expected deposits by March; by June that was up to 80%. So there's a 3- to 6-month lag in getting the deposit opportunity achieved. That's why we highlighted a timing mismatch this quarter: loan growth was exceptional and deposit growth was exceptional, but over the next two quarters I expect that gap will close. We'll continue to see brokered deposits come down. For the remainder of the year, about $2 billion of brokered CDs come off at a rate of 4.1%. This quarter I gave you the new origination numbers and they're well below that, which helps drive the structural tailwind that differentiates us from many peers.
Got it. Any change to your NIM outlook for the fourth quarter?
No. We still think exiting low to mid-3.30s is what we've talked about. There's no change to that.
Going back to the expense conversation and some of the expected benefits from AI. Any color you can provide on the potential timeline there? Maybe discuss the expense side of the equation and when we can actually start seeing some of those benefits minimizing some of the more recent expense growth?
I think, as Ira mentioned, some of it's already in. When you look at the expense growth this quarter, $5 million sequentially, $1 million of that is from higher FDIC expenses due to deposit growth. We had exceptional growth in loans and fee income; there are certain incentives associated with that which affect expense. We've used third parties to help operationalize transformation efforts, which in some cases include AI but not in all cases. In the professional services line, you'll see a decline. There will be some follow-up transition as we optimize onshore headcount; compensation costs should continue to come down or stabilize and you'll see some professional fees offsetting that. Overall, that's a positive trade for expenses and our efficiency ratio. There are many moving pieces every quarter, and I feel very good about the AI efficiencies we're getting and that there's more to come. But I wouldn't overreact to the sequential change in expenses; some items are unrelated to the AI discussion.
Okay. Great. And then maybe looking at the loan growth this quarter, we saw multifamily get reengaged. You called out some strong growth in the health care vertical for CRE. I'm just wondering the mix of future loan growth and maybe talk through some of the spread dynamics within the CRE bucket versus what you're putting on. If that spread persists, is that going to have a meaningful change on loan yields going forward?
Within commercial real estate, the majority of our growth is coming from the owner-occupied portfolio. You called out multifamily being higher this quarter, but construction was down. A good amount of the multifamily growth was construction loans that went into permanent financing, so it's effectively neutral to the regulatory CRE ratio. From a spread perspective, there's some spread compression in the market and volatility monthly, but in general it's been fairly stable for us. C&I loan originations have picked up and our spreads there have held up better than in CRE. That C&I growth has offset some spread compression in CRE. We were conservative coming into the year assuming tighter spreads. Nothing we've seen is out of line with expectations, though it remains competitive, particularly in CRE.
On asset repricing, loan yields came in 3 basis points higher quarter-over-quarter and you called out new originations coming in at a higher rate. Can you provide any color about how much fixed asset repricing we still have going into the second half of the year and maybe anything into 2027?
For the remainder of this year, we have $1.4 billion of fixed rate loans that are maturing at a rate of 4.67%, which is roughly 150 basis points lower than where new originations are. For the first half of next year, there's an additional roughly $1 billion at about 4.75% that matures. That provides some of the tailwind on the loan side that we're discussing.
Great. And just last one for me on capital. How are you prioritizing capital between loan growth, buybacks and potential CRE concentration reductions from here?
There's no change in our approach. Our primary focus remains on well-funded high-quality loan growth and secondarily on buybacks. This quarter we had significant loan growth and toggled back on the buyback. Next quarter, should loan growth lighten, we'd be more active on buybacks. CET1 is in the middle of our guidance range; no change to expectations. Regarding CRE concentration, you've seen it come down consistently. This quarter it came down 12 percentage points; nine of those 12 points were because of the excess subordinated debt, and the remaining three points were due to organic capital accretion. We still grew regulatory CRE by $100 million, and we were able to drive the ratio lower by about 3% on an organic basis.
I'll start on credit quality. You saw some migration in and out of the 30- to 59-day bucket in nonaccruals. You attributed that to some CRE loans. Could you share a little more on that and your latest thoughts on credit quality overall into the second half of the year?
For the migration into nonaccrual, two of the three loans that moved into that category are appraised extremely strongly and are well covered by value. One was an office portfolio where we could not come to terms on a continuation and are looking to exit; it has matured and we're continuing to receive payments and it's well collateralized. The other loan has been hovering between the 60-day bucket and did go beyond 90 days; we moved it into nonaccrual and they made a payment and are running closer to 60 days; it's also well collateralized. In our nonaccrual portfolio, approximately 50% of loans continue to pay interest. We look at the overall trends and the large reduction in criticized assets as a stronger indication of where the portfolio is going, and we're seeing solid trends there.
Awesome. On the ACL ratio, it fell a few basis points quarter-over-quarter, but you reiterated the provision expense outlook. Do you still think you could be able to get back up to 120% by the end of this year?
I don't think we have a hard and fast target of 120%. It's within a range we're comfortable with. Year-over-year, the allowance coverage is down two basis points despite a 15 percentage point reduction in criticized and classified assets. As criticized and classified assets continue to come down, it would imply a lower ACL; that's then offset by C&I loan growth, which carries a higher allowance. Everything is playing out as we expect. We state general stability each quarter, but it will move a couple basis points based on model economic assumptions. Overall, it's been pretty stable for a long period.
Travis, going back to funding: considering competitive dynamics for deposits now against the maturing brokered, what are your expectations for deposit cost increases from here? And how much of the $5 billion in brokered do you think you can or do you want to replace with core? I assume there's some residual on an ongoing basis; curious what that number is.
On deposit cost, the level of competition has the potential to raise core deposit costs, but we have an offset from brokered deposits. Our model currently has roughly 4 to 5 basis points of deposit cost expansion in the next two quarters, and we expect margin to improve 5 to 7 basis points for each of the next two quarters as well, which offsets this. Brokered deposits are unlikely to go to zero; they serve an important purpose for interest rate risk management. Our goal is to get loans to nonbrokered deposits to 100%, and I think we can do that. Over the last several quarters you've seen chunky reductions in brokered deposits; core deposit growth has been consistent. While brokered won't go to zero, there's a reasonable level that helps support our rate risk management and securities.
Yes. And then thinking about NIM longer term: we're in a period where fixed asset repricing benefits exist. Looking back to 2023 when loan yields spiked for the industry, assuming some of that rolls off in 2028, does your model show NIM leveling out as we exit 2027 into 2028? Curious about longer-term NIM thoughts.
I'll get you through the end of 2027: we expect continued expansion between now and the end of 2027. I would expect continued tailwinds beyond 2027. One thing to keep in mind: given our CRE concentration entering 2023 and 2024, we weren't originating a lot of fixed rate CRE loans when rates were highest. For that reason, we don't have the repricing headwind of higher fixed rate loans coming off. The fixed rate loans coming off remain pretty low yielding, which gives us an opportunity and helps us avoid volatility in prepayment activity that others experienced because we weren't putting on many CRE loans when rates were highest.
Matt, we've made a lot of structural changes across the organization since then. We've invested in the treasury solution product, added C&I teams, and deemphasized some commercial real estate assets that had lower relationship and compensating balances. We've changed how Valley looks going into 2028 versus 2023. The structural funding advantages should provide tailwinds as well.
Got it. Ira, we talked about that mid-teens ROTCE outlook. When do you think you can hit that based on what you know today?
I think we've given guidance toward the beginning of 2028 for reaching the mid-teens ROTCE. I still think we see tailwinds in margin and positive operating leverage from expense reductions across the organization. The guidance we've given hasn't changed.
On expenses, can we assume professional and legal fees are trending down in the second half of '26 and through 2027? I believe this line item has been elevated because of transformation efforts. Also, you're talking about a lot of AI benefits and the positive impact on efficiency ratio plus your expectations on NIM expansion through 2027. How should we think about how that's impacting the efficiency ratio target? You've talked about sub-50% by the end of '26. How should we think about it beyond 2026?
There's no change to our expectation that the efficiency ratio should be 50% or lower as we exit 2026. Industry-wide AI longer term should provide a potential opportunity to enhance efficiency ratios by around 500 basis points, and we believe Valley can benefit similarly. Exiting 2026 at or below 50% leaves additional opportunity to continue driving it lower. Many of the revenue tailwinds we're benefiting from in 2026 continue into 2027. Our expectation is the efficiency ratio continues to decrease as we drive net interest income and fee income growth and keep expense growth much lower than revenue growth. Regarding professional fees, I agree that this is close to the peak; we'll begin to offboard some third parties that have been supporting the transformation.
Are the new deposits coming into the bank on the core side, including NIB, coming in around 2.5% as quoted previously, or is that slightly higher now? Could you give an updated number?
I'll give the numbers. In the first quarter, we originated $1.4 billion of new core deposits at a rate of 2.55%. This quarter, we originated $2.5 billion in aggregate at a rate of 2.71%. However, this quarter's originations include about $600 million of retail CD promotions at a rate of 4%. Excluding CDs from both quarters, in the first quarter we originated $800 million at 1.78%, and in the second quarter we originated $1.3 billion at 1.66%. So exclusive of CDs, we originated $500 million more core deposits at a rate that was 12 basis points lower than the first quarter.
I wanted to clarify: did you mention the Fed interest rate assumptions for the NII guide? Could you confirm those, please?
At this point, we have one hike assumed for 2026 and another half hike assumed for 2027. We've talked about being effectively neutral to the front end of the curve; that continues to be our balance sheet positioning. Effectively, our floating rate loans, which are about 40% of our loan portfolio, balance the amount of deposits when you adjust for beta that would also float on the front end. Whether there are hikes or cuts, it doesn't materially change our NII outlook. We're more exposed to the belly of the curve, and we've seen expansion there since the beginning of the year.
Is that on a constant size balance sheet, or does that include a presumed slowdown in balance sheet growth if rates are a little higher?
We expect the balance sheet to grow consistent with current trends. As we do more C&I, the amount of loans that float on the front end of the curve will increase, and that is where our deposit growth is coming as well. The statement is made with our balance sheet today; given the growth we're seeing, it should be consistent going forward. If there were any changes in sensitivities, we'd use hedges to keep sensitivity within ranges we're comfortable with.
I would add that we've added a lot of talent, are in the right markets and specialty verticals to continue to grow. We don't expect a material change in our loan growth outlook with reasonable expansion in longer-term rates.
I meant more along the lines that higher rates can weigh on loan growth, for example.
Got you. No, I think we're far away from that. We've added a lot of talent, are in the right markets and specialty verticals to continue to grow. I don't think higher rates would materially change our loan growth outlook with reasonable expansion in longer-term rates.
I just want to once again thank everyone for taking the time to join us this quarter. We're very excited about the results and what we're looking for for the rest of the year and look forward to talking to you again after Q3. Thank you.
This concludes today's program. We thank you for joining. You may now disconnect.