管理層發言
Hello, and thank you for being here. Welcome to Valley National Bancorp's Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Andrew Jianette. Please proceed.
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 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 franchise's further development. In September, Patrick Smith joined as President of Consumer Banking, 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, noninterest income. Excluding volatile net gains on loans sold, noninterest income has grown at an annual rate of 15% since 2017, three times faster than publicly 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 and more pessimistic stress test forecasts. 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 healthcare 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 healthcare C&I or capital call loan.
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. After 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 sub-segment, 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 noninterest 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. Noninterest 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 noninterest 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. Nonaccrual 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 nonaccrual.
On a combined basis, total past dues and nonaccrual 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.
分析師問答
Our first question comes from David Smith with Truist Securities.
Could you discuss the competitive environment, especially in light of the decline in C&I loans? I understand that some of this decline was influenced by commodities and the rise in deposit costs for the quarter on average. I believe there was a decrease in the spot deposit rate, but could you help us understand the competitive factors driving these trends and how you anticipate them to change in the fourth quarter and the upcoming 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 million to $930 million 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 is 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 brokered 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 we 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 and nonbanks are fighting pretty hard for loans. And we have 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 TCE 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, look, 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.
Our next question comes from the line of Feddie Strickland with 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 than inside the legacy Northeast footprint?
So our originations for the quarter and actually for the last year really reflected one-third, one-third, one-third: one-third in the Southeast, one-third in the Northeast and one-third in 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 an 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 from the Northeast as well. But we feel really strong and confident in the growth numbers that are largely a function of what we're seeing in the Florida footprint as well.
Ira, 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 maybe 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.
Our next question comes from the line of Anthony Elian with JPMorgan.
Could you provide more color on the increase in nonaccrual loans? I know you called out the construction loan that migrated to nonaccrual 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 one $35 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 are in the midst of a refinance to take us out. We don't anticipate any issues with that at all on the go forward. The other primary migration into nonaccrual is based off of updated appraisals. What I would note is that 50% of our nonaccrual portfolio is current on payment. So there's just some appraisal valuation and consistent with our guidance to go there, but that is a much higher percentage of paying nonaccruals 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 in 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 two-thirds of payoffs in refinance at par and about one-third 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 that CRE balances will stabilize and begin to grow and then allow that capital to build to drive the next leg down in the ratio.
Our next question comes from the line of Manan Gosalia with 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.
Thank you for the question. As Ira pointed out, the Florida franchise stands out as a major differentiator in my view. It has maintained strong momentum and growth for many years, which continues as it has reached a $15 billion size, primarily through organic growth. There are significant opportunities in front of us. Additionally, I see potential for Valley to expand into the upper segment of commercial and industrial lending. We are bringing in new senior lenders focused on the revenue range of $150 million to $500 million, which is a segment we haven't traditionally targeted as much. We are currently onboarding five senior bankers who are in the process of building their teams. Moreover, I believe there is a great opportunity for Valley in business banking. However, we need to enhance our engagement in that segment, particularly regarding deposits. We have a clear chance to improve here.
As part of this initiative, we plan to expand our professional services offerings, focusing on law firms, accounting firms, and medical and dental practices, as they typically have a favorable deposit profile. We believe that our move into the upper segment of C&I lending can be a real game-changer, especially given the current gaps left by larger institutions and regional banks that are consolidating. Valley's commitment to building relationships and our responsiveness set us apart from super regional banks, which is appreciated by our clients. We are bringing on experienced bankers to grow teams across all regions and adding business bankers as part of our strategy. We have also gone through an efficiency initiative to create the necessary capacity for this growth. Overall, I see numerous opportunities for Valley to expand in 2026 and beyond.
This is Patrick. First of all, I want to express how enthusiastic I am about what I've observed in my first few weeks at Valley. In response to your question, I would highlight a few key points. One area is small business. I've been assessing our small business segment, and I see significant growth potential there. We have not fully tapped into the small business market, and there's a real chance for organic growth across our footprint. To capitalize on this, we've been adding experienced small business bankers and enhancing our product offerings. So, I view this as a fantastic opportunity. We have already brought on eight bankers primarily in Florida and New Jersey to pursue this potential. Additionally, I believe we can organically increase retail deposits from our branches. Historically, our branches have supported our commercial business, but as we shift our focus more towards retail, there is a strong opportunity to grow our retail franchise through these branches. We have an excellent branch network that presents a substantial opportunity. Finally, I want to reiterate what Gino mentioned about attracting strong talent in the retail bank, which I expect will continue and serve as a core driver for our retail franchise growth, much like it does in commercial.
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'll 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.
I want to discuss where we stand regarding positive operating leverage. Let's take a moment to look back at our situation before the regional banking issues we faced in 2023. In June of 2023, we had 3,957 associates across our organization, and now we're down to 3,624, reflecting a decrease of 333 associates, or about 8.5%. To put things in perspective, at the end of 2022, we reported a return on tangible common equity of 17.20%. We remain committed to growing the organization and delivering appropriate returns to our shareholders, which we believe we can achieve again. Due to the external challenges we encountered this year, we had to adjust our investment strategy for 2023. We have also shifted our focus on commercial real estate in light of recent events involving NYCB and others. We are confident that the necessary reductions have been made, allowing us to reinvest in revenue. As mentioned by Gino and Patrick, we will continue hiring within the organization, putting us on a growth path that should return us to the tangible common return levels we have seen in the past, aligning more closely with our higher-performing peers. We don't foresee the need to add substantial incremental expenses, as we have already created room for that, and we are very optimistic about the positive operating leverage we are poised to achieve.
Our next question comes from the line of Chris McGratty with KBW.
Travis, referring to your comment about the commercial real estate portfolio reaching a low point and then experiencing low single-digit growth, how do you view the impact of low interest rates on that statement?
Yes. We expect our loan growth guidance to include a certain level of payoffs based on our rate forecast. If rates are significantly lower than we expect, payoffs would increase, and we might end up at the lower end of our guidance range for loan growth. However, we effectively paused CRE origination in 2024, a time when the highest yields for CRE loans were established. This may mean we don't face the same headwind from lower rates affecting our payoff activity as others do. Our fixed-rate loan portfolio is yielding in the mid-4s to 5%, so rates would need to drop considerably before we see a significant spike in payoff activity. While it’s a factor to consider, I believe we are somewhat more shielded compared to other lenders.
I would add that lower rates will also increase some transaction volume. Our pipeline is currently $3.3 billion in total commercial and industrial and commercial real estate, up from $2.1 billion in 2024. It's more evenly split between commercial real estate and commercial and industrial, whereas it was previously skewed 60-40. We are witnessing positive momentum in both sectors, and while the payoffs are present and liquidity exists in the marketplace, we are effectively expanding our pipeline.
That's helpful. And I guess my follow-up, Ira, is more of a strategic question. It 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?
I think there has been no change in our perspective on mergers and acquisitions throughout the organization. For us, being shareholder-friendly and focusing on shareholders is our primary focus regarding capital allocation. We have made several acquisitions over time, always considering the tangible book value dilution and the expected return to shareholders. As we move forward with capital deployment, we recognize that we are currently at a significant discount compared to our peers. We feel very confident about our earnings trajectory, and with a 1% return on tangible book value, it seems like a wise use of capital to me.
I would just add, Chris, that from an M&A perspective, we have an incredible organic opportunity set ahead of us. Our primary focus is on supporting the growth that we will generate organically. I believe more M&A activity is beneficial for us as it creates additional disruption that we can take advantage of. Through the investments we are making in talent, we are working to position ourselves to capitalize on that.
Our next question comes from the line of Dave Rochester with 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 overreliance 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 Valley 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 noninterest 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 them.
Great. And on the effort to go upmarket, where are you in the innings of that hiring in that effort? Are you 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 will you start to see the boost in growth from that?
We've made significant progress in hiring both senior individuals and underwriters so far. Our goal is to have them on board to start strongly in January and continue through 2026. I believe we will experience real growth in upmarket commercial and industrial sectors and business banking next year. Currently, we are in the early stages of this process, but the momentum has been positive. Many people are eager to join Valley, which is viewed favorably in the market, and we are enthusiastic about the potential ahead.
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 that, I think, look, there's obviously headwinds in different quarters. 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 that there'll be a lot of strength there. And maybe I'll 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 is still hiring and Patrick is still hiring.
Yes. We're penciling 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'd 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.
Our next question comes from the line of David Smith with Truist Securities.
Just thinking a little bit longer term now, you did 11.6% adjusted ROTCE 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% ROTCE target. I think we're pretty confident we can effectively achieve it by late '27, early '28. If you think about where we're starting today 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.
Our next question comes from the line of Matthew Breese with 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. The 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 nonbrokered 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, Matt, 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. My last question feels a bit out of tune given all the positivity and optimism regarding organic growth. However, it seems like the M&A deal window is open, and I heard your focus on organic growth. I wanted to get your thoughts on all strategic alternatives, including the possibility of a sale, since the big bank M&A window appears to be open as well. I haven't seen that in a while and would appreciate your insights on the matter. What would drive such an outcome?
I'll just go back to the one comment of shareholder first, right? And I think that's how we need to think about anything that happens in this organization.
Our next question comes from the line of Jonathan Rau with Barclays.
This is Jon Rau on for Jared. I guess 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 guess, the banking system. Is there any subset 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? I know they're small there 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 and really some rational transactions. So I think you hit the nail on the 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 offered a lower loan amount traditionally and required stronger in-place debt service coverage at our 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 I guess 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. I just wanted to confirm that there is no expected loss on the land loan that the borrower is refinancing away from you.
No, we have more than adequate value there. No loss anticipated.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.
Mark, maybe for you. What do you think the time line is for nonaccrual 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 I 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 nonaccruals 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 believe that's absolutely the case. The progress we've made has been significant, especially regarding the funding side, which has improved as we worked through the liquidity crisis. This improvement has boosted our net interest income. We also have a notable fixed-rate asset repricing advantage coming up. By 2026, we will have $1.7 billion in loans repricing at about 4.75%, which presents considerable opportunities and supports the margin expansion we've discussed. From a credit standpoint, we expect to see normalized charge-off rates in 2026, around 15 basis points, with a generally stable reserve. When you put all of this together, I believe this provision level is sustainable within a certain range.
Our next question comes from the line of Janet Lee with TD Cowen.
On deposits, when I look at specialized deposit growth over the past quarter, that's about $700 million. It seems that much of that is being used to replace indirect deposits. You mentioned that deposit growth should be increasing at a faster pace than loans and that the change in the incentivized structure is likely to assist with that. If I focus on the pace of deposit growth from specialized deposits, particularly in other commercial and small business, is this the area where you anticipate a significant amount of your deposit growth will originate? Can 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, look, 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. We look 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. Florida 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. You made it clear that you expect 4% to 6% loan growth over the intermediate term by 2026. Regarding the near term, given the headwinds from commodities and C&I payoffs in the third quarter, can I view that as temporary? Are there any segments of Bank Leumi or within Valley that you might consider reducing?
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.
Our next question comes from the line of Steve Moss with 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, although slightly lower because benchmark rates are lower. We saw some spread tightening earlier this year. I'd say 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 handled loans of this size but hasn't focused on it as much. We will now concentrate more on this area and bring in experienced talent. The pricing is generally a bit lower, and we are developing our syndication platform. We intend to originate these loans and sell some of them. The pricing usually ranges from 1.75 to 2.25, and we aim to stay above that threshold. These relationships are robust, including deposits, fees, and opportunities for capital markets. We view this as a key driver of profitability moving 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.
We experienced a $100 million decrease in criticized assets during the period. This improvement was achieved not only through upgrades but also by payoffs in financing, which is a positive development. I will need to follow up regarding the specifics of the 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.