What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-11 · 402 added, 328 removed, 569 unchanged (56% of the section changed)

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Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions.

These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms.

These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “would,” “could,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms.

Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements.

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and the global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;

the impact of COVID-19 on our employees and our ability to provide services to our clients and respond to their needs;

the impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 arise in various locations, including Florida and Alabama;

potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic or as a result of our action in response to, or failure to implement or effectively implement, federal, state and local laws, rules or executive orders requiring that we grant forbearances or not act to collect our loans;

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a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;

the inability to realize expected cost savings and synergies from the Oritani merger in amounts or in the timeframe anticipated;

the inability to retain Oritani customers;

higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;

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Critical Accounting Policies and Estimates

At March 31, 2020 , we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

We identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

Determining the allowance for loan losses has historically been identified as a critical accounting estimate.

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Accordingly, our actual credit loss experience may not be in line with our expectations.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at March 31, 2020.

As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the first quarter of 2020 and the related increase in economic uncertainty, we increased our probability weighting for the most severe economic scenario.

As a result, approximately 50 percent of the provision of credit losses for loans totaling $33.9 million for the first quarter 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at June 30, 2020 .

As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the first half of 2020 and the related increase in economic uncertainty, we increased our probability weighting for the most severe economic scenario as compared to those at January 1, 2020.

As a result, over 40 percent of the provision of credit losses for loans totaling $75.0 million for the six months ended June 30, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

Details regarding our critical accounting policies for goodwill and other intangible assets, and income taxes are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 .

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Company Overview.

At March 31, 2020 , Valley had consolidated total assets of approximately $39.1 billion , total net loans of $30.1 billion , total deposits of $29.0 billion and total shareholders’ equity of $4.4 billion .

At June 30, 2020 , Valley had consolidated total assets of approximately $41.7 billion , total net loans of $32.0 billion , total deposits of $31.4 billion and total shareholders’ equity of $4.5 billion .

Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama.

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Impact of COVID-19.

In March 2020, the outbreak of the novel Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place.

These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.

It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

The CARES Act includes the Paycheck Protection Program (PPP), a $349 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

Valley National Bank is a certified Small Business Administration (SBA) lender and has dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under program, obtain SBA approval and receive funding as quickly as possible.

During April 2020, Valley facilitated $1.6 billion of SBA assistance to its customers through this program's initial loan submission period ending on April 16, 2020.

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act) was signed into law by President Donald Trump to address the continuing economic issues created by the COVID-19 pandemic.

The Enhancement Act supplements the Paycheck Protection Program enacted on March 27, 2020, and provides additional funding of $321 billion for small-business loans, as well as other additional funding for health care providers and COVID-19 testing.

As of May 6, 2020, Valley facilitated approximately $650 million of SBA assistance to its customers as part of this second round of program funding.

In order to safeguard the health and wellness of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including temporary closure of certain offices, restricting employee travel and directing employees to work remotely whenever possible.

We also implemented our business continuity plans to the extent necessary.

Over 90 percent of our non-branch employees are currently working remotely.

We have temporarily closed 36 percent of our branches and all other branches offer only restricted drive-up service or lobby service by appointment.

In an effort to support our employees through our extended benefits program, we paid $1.8 million in bonuses to our hourly employees;

provided 80 hours of additional paid time for quarantine and sick time, as well as 24 additional hours for childcare arrangements;

and will provide full coverage of COVID-related medical costs for covered employees and their families.

In response to the COVID-19 pandemic, we have also entered into short-term loan modifications to provide temporary payment relief requested by certain qualifying borrowers.

Generally, our forbearance agreements allow for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative basis.

As of March 31, 2020, we have granted temporary modifications on approximately 2,100 loans, resulting in an immaterial amount of deferred interest payments for the first quarter 2020.

Through May 6, 2020, and including the deferred loans as of March 31, 2020, we have processed approximately 4,300 consumer payment deferral requests, including approximately 850 related to residential mortgage loans.

In addition, Valley has processed payment deferral requests for approximately 1,250 mortgage loans serviced for others.

From a commercial customer perspective, Valley has processed approximately 3,100 payment deferral requests.

Significant uncertainties as to future economic conditions exist, and we have taken purposeful actions in response, including heightened levels of balance sheet liquidity as of March 31, 2020.

Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL have contributed to an increased provision for credit losses for the first quarter 2020.

The widespread outbreak of the novel Coronavirus Disease 2019 (COVID-19) has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity, including in the markets that we serve.

Our markets within Florida and Alabama have experienced a recent increase in COVID-19 infection rates and such negative trends could hamper reopening and economic recovery in these markets.

Uncertainties and disruptions from COVID-19 have slowed our traditional new commercial loan volumes and many consumer loan products, such as automobile loans during the second quarter 2020.

Any sustained economic downturn or other long-term changes in consumer and business behaviors from COVID-19 may also adversely impact the value of assets that serve as collateral for our loans.

The $659 billion Paycheck Protection Program (PPP) provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as supplemented by the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), was designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

These loans are intended to guarantee 8 to 24 weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

Valley National Bank is a certified Small Business Administration (SBA) lender and during the second quarter of 2020 dedicated significant staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the program, obtain SBA approval and receive funding as quickly as possible.

To date, Valley has facilitated over 12,800 SBA-approved PPP loans and had over $2.2 billion of these loans outstanding as of June 30, 2020.

We expect the majority of these loans to be forgiven in accordance with rules, application and documentation requirements for this program, some of which have only recently been released.

The loan forgiveness rules may be subject to further revisions and additional SBA guidance in the coming months.

During the latter part of second quarter 2020, we have taken steps to reopen most branches in New Jersey and New York that had been either temporarily closed or had reduced lobby services due to COVID-19, while acting with an abundance of caution in order to safeguard the health and wellness of our customers and employees.

We will continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant, which may necessitate resumption of certain branch or other office closures and reduced lobby services.

Our business continuity plan continues to remain in effect and a significant portion of our non-customer facing employees continue to work remotely as we work through our return to work plans and monitor the level of the health crisis in our primary markets.

In response to the COVID-19 pandemic and its economic impact on certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers.

Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers.

Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.

Significant uncertainties as to future economic conditions exist, and we have taken purposeful actions in response, including continued heightened levels of balance sheet liquidity during the second quarter 2020.

Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first half of 2020.

We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, Enhancement Act and other government stimulus or Federal Reserve actions.

However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

See the "Operating Environment" section and our risk factors under Part II Item 1A below for more details.

Branch Transformation.

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For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline.

During March 2020, we permanently closed an

additional 3 branches located in New Jersey.

During the first quarter 2020, we permanently closed an additional 9 branches located in New Jersey, including the consolidation of 6 acquired Oritani branches into nearby legacy Valley branches.

We currently expect to permanently close 10 branches during the remainder of 2020.

For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.

At this time, we plan to reopen all branches temporarily closed due to the impact of the COVID-19 pandemic.

At this time, we plan to reopen branches temporarily closed due to the impact of the COVID-19 pandemic, although the timing of reopening these branches is uncertain.

Quarterly Results.

Net income for the first quarter 2020 was $87.3 million , or $0.21 per diluted common share, compared to $113.3 million , or $0.33 per diluted common share, for the first quarter 2019 .

The $26.1 million decrease in quarterly net income as compared to the same quarter one year ago was largely due to:

(i) a $66.3 million decrease in non-interest income due to a $78.5 million gain on the sale (and leaseback) recognized during the first quarter 2019, (ii) a $26.7 million increase in our provision for credit losses for loans due to the CECL adoption and the impact of the COVID-19 pandemic on the model results and (iii) a $7.9 million increase in non-interest expense, partially offset by (iv) a $46.7 million increase in net interest income caused by higher average loan balances driven by strong organic loan growth over the last 12 months and loans acquired from Oritani, and (v) a $28.1 million decrease in income tax expense largely due to lower pre-tax income.

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our first quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our first quarter 2020 results.

Net income for the second quarter 2020 was $95.6 million , or $0.23 per diluted common share, compared to $76.5 million , or $0.22 per diluted common share, for the second quarter 2019 .

The $19.1 million increase in quarterly net income as compared to the same quarter one year ago was largely due to:

(i) a $62.3 million increase in net interest income driven by organic and Oritani acquired loan growth over the last 12 months combined with our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment, (ii) a $17.2 million increase in non-interest income mainly caused by strong commercial loan customer swap fees, higher BOLI income and additional gains on the sales of residential mortgage loans, partially offset by (iii) a $39.1 million increase in our provision for credit losses for loans due to the adoption of CECL and the impact of the COVID-19 pandemic on the model results, (iv) a $15.4 million increase in non-interest expense due to our expanded franchise following the Oritani acquisition, higher technology consulting and certain additional expenses due to COVID-19, and (v) a $5.9 million increase in income tax expense.

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our second quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our second quarter 2020 results.

Operating Environment.

During the first quarter 2020, real GDP contracted by 4.8 percent, as compared to an expansion of 2.1 percent in the fourth quarter 2019.

The contraction was across many sectors of the U.S.

economy as firms reduced their capital investments and pulled back from their other normal purchasing volumes due to business closures and interrupted supply chains.

Additionally, households have been adversely impacted by sharply rising rates of layoffs and temporary furloughs and have also experienced severe restrictions on their movements outside their homes, due to state and local government emergency orders.

Congressional Budget Office (CBO) predicts that economic activity in the United States as measured by GDP will experience a sharp contraction of 12 percent in the second quarter of 2020, equivalent to an annual rate of decline of 40 percent for the quarter, with the unemployment rate rapidly rising to 14 percent in the second quarter.

For fiscal year 2020, the CBO projects the federal budget deficit will be $3.7 trillion with federal debt held by the public projected to be 101 percent of GDP by the end of the fiscal year.

Economic activity is expected by many to increase in the third quarter 2020, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity.

However, significant challenges in the economy and the labor market are expected to persist for some time.

Beginning in March 2020, the Federal Reserve announced several emergency actions in response to the COVID-19 pandemic.

On two separate occasions, the target range was reduced by 50 and 100 basis points at their March 3, 2020 and March 16, 2020 meetings, respectively.

The target range for the federal funds rate is currently between zero and 0.25 percent.

Additionally, the Federal Reserve initiated several programs to support the flow of credit to households and businesses to promote its employment and price stability goals.

During the second quarter 2020, real gross domestic product declined 32.9 percent.

COVID-19 and the measures taken to mitigate the health crisis have caused households and businesses to sharply reduce consumption and investment.

As a result, job losses have increased sharply while prices for goods and services have fallen.

The unemployment rate was 11.1 percent in June 2020 compared to 4.4 percent in March of this year.

The ongoing public health crisis will weigh heavily on economic activity, employment and inflation.

To support the flow of credit, the Federal Reserve reduced the target range for the federal funds rate earlier this year.

In addition, the Federal Reserve began purchasing Treasury securities and agency residential and commercial mortgage-backed securities.

Currently, the target range for the federal funds rate is between zero and 0.25 percent.

The 10-year U.S.

Treasury note yield ended the first quarter at 0.70 percent, 122 basis points lower compared with December 31, 2019.

The spread between the 2- and 10-year U.S.

Treasury note yields ended the first quarter 2020 at 0.47 percent, 13 basis points higher compared to the end of the fourth quarter 2019 and 33 basis points higher compared to March 31, 2019.

For all commercial banks in the U.S., loans and leases grew approximately 4.9 percent in the first quarter 2020 compared to the previous quarter, largely resulting from balance sheet expansion at larger institutions.

For the industry, banks reported increasing demand for commercial and industrial loan products to large and middle market firms compared to the previous quarter.

Similarly, demand improved for most commercial real estate loans during the first quarter of 2020.

Banks also reported less stringent credit standards for new loans, particularly for loans secured by multifamily residential structures.

Valley’s originations increased across most loan categories driven by a strong fourth quarter 2019 pipeline and, in part, by a slight increase in utilization rates on commercial lines of credit.

Demand for consumer loans, particularly, residential mortgage loans, was driven by high levels of refinance activity.

The outbreak of COVID-19 has adversely impacted general business activity and consumer sentiment.

result, demand for consumer loans is likely to wane in the second quarter, while an expected decline in new commercial loan activity will be supplemented by a high level of SBA PPP loan originations.

However, many of the SBA loans are expected to be forgiven by the SBA and be repaid to Valley within a relatively short period.

These factors may continue to challenge our business operations and results, as highlighted throughout the remaining MD&A discussion below.

Loans increased $728.9 million , or 9.8 percent on an annualized basis to approximately $30.4 billion at March 31, 2020 from December 31, 2019 .

The increase was mainly due to continued strong quarter over quarter organic growth in commercial real estate and commercial and industrial loans, as well as stronger residential loan volumes during the first quarter 2020 .

During the first quarter 2020 , we originated $148 million of residential mortgage loans for sale rather than held for investment and sold approximately $196 million of loans, including $30.0 million of pre-existing loans from our residential mortgage loan portfolio.

Residential mortgage loans held for sale totaled $58.9 million and $76.1 million at March 31, 2020 and December 31, 2019 , respectively.

Treasury note yield ended the second quarter at 0.66 percent, 134 basis points lower compared with June 30, 2019.

The current economic environment has weakened traditional commercial loan demand, while residential mortgage loan volumes for both purchased and refinanced activity are relatively solid in the early stages of the third quarter 2020.

The low market interest rates for new loans will continue to put pressure on our overall loan yields and net interest margin.

In parts of the Bank’s footprint, particularly Florida, the number have COVID-19 cases have

recently increased, which may hinder attempts to resume normal business activity in those regions.

More broadly, the ongoing health crisis has caused household and business confidence to remain subdued which is likely to weigh on Valley’s financial results, as highlighted in the remaining MD&A discussion below.

Loans increased $1.9 billion to approximately $32.3 billion at June 30, 2020 from March 31, 2020 largely due to approximately $2.2 billion of SBA PPP loan originations within the commercial and industrial loan category during the second quarter 2020 .

Commercial real estate loans increased $181.6 million, or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our strong loan commitment pipeline at March 31, 2020 and slower repayment activity in the second quarter.

Residential mortgage and the consumer loan categories all experienced moderate declines in the second quarter due to the impact of COVID-19 and our normal mortgage banking sales activity.

During the second quarter 2020 , we originated $296 million of residential mortgage loans for sale rather than held for investment and sold approximately $237 million of these loans.

Residential mortgage loans held for sale at fair value totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020 , respectively.

See further details on our loan activities under the “Loan Portfolio” section below.

Asset Quality.

Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded loans that were formerly classified as Purchased Credit-Impaired (PCI) loans.

Under previous U.S.

GAAP, PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and were not subject to delinquency classification in the same manner as loans originated by Valley.

Under the new CECL standard, Valley's PCI loan pools are accounted for as Purchased Credit Deteriorated (PCD) loans on a loan level basis and, if applicable, reported in our past due and non-accrual loans at March 31, 2020 .

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $116.1 million to $220.5 million at March 31, 2020 as compared to December 31, 2019 largely due to an increase in non-accrual loans.

Non-accrual loans increase d $112.9 million to $205.9 million at March 31, 2020 as compared to December 31, 2019 , largely due to non-accrual PCD loans totaling approximately $74.4 million which are required to be reported as delinquent loans under the CECL accounting guidance effective January 1, 2020.

The remaining increase was largely due to additional taxi medallion loans within the commercial and industrial category.

Non-accrual loans represented 0.68 percent of total loans at March 31, 2020 , as compared to 0.31 percent at December 31, 2019 .

The increase in this percentage over the prior linked quarter is largely due to the $74.4 million of non-accrual PCD loans reported at March 31, 2020 .

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased $91.2 million to $159.4 million , or 0.52 percent of total loans, at March 31, 2020 as compared to $68.2 million , or 0.23 percent of total loans, at December 31, 2019 largely due to an increase in early stage delinquencies in most loan categories.

The increase was partly due to a few large commercial real estate loan delinquencies, an uptick in residential mortgage delinquencies and PCD loans past due totaling approximately $18.2 million at March 31, 2020 .

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio.

However, due to the potential for future credit deterioration caused by the recent downturn in economic conditions impacted by the COVID-19 pandemic and a number of our borrowers performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported as of March 31, 2020 .

See the "Non-Performing Assets" section below for further analysis of our asset quality.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020 .

Non-accrual loans increase d $4.7 million to $210.6 million at June 30, 2020 as compared to March 31, 2020 partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020 .

Non-accrual loans represented 0.65 percent of total loans at June 30, 2020 , as compared to 0.68 percent at March 31, 2020 .

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $66.3 million to $93.1 million , or 0.29 percent of total loans, at June 30, 2020 as compared to $159.4 million , or 0.52 percent of total loans, at March 31, 2020 due to a decline in early stage delinquencies for all loan categories.

Commercial real estate loans past due 30 to 59 days and 60 to 89 days decreased by $27.8 million and $14.4 million, respectively, as compared to March 31, 2020 .

The improved performance within the 30 to 59 day category was mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020.

Commercial real estate loans past due 60 to 90 days at June 30, 2020 declined primarily due to the normal renewal of a $13.8 million performing matured loan reported in this category at March 31, 2020 .

See further details in the "Non-performing Assets" section below.

Deposits and Other Borrowings .

Our mix of the deposit categories of total average deposits for the first quarter 2020 remained relatively unchanged as compared to the fourth quarter 2019 , with a slight shift from time deposits to money market accounts.

The higher money market balances were driven by increased depositor balances resulting from the uncertain financial markets, as well as a partial shift to more liquid funds for maturing retail CD customers.

Average non-interest bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 23 percent , 45 percent and 31 percent of total deposits as of March 31, 2020 ,

respectively.

Overall, average deposits increased by $2.0 billion to $28.8 billion for the first quarter 2020 as compared to the fourth quarter 2019 largely due to the $2.9 billion of assumed deposits in the Oritani acquisition on December 1, 2019.

Actual ending balances for deposits decreased $168.8 million to approximately $29.0 billion at March 31, 2020 from December 31, 2019 largely due to a $1.2 billion decrease in time deposits.

The decline in time deposits was mostly driven by an $825 million decrease in brokered CDs due to maturities during the first quarter and lower use of such deposits in our liquidity and loan funding management at March 31, 2020.

These decreases were partially offset by increases in savings, NOW and money market deposits and non-interest bearing deposits of $741.3 million and $240.7 million at March 31, 2020 , respectively from December 31, 2019 .

Total brokered deposits (consisting of both time and money market deposit accounts) were $3.4 billion at March 31, 2020 as compared to $4.1 billion at December 31, 2019 .

Average short-term borrowings decreased $303.2 million to $1.3 billion for the first quarter 2020 as compared to the fourth quarter 2019 largely due to the maturity and repayment of short-term FHLB borrowings.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $397.4 million to $2.8 billion for the first quarter 2020 as compared to the fourth quarter 2019 .

Actual ending balances for short-term borrowings and long-term borrowings increased by $1.0 billion and $683.2 million , to $2.1 billion and $2.8 billion , respectively at March 31, 2020 as compared to December 31, 2019 .The increase in both short- and long-term borrowings was primarily driven by our plan to increase our liquidity levels as an abundance of caution in the face of the escalating economic crisis created by the COVID-19 pandemic.

As of March 31, 2020 , the short-term borrowings mainly consisted of FHLB advances totaling $1.5 billion with weighted interest rates well below 1.0 percent and federal funds purchased totaling $457 million with a weighted average rate of 0.17 percent.

Of the $1.5 billion in FHLB advances, $600 million were hedged with cash flow interest rate swaps as part of our interest rate risk management strategies during the first quarter 2020 .

In addition, during the first quarter 2020 Valley obtained $723 million of new long-term FHLB advances with maturities between three and five years at a combined weighted average rate of approximately 1.89 percent.

and time deposits represented approximately 27 percent , 45 percent and 28 percent of total deposits as of June 30, 2020 , respectively.

Overall, average deposits increased by $2.0 billion to $30.8 billion for the second quarter 2020 as compared to the first quarter 2020 .

Our mix of the deposit categories of total average deposits for the second quarter 2020 as compared to the first quarter 2020 experienced a shift to non-interest bearing deposits largely due to new deposits resulting from the funding of customer PPP loans, as well as a continued migration of maturing retail CD customers into more flexible and lower-cost transaction account types.

Actual ending balances for deposits increased $2.4 billion to approximately $31.4 billion at June 30, 2020 from March 31, 2020 largely due to increases of $2.0 billion and $666.6 million in non-interest bearing deposits and interest-bearing deposits without stated maturities, respectively.

The increases were mostly driven by the aforementioned deposits from PPP loan customers, higher depositor balances due to the uncertain financial markets, as well as a partial shift to more liquid account types for maturing retail CD customers.

As a result, time deposits decreased $294.3 million at June 30, 2020 as compared to March 31, 2020 .

Total brokered deposits (consisting of both time and money market deposit accounts) were $3.6 billion at June 30, 2020 as compared to $3.4 billion at March 31, 2020 .

While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2020.

Additionally, the vast majority of the PPP loan customers that are Valley depositors are expected to use the funds for qualifying payroll and other costs over an 8 to 24 week period to obtain loan

The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in the second half of 2020.

Average short-term borrowings increased $1.0 billion to $2.3 billion for the second quarter 2020 as compared to the first quarter 2020 driven by our prudent steps to increase our liquidity levels starting in the end of the first quarter 2020 in the face of the escalating economic crisis created by the COVID-19 pandemic.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $111.0 million to $2.9 billion for the second quarter 2020 as compared to the first quarter 2020 mostly due to $100 million of new long-term FHLB advances executed in March 2020 as part of our overall liquidity strategy.

Actual ending balances for short-term borrowings moderately decreased by $12.8 million to $2.1 billion at June 30, 2020 as compared to March 31, 2020 .

Long-term borrowings increased $101.9 million to $2.9 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our $115.0 million issuance of 5.25 percent fixed-to-floating rate subordinated notes on June 5, 2020.

Selected Performance Indicators.

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Three Months Ended

Six Months Ended

Return on average assets

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Three Months Ended

Six Months Ended

(in thousands)

Net income, as reported

Losses on securities transactions (net of tax)

Net impairment losses on securities (net of tax)

Losses (gains) on securities transactions (net of tax)

Severance expense (net of tax) (1)

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(2) Impairment is included in the amortization of tax credit investments.

Merger related expenses are primarily within professional and legal fees, and other non-interest expenses..

Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other non-interest expenses.

Income tax expense related to reserves for uncertain tax positions.

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Three Months Ended

Six Months Ended

($ in thousands)

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Three Months Ended

Six Months Ended

($ in thousands)

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Three Months Ended

Six Months Ended

($ in thousands)

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Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley.

Net interest income on a tax equivalent basis totaling $266.4 million for the first quarter 2020 increased $46.5 million as compared to the first quarter 2019 and increased $26.8 million as compared to the fourth quarter 2019 .

The increase as compared to the fourth quarter 2019 was largely due to higher average loan balances and lower costs of interest-bearing liabilities, partly offset by lower yielding loans.

Interest income on a tax equivalent basis increased $20.0 million to $364.8 million for the first quarter 2020 as compared to the fourth quarter 2019 , mainly due to a $2.0 billion increase in average loans and higher loan discount accretion partially caused by repayments.

Interest expense of $98.5 million for the first quarter 2020 decreased $6.8 million as compared to the fourth quarter 2019 , largely due to the overall lower cost of funds, partially offset by the interest cost associated with higher average balances of interest-bearing deposits and long-term borrowings.

In December 2019, we prepaid $635.0 million of long-term FHLB advances with a combined weighted average interest rate of 3.93 percent.

Average interest earning assets increased $5.1 billion to $34.7 billion for the first quarter 2020 as compared to the first quarter 2019 , primarily due to $3.8 billion of interest earning assets acquired from Oritani and strong organic loan growth over the last 12-month period.

Compared to the fourth quarter 2019 , average interest earning assets increased by $2.3 billion from $32.3 billion due to the Oritani acquisition, continued organic loan growth during the first quarter 2020 and higher average overnight funds and investment securities partly driven by our planned increase in liquidity levels in response to the COVID-19 pandemic.

Average loans increased $2.0 billion to $30.0 billion for the first quarter 2020 from the fourth quarter 2019 mainly due to the Oritani acquisition and strong loan growth within the commercial and industrial, commercial real estate and residential loan portfolios.

Average interest bearing liabilities increased $3.9 billion to $26.2 billion for the first quarter 2020 as compared to the first quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth retail deposits and additional borrowings caused by the funding of loan growth.

Compared to the fourth quarter 2019 , average interest bearing liabilities increased by $2.0 billion in the first quarter 2020 primarily due to the deposits acquired from Oritani and our liquidity management strategies executed in the first quarter of 2020.

Net interest income on a tax equivalent basis totaling $283.5 million for the second quarter 2020 increased $62.1 million as compared to the second quarter 2019 and increased $17.2 million as compared to the first quarter 2020 .

The increase as compared to the first quarter 2020 was largely driven by our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment and a $2.0 billion increase in average loan balances largely resulting from PPP loan originations.

Interest expense of $66.0 million for the second quarter 2020 decreased $32.5 million as compared to the first quarter 2020 largely due to the overall lower cost of funds, partially offset by the interest cost associated with higher average interest-bearing deposits without stated maturities and other borrowings.

However, interest income on a tax equivalent basis decreased $15.3 million to $349.5 million for the second quarter 2020 as compared to the first quarter 2020 .

The decrease was mainly due to overall lower loan yields caused, in part, by normal repayments of higher yielding loans, variable rate loan resets and a $3.1 million decline in loan discount accretion in second quarter 2020 due to lower prepayments for certain loans.

Average interest earning assets increased $7.9 billion to $37.8 billion for the second quarter 2020 as compared to the second quarter 2019 primarily due to $3.8 billion of interest earning assets acquired from Oritani and organic loan growth over the 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020 .

As compared to the first quarter 2020 , average interest earning assets increased by $3.1 billion from $34.7 billion largely due to the PPP loan originations and higher overnight funds resulting from our increased liquidity levels in response to the COVID-19 pandemic.

Average interest bearing liabilities increased $5.3 billion to $27.6 billion for the second quarter 2020 as compared to the second quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth of retail deposits and additional long-term borrowings caused by the funding of loan growth and our increased liquidity in response to COVID-19.

As compared to the first quarter 2020 , average interest bearing liabilities increased by $1.4 billion in the second quarter 2020 primarily due to increased levels of short-term borrowings and growth in deposits driven by PPP loan customers and organic growth from higher depositor balances partly caused by the uncertain financial markets.

See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of 3.07 percent for the first quarter 2020 increased by 9 basis points and 11 basis points from 2.98 percent and 2.96 percent for the first quarter 2019 and fourth quarter 2019 , respectively.

The yield on average interest earning assets decreased by 6 basis points on a linked quarter basis mostly due to a decrease in the yield on loans.

The yield on average loans decreased by 7 basis points to 4.44 percent for the first quarter 2020 as compared to the fourth quarter 2019 , largely due to the repayment of higher yielding loans, partly offset by a $7.7 million increase in loan discount accretion in the first quarter 2020 .

The overall cost of average interest bearing liabilities decreased 24 basis points to 1.50 percent for the first quarter 2020 , as compared to the linked fourth quarter 2019 , due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019.

Our cost of total average deposits was 1.07 percent for the first quarter 2020 as compared to 1.20 percent for the fourth quarter 2019 .

The following table reflects the components of net interest income for the three months ended March 31, 2020 , December 31, 2019 and March 31, 2019 :

Our net interest margin on a tax equivalent basis of 3.00 percent for the second quarter 2020 increased by 4 basis points from 2.96 percent in second quarter 2019 and decreased by 7 basis points from 3.07 percent for the first quarter 2020 .

The yield on average interest earning assets decreased by 51 basis points on a linked quarter basis mostly due to the impact of the lower interest rate environment.

The yield on average loans decreased by 42 basis points to 4.02 percent for the second quarter 2020 as compared to the first quarter 2020 largely due to the repayment of higher yielding loans, lower yielding variable and new loans, including the origination of $2.2 billion of PPP loans in second quarter 2020 , and an increase in excess liquidity held in low yield overnight investments.

The overall cost of average interest bearing liabilities decreased 54 basis points to 0.96 percent for the second quarter 2020 as compared to the linked first quarter 2020 due to the significantly lower interest rates paid on deposits and borrowings.

During the first half of 2020, we also benefited from the prepayment of $635 million high cost FHLB advances in December 2019.

Our cost of total average deposits was 0.60 percent for the second quarter 2020 as compared to 1.07 percent for the first quarter 2020 .

The following table reflects the components of net interest income for the three months ended June 30, 2020 , March 31, 2020 and June 30, 2019 :

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and

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Three Months Ended

March 31, 2020

December 31, 2019

June 30, 2020

March 31, 2020

June 30, 2019

($ in thousands)

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Net interest margin on a fully tax equivalent basis (6)

The following table reflects the components of net interest income for the six months ended June 30, 2020 and 2019 :

Six Months Ended

June 30, 2020

June 30, 2019

($ in thousands)

Interest earning assets:

Taxable investments (3)

Tax-exempt investments (1)(3)

Interest bearing deposits with banks

Total interest earning assets

Allowance for loan losses

Cash and due from banks

Unrealized gains (losses) on securities available for sale, net

Liabilities and shareholders’ equity

Interest bearing liabilities:

Savings, NOW and money market deposits

Time deposits

Total interest bearing deposits

Short-term borrowings

Long-term borrowings (4)

Total interest bearing liabilities

Non-interest bearing deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income/interest rate spread (5)

Tax equivalent adjustment

Net interest income, as reported

Net interest margin (6)

Tax equivalent effect

Net interest margin on a fully tax equivalent basis (6)

Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate.

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Change in Net Interest Income on a Tax Equivalent Basis

Three Months Ended March 31, 2020 Compared to March 31, 2019

Three Months Ended June 30, 2020 Compared to June 30, 2019

Six Months Ended June 30, 2020 Compared to June 30, 2019

(in thousands)

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Non-Interest Income

Non-interest income decreased $66.3 million for the three months ended March 31, 2020 as compared to the same period of 2019 .

The following table presents the components of non-interest income for the three months ended March 31, 2020 and 2019 :

Non-interest income increased $17.2 million and $49.0 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019 .

The following table presents the components of non-interest income for the three and six months ended June 30, 2020 and 2019 :

Three Months Ended

Six Months Ended

(in thousands)

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Service charges on deposit accounts

Losses on securities transactions, net

(Losses) gains on securities transactions, net

Net impairment losses on securities recognized in earnings

Fees from loan servicing

Gains on sales of loans, net

Gains on sales of assets, net

(Losses) gains on sales of assets, net

Bank owned life insurance

Total non-interest income

Income from trust and investment services increased $509 thousand for the three months ended March 31, 2020 as compared to the first quarter 2019 primarily due to increased fees related to higher levels of assets under management at Valley's asset management advisory subsidiary.

Insurance commissions declined $574 thousand for the three months ended March 31, 2020 as compared to the first quarter 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Insurance commissions declined $1.0 million and $1.6 million for the three and six months ended June 30, 2020 as compared to the corresponding periods in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased by $2.3 million and $2.5 million for the three and six months ended June 30, 2020 , respectively, as compared to the corresponding periods in 2019 mostly due to waived fees related to COVID-19 customer relief efforts in the second quarter 2020.

The other-than-temporary impairment losses on securities for the three and six months ended June 30, 2019 related to one special revenue bond in default of its contractual payments starting in the second quarter 2019.

Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end.

Net gains on sales of loans was relatively unchanged for the three months ended March 31, 2020 , as compared to the same period of 2019 , despite fewer loans sold in the first quarter 2020 .

During the first quarter 2020 , we sold $196.1 million of residential mortgage loans, as compared to $293.1 million sold during the first quarter 2019 , including $30.0 million and $100.0 million of pre-existing residential mortgage loans sold from our loan portfolio for the respective periods.

The net gains from the change in the fair value of loans held for sale totaled $3.2 million and $4.0 million for the three and six months ended June 30, 2020 , respectively, as compared to $225 thousand and $549 thousand for the three and six months ended June 30, 2019 .

During the second quarter 2020 , we sold approximately $237 million of residential mortgage loans as compared to $223 million during the second quarter 2019 .

See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Net gains on sales of assets decreased $77.6 million for the three months ended March 31, 2020 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income increased $1.3 million for the three months ended March 31, 2020 as compared to the first quarter 2019 largely due to the death benefits received in the first quarter 2020 and income from bank owned life insurance acquired from Oritani during the fourth quarter of 2019.

Other non-interest income increased $10.1 million for the three months ended March 31, 2020 as compared to the first quarter 2019 .

The increase was primarily due to swap fee income related to derivative interest rate swaps executed with commercial loan customers totaling $14.2 million for the three months ended March 31, 2020 as compared to $4.1 million for the three months ended March 31, 2019 .

Net gains on sales of assets decreased $77.3 million for the six months ended June 30, 2020 , primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income increased $3.6 million and $4.9 million for the three and six months ended June 30, 2020 , respectively as compared to the same periods in 2019 due to income from bank owned life insurance acquired from Oritani during the fourth quarter 2019 and death benefits received in the 2020 periods.

Other non-interest income increased $9.7 million and $19.8 million for the three and six months ended June 30, 2020 as compared to the same periods in 2019 .

The increase was primarily due to swap fee income related to

derivative interest rate swaps executed with commercial loan customers totaling $14.7 million and $5.4 million for the three months ended June 30, 2020 and June 30, 2019, respectively and $28.9 million and $9.5 million for the six months ended June 30, 2020 and June 30, 2019 , respectively.

Non-Interest Expense

Non-interest expense increased $7.9 million for the three months ended March 31, 2020 as compared to the same period of 2019 .

The following table presents the components of non-interest expense for the three months ended March 31, 2020 and 2019 :

Non-interest expense increased $15.4 million and $23.3 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019 .

The following table presents the components of non-interest expense for the three and six months ended June 30, 2020 and 2019 :

Three Months Ended

Six Months Ended

(in thousands)

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Total non-interest expense

Salary and employee benefits expense increased $2.6 million for the three months ended March 31, 2020 as compared to the first quarter 2019 .

The increase was partly driven by a $1.8 million special bonus to hourly employees due to the COVID-19 pandemic, as well as additional salaries related to bank branch and other operational staff retained from the Oritani acquisition.

Salary and employee benefits expense increased $2.3 million and $5.0 million for the three and six months ended June 30, 2020 , respectively.

As compared to second quarter 2019 , the increase was largely due to additional salaries related to bank branch and other operational staff retained from the Oritani acquisition and higher accrued cash incentive compensation.

These additional expenses were partially offset by cost reductions from our ongoing branch transformation efforts and other operational improvements over the last 12 months.

Net occupancy and equipment expense increased $4.6 million for the three months ended March 31, 2020 as compared to the first quarter 2019 .

This increase was primarily due to the net impact of additional costs in the current quarter associated with branches and other facilities acquired from Oritani, increased rental expenses due to the sale leaseback transaction completed in the first quarter 2019, partially offset by cost savings generated from branch closures over the last 12 months

The FDIC insurance expense decreased $2.2 million for the three months ended March 31, 2020 as compared to the first quarter 2019 largely due to moderate expense accrual adjustments to the actual cash assessment payments in both periods.

Amortization of other intangibles increased $1.2 million for the three months ended March 31, 2020 as compared to the first quarter 2019 due, in part, to $628 thousand of amortization expense from core deposit intangibles acquired in the recent Oritani acquisition and higher amortization expense on loan servicing rights.

The increase for the six months ended June 30, 2020 as compared to the same period in 2019 was also partly driven by a $1.8 million special bonus paid to hourly employees impacted by COVID-19 that was incurred in the first quarter of 2020.

Net occupancy and equipment expense increased $3.5 million and $8.1 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

These increases were mostly due to additional costs associated with branches and other facilities acquired from Oritani, which were partially offset by costs savings from branch closures over the last 12 months.

During the three and six months ended June 30, 2020 , we incurred higher expenses for equipment and certain other COVID-19 related expenses which included additional cleaning services for facilities to maintain employee and customer safety.

In addition, the increase for the six months June 30, 2020 was driven by rental expenses resulting from a sale leaseback transaction completed towards the end of the first quarter of 2019.

Amortization of other intangibles increased $2.5 million and $3.7 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible amortization acquired in the recent Oritani acquisition.

See Note 9 to the consolidated financial statements for more details.

Professional and legal fees increased $816 thousand for the three months ended March 31, 2020 as compared to the same period of 2019 due to $444 thousand of integration costs related to the Oritani acquisition, as well as other incremental increases in consulting fees.

Amortization of tax credit investments decreased $3.9 million for the three months ended March 31, 2020 as compared to the same period of 2019 .

The first quarter of 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds.

The remainder of the variance from the prior period is due to normal differences in the timing and amount of such investments and recognition of the related tax credits.

Professional and legal fees increased $3.7 million and $4.5 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 , largely due to higher costs from technology transformation consulting services and remote work readiness costs incurred in the second quarter 2020.

Amortization of tax credit investments decreased $1.4 million and $5.4 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

The first half of 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar.

The remainder of the variances from the prior periods were mainly due to normal differences in the timing and

amount of such investments and recognition of the related tax credits.

Tax credit investments, while negatively impacting the level of our operating expenses and efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate.

See Note 14 to the consolidated financial statements for more details on our tax credit investments.

Other non-interest expense increased $4.9 million for the three months ended March 31, 2020 as compared to the first quarter 2019 primarily due to incrementally higher operating expenses from a variety of categories including data processing, insurance, postage, miscellaneous supplies, and printing costs largely caused by the acquisition of Oritani, as well as the organic growth of our business.

Additionally, advertising and OREO expenses increased $945 thousand and $404 thousand, respectively, during the first quarter 2020 as compared to the same period one year ago, and net gains on the sale of OREO properties declined by $725 thousand.

Other non-interest expense increased $3.1 million and $8.0 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

The increases were primarily due to incrementally higher operating expenses in several categories due to the expansion of our operations both organically and through the acquisition of Oritani in the fourth quarter 2020, certain PPP loan costs, such as advertising, and other COVID-19 related costs.

Net gains on the sales of OREO properties also declined $583 thousand and $1.3 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019.

Efficiency Ratio

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Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense.

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three months ended March 31, 2020 and 2019 :

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and six months ended June 30, 2020 and 2019 :

Three Months Ended

Six Months Ended

($ in thousands)

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Gain on sale-leaseback transaction (pre-tax)

Losses on securities transactions, net (pre-tax)

Losses (gains) on securities transactions, net (pre-tax)

Net impairment losses on securities (pre-tax)

Total net interest income and non-interest income

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Efficiency ratio, adjusted

Income tax expense totaled $29.1 million for the first quarter 2020 as compared to $37.0 million and $57.2 million for the fourth quarter 2019 and first quarter 2019 , respectively.

Our effective tax rate was 25.0 percent , 49.2 percent , and 33.5 percent for the first quarter 2020 , fourth quarter 2019 , and first quarter 2019 , respectively.

The decline in the effective tax rate was mainly due to $18.7 million and $12.1million increases in the provision for income taxes related to uncertain tax liability positions during the fourth quarter 2019 and first quarter 2019 , respectively.

The uncertain tax liability positions related to renewable energy tax credits and other tax benefits previously recognized from our investments in mobile generators sold and leased back by DC Solar and its affiliates.

On March 27, 2020, President Trump signed the CARES Act, which did not have a material impact on our reported income tax expense for the first quarter of 2020.

Income tax expense totaled $33.5 million for the second quarter 2020 as compared to $29.1 million and $27.5 million for the first quarter 2020 and second quarter 2019 , respectively.

Our effective tax rate was 25.9 percent , 25.0 percent and 26.5 percent for the second quarter 2020 , first quarter 2020 and second quarter 2019 , respectively.

The slightly higher effective tax rate in the second quarter 2020 as compared to the first quarter 2020 was primarily attributable to higher pre-tax income in second quarter 2020 .

The CARES Act did not have a material impact on our reported income tax expense for the six months ended June 30, 2020.

GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year.

Our adherence to these tax guidelines may result in volatile effective

income tax rates in future quarterly and annual periods.

Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods.

Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

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Expenses related to the branch network, all other components of retail banking, along with the back office departments of our subsidiary bank are allocated from the corporate and other adjustments segment to each of the other three business segments.

Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a “pool funding” methodology, which involves the allocation of uniform funding cost based on each segment's average earning assets outstanding for the period.

Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period.

The financial reporting for each segment contains allocations and reporting in line with our operations, which may not necessarily be comparable to any other financial institution.

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Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

The following tables present the financial data for each business segment for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31, 2020

The following tables present the financial data for each business segment for the three months ended June 30, 2020 and 2019 :

Three Months Ended June 30, 2020

($ in thousands)

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Annualized return on average interest earning assets (before tax)

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

($ in thousands)

Average interest earning assets

Income before income taxes

Income (loss) before income taxes

Annualized return on average interest earning assets (before tax)

Consumer Lending

This segment, representing approximately 24 percent of our loan portfolio at March 31, 2020 , is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 14.6 percent of our loan portfolio at March 31, 2020 ) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.7 percent of total loans at March 31, 2020 ) is relatively unaffected by movements in the market

level of interest rates.

This segment, representing approximately 22.1 percent of our loan portfolio at June 30, 2020 , is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan

portfolio (which represented 13.6 percent of our loan portfolio at June 30, 2020 ) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.2 percent of total loans at June 30, 2020 ) is relatively unaffected by movements in the market level of interest rates.

However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles.

The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased $396.1 million to $7.2 billion for the three months ended March 31, 2020 as compared to the first quarter 2019 .

The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations over the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit.

Income before income taxes generated by the consumer lending segment decreased $2.8 million to $16.2 million for the first quarter 2020 as compared to the first quarter 2019 .

Net interest income increased $3.1 million and was mainly driven by lower funding costs and the increase in average loans.

The increase in net interest income was partially offset by increases of $1.2 million and $4.7 million in non-interest expense and provision for loan losses, respectively.

The increase in the provision for loan losses for the first quarter 2020 as compared to the first quarter 2019 was mainly due to the impact of loan growth and the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

Average interest earning assets in this segment increased $458.0 million to $7.2 billion for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the second quarter 2020 economic slowdown due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $10.9 million to $29.6 million for the second quarter 2020 as compared to the second quarter 2019 largely due to an $11.1 million increase in net interest income mainly driven by lower funding costs and the increase in average loans.

The increase in net interest income was partially offset by increases of $2.2 million and $2.0 million in the provision for loan losses and non-interest expense, respectively.

The increase in non-interest expense was partly due to higher amortization expense of loan servicing rights for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase in the provision for loan losses for the second quarter 2020 as compared to the second quarter 2019 was mainly due to the impact of the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio increased 2 basis points to 2.69 percent for the first quarter 2020 as compared to the first quarter 2019 mainly due to a 23 basis point decrease in the costs associated with our funding sources, partially offset by a 21 basis point decrease in the yield on average loans.

The net interest margin on the consumer lending portfolio increased 44 basis points to 3.05 percent for the second quarter 2020 as compared to the second quarter 2019 mainly due to a 74 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans.

The decrease in our funding costs was mainly due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019.

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Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates.

Commercial and industrial loans totaled approximately $5.0 billion and represented 16.5 percent of the total loan portfolio at March 31, 2020 .

Commercial real estate loans and construction loans totaled $18.1 billion and represented 59.5 percent of the total loan portfolio at March 31, 2020 .

Average interest earning assets in this segment increased approximately $4.3 billion to $22.8 billion for the three months ended March 31, 2020 as compared to the first quarter 2019 .

The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over the last 12-month period and loans acquired from Oritani during the fourth quarter 2019.

For the three months ended March 31, 2020 , income before income taxes for the commercial lending segment increased $20.3 million to $102.8 million as compared to the same quarter 2019 mainly due to increases in both net interest income and non-interest income.

Net interest income increased $43.3 million to $202.7 million for the first quarter 2020 as compared to the same period in 2019 largely due to higher average loan balances.

Non-interest income increased $8.8 million to $15.6 million during the three months ended March 31, 2020 as compared to the first quarter 2019 mainly due to a $9.8 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $21.2 million increase in the provision for credit losses mainly due to loan growth, higher specific reserves associated with our tax medallion loan portfolio and the adverse economic forecast for credit losses during the first quarter 2020.

Internal transfer expense and non-interest expense also increase d $11.7 million for the first quarter 2020 as compared to the first quarter 2019 partly due to acquired and organic growth in our business since March 31, 2019.

The net interest margin for this segment increased 10 basis points to 3.56 percent for the first quarter 2020 as compared to the first quarter 2019 largely due to a 23 basis point decrease in the cost of our funding sources, partially offset by a 13 basis point decrease in the yield on average loans.

Commercial and industrial loans totaled approximately $6.9 billion and represented 21.3 percent of the total loan portfolio at June 30, 2020 .

Commercial real estate loans and construction loans totaled $18.3 billion and represented 56.6 percent of the total loan portfolio at June 30, 2020 .

Average interest earning assets in this segment increased approximately $6.0 billion to $24.8 billion for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over most of the last 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020 , as well as loans acquired from Oritani during the fourth quarter 2019.

For the three months ended June 30, 2020 , income before income taxes for the commercial lending segment increased $11.9 million to $102.6 million as compared to the same quarter 2019 mainly due to increases in both net interest income and non-interest income.

Net interest income increased $50.3 million to $214.5 million for the second quarter 2020 as compared to the same period in 2019 largely due to higher average loan balances.

Non-interest income increased $8.5 million to $16.2 million during the three months ended June 30, 2020 as compared to

the second quarter 2019 mainly due to a $9.3 million increase in swap fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $36.8 million increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses, higher specific reserves associated with our tax medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers.

Internal transfer expense also increase d $13.1 million for the second quarter 2020 as compared to the second quarter 2019 partly due to acquired and organic growth in our business since June 30, 2019.

The net interest margin for this segment decreased 3 basis points to 3.46 percent for the second quarter 2020 as compared to the first quarter 2019 largely due to a 77 basis point decrease in the yield on average loans, partially offset by a 74 basis point decrease in the cost of our funding sources.

I nvestment Management

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See the “Asset/Liability Management” section below for further analysis.

Average interest earning assets in this segment increased $366.5 million during the first quarter 2020 as compared to the first quarter 2019 primarily due to a $302.9 million increase in average interest bearing deposits and, to a lesser extent, an increase in the investment securities portfolio.

The increase in average interest bearing deposits was caused by the timing of loan and investment activity, as well as our prudent increase in our liquidity levels during first quarter 2020 .

For the quarter ended March 31, 2020 , income before income taxes for the investment management segment decreased $912 thousand to $7.8 million as compared to the first quarter 2019 due, in part, to a $759 thousand provision for credit losses for debt securities classified as held to maturity under the new CECL standard adopted in the first quarter 2020 .

The net interest margin for this segment decreased 13 basis points to 1.63 percent for the first quarter 2020 as compared to the same quarter 2019 largely due to a 36 basis point decrease in the yield on average investments, partially offset by a 23 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the first quarter 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months.

Average interest earning assets in this segment increased $1.4 billion during the second quarter 2020 as compared to the second quarter 2019 primarily due to a $1.3 billion increase in average interest bearing deposits with banks and, to a lesser extent, an increase in the investment securities portfolio.

The increase in average overnight interest bearing deposits with banks was primarily caused by our prudent strategy to increase our excess liquidity during second quarter 2020 , as well as the normal timing of loan and investment activity, including SBA PPP loan originations within the commercial lending segment.

For the quarter ended June 30, 2020 , income before income taxes for the investment management segment increased $613 thousand to $7.5 million as compared to the second quarter 2019 mainly due to a $923 thousand increase in net interest income.

The net interest margin for this segment decreased 29 basis points to 1.28 percent for the second quarter 2020 as compared to the same quarter 2019 largely due to a 103 basis point decrease in the yield on average investments, partially offset by a 74 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the second quarter 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and higher levels of average overnight investments at a yield of 11 basis points during the second quarter 2020.

Corporate and other adjustments

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses not reported in the investment management segment above, interest expense related to subordinated notes, amortization and impairment of tax credit investments, as well as non-core items, including merger expenses and the gain on the sale leaseback transactions.

The corporate segment recognized a $10.5 million pre-tax loss and a $60.2 million pre-tax gain for the three months ended March 31, 2020 and 2019 , respectively.

The decline in pre-tax income was mainly due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized in non-interest income for the first quarter 2019.

However, internal transfer income increased $13.5 million for the three months ended March 31, 2020 from the first quarter 2019 .

The corporate segment recognized a $10.6 million and $12.2 million pre-tax loss for the three months ended June 30, 2020 and 2019 , respectively.

Lower pre-tax loss for the second quarter 2020 was mainly due to a $1.3 million increase in non-interest income.

Non-interest expense increased $16.0 million and was more than offset by a $16.4 million increase in internal transfer income for the three months ended June 30, 2020 from the second quarter 2019 .

See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

The following tables present the financial data for each business segment for the six months ended June 30, 2020 and 2019 :

Six Months Ended June 30, 2020

($ in thousands)

Average interest earning assets

Income (loss) before income taxes

Annualized return on average interest earning assets (before tax)

Six Months Ended June 30, 2019

($ in thousands)

Average interest earning assets

Income before income taxes

Annualized return on average interest earning assets (before tax)

Consumer Lending

Average interest earning assets in this segment increased $427.2 million to $7.2 billion for the six months ended June 30, 2020 as compared to the same period in 2019 .

Income before income taxes generated by the consumer lending segment increased $8.1 million to $45.8 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $14.2 million and $5.0 million in net interest income and non-interest income, respectively.

The increase in net interest income was mainly driven by lower funding costs and the increase in average loans.

The increase in non-interest income was largely attributable to higher net gains on sales of loans for the six months ended June 30, 2020 as compared to the same period in 2019 .

The positive impact of the aforementioned items was partially offset by increases of $6.9 million and $3.2 million in provision for loan losses and non-interest expense, respectively.

The increase in the provision for loan losses for the first half of 2020 as compared to the same period of 2019 was mainly due to the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio increased 23 basis points to 2.88 percent for the six months ended June 30, 2020 as compared to the same period one year ago mainly due to a 49 basis point decrease in the costs associated with our funding sources, partially offset by a 26 basis point decrease in the yield on average loans.

The 26 basis point decrease in loan yield was largely due to lower yielding new loan volumes.

Commercial Lending

Average interest earning assets in this segment increased $5.2 billion to $23.8 billion for the six months ended June 30, 2020 as compared to the same period in 2019 .

This increase was primarily due to organic loan growth over most of the last 12-month period, including SBA PPP loans originations of $2.2 billion in the second quarter 2020 , and loans acquired from Oritani.

For the six months ended June 30, 2020 , income before income taxes for the commercial lending segment increased $32.2 million to $205.4 million as compared to the same period in 2019 .

Net interest income increased $93.6 million to $417.2 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to the higher average loan balances.

Non-interest income also increased $17.3 million for the six months ended June 30, 2020 as compared to the same period in 2019 due, in part, to a $19.4 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $58.0 million increase in the provision for credit losses to $65.1 million during the six months ended June 30, 2020 as compared to $7.1 million for the same period in 2019 .

The increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses during the first half of 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to COVID-19 impacted borrowers.

See further details in the "Allowance for Credit Losses" section in this MD&A.

The net interest margin for this segment increased 3 basis points to 3.51 percent for the six months ended June 30, 2020 as compared to the same period in 2019 due to a 49 basis point decrease in the cost of our funding sources, partially offset by a 46 basis point decrease in yield on average loans.

I nvestment Management

Average interest earning assets in this segment increased $889.3 million during the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $796.2 million and $93.1 million in average interest bearing deposits with banks and average investments, respectively.

The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the second quarter 2020.

For the six months ended June 30, 2020 , income before income taxes for the investment management segment moderately decreased $299 thousand to $15.4 million as compared to the same period in 2019 .

Net interest income increase d $934 thousand during the six months ended June 30, 2020 as compared to the same period of 2019 but was partially offset by a $800 thousand provision for credit losses for debt securities held to maturity during the first half of 2020 under the new CECL standard.

Non-interest income increased $4.3 million to $9.0 million for the six months ended June 30, 2020 as compared to the same period of 2019 partly due to higher bank owned life insurance income.

However, internal transfer expense increase d $4.0 million for the six months ended June 30, 2020 as compared to the same period of 2019.

The net interest margin for this segment decreased 25 basis points to 1.42 percent for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to a 74 basis point decrease in the yield on average investments, partially offset by a 49 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the same period of 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and low yielding excess liquidity held in overnight investments.

Corporate and other adjustments

The pre-tax net loss for the corporate segment totaled $21.1 million for the six months ended June 30, 2020 as compared to the net income of $48.0 million for the same period in 2019 .

The negative change of $69.1 million was mainly due to a decrease in non-interest income coupled with an increase in non-interest expense.

The non-interest

income decreased $75.7 million to $13.6 million for the six months ended June 30, 2020 as compared to the same period in 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of several bank locations recognized during the first half of 2019.

Non-interest expense increased $23.5 million to $224.1 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 largely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses and professional and legal fees.

(See further details in the "Non-Interest Expense" section above).

Internal transfer income increased $29.8 million to $199.5 million for the six months ended June 30, 2020 as compared to the same period in 2019 .

ASSET/LIABILITY MANAGEMENT

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The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities.

The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of March 31, 2020 .

The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk.

In the model, the forecasted shape of the yield curve remains static as of March 31, 2020 .

In the model, the forecasted shape of the yield curve remains static as of June 30, 2020 .

The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of March 31, 2020 .

Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 2020 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the first quarter 2020 .

The model also utilizes an immediate parallel shift in market interest rates at March 31, 2020 .

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2020 .

Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2020 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the second quarter 2020 .

The model also utilizes an immediate parallel shift in market interest rates at June 30, 2020 .

The assumptions used in the net interest income simulation are inherently uncertain.

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Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods.

Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

Other factors, including, but not limited to, the slope of the yield curve and

projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

Convexity is a measure of how the duration of a financial instrument changes as market interest rates change.

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($ in thousands)

As noted in the table above, a 100 basis point immediate decrease in interest rates combined with a static balance

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to decrease net interest income over the next 12 months by 5.30 percent .

Valley's sensitivity to changes in market rates increased as compared to December 31, 2019 (which projected an increase of 3.19 percent in net interest income over a 12 month period) mostly due to the significant changes interest rate environment and the term structure of rates and with some effect from variations in balance sheet composition.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at March 31, 2020 .

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 months by 3.12 percent.

Valley's sensitivity to changes in market rates as compared to March 31, 2020 is mostly due to the significant changes in items included in interest income and Valley's slightly asset sensitive profile.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at June 30, 2020 and sees the likelihood of rates decreasing further as a minimal risk whereas an increase in rates longer term has a higher probability of occurrence.

However, the level of net interest income sensitivity may increase or decrease in the future as a result of changes in deposit and borrowings strategies, the slope of the yield curve and projected cash flows.

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A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace.

Liquidity management is carefully performed and reported by our Treasury Department to two Board committees.

Liquidity management is carefully performed and routinely reported by our Treasury Department to the Investment Committee established by the Board of Directors and also to the Asset and Liability Committee.

Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.

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The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding.

The Bank was in compliance with the foregoing policies at March 31, 2020 .

During mid-March 2020, Valley activated its Contingent Funding Plan (CFP), including governing oversight by establishing the Liquidity Crisis Committee (LCC), in response to the financial and public health crisis caused by the COVID-19 pandemic.

The LCC continues to meet frequently to assess the financial impacts of the significant business disruption caused by COVID-19, closely monitor events which may disrupt financial markets and make decisions about accessing various sources of liquidity as part of Valley's overall liquidity management strategy.

The LCC executed a plan to increase the Bank's liquidity by approximately $1.7 billion through various new short- and long-term borrowings during the first quarter 2020 which continued into the early stages of the second quarter.

The Bank was in compliance with the foregoing policies at June 30, 2020 .

During March 2020, Valley activated a contingent funding plan to prudently increase our liquidity position in response to the financial and public health crisis caused by the COVID-19 pandemic.

At June 30, 2020 , our cash

and cash equivalents totaled $1.9 billion, an increase from $1.0 billion at March 31, 2020.

In the early stage of the third quarter 2020, we continue to believe that holding excess liquidity is prudent given the uncertain environment that we currently face.

Going forward, we will closely monitor external events and adjust our mix and levels of funding accordingly.

See the "Deposits and Other Borrowings" section and Note 10 to the consolidated financial statements for more information.

securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions.

Total liquid assets were approximately $2.9 billion , representing 8.2 percent of earning assets at March 31, 2020 and $2.2 billion , representing 6.4 percent of earning assets at December 31, 2019 .

Of the $2.9 billion of liquid assets at March 31, 2020 , approximately $1.0 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies.

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions.

Total liquid assets were approximately $3.8 billion , representing 10.1 percent of earning assets at June 30, 2020 and $2.2 billion , representing 6.4 percent of earning assets at December 31, 2019 .

Of the $3.8 billion of liquid assets at June 30, 2020 , approximately $1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approximately $1.1 billion in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received.

Loan principal payments (including loans held for sale at March 31, 2020 ) are projected in accordance with their scheduled contractual terms to be approximately $7.6 billion over the next 12 months.

Loan principal payments (including loans held for sale at June 30, 2020 ) are projected in accordance with their scheduled contractual terms to be approximately $8.8 billion over the next 12 months.

As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.

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Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources.

Average core deposits totaled approximately $23.9 billion and $20.4 billion for the three months ended March 31, 2020 and for the year ended December 31, 2019 , respectively, representing 68.8 percent and 66.8 percent of average earning assets for the respective periods.

Average core deposits totaled approximately $24.8 billion and $20.4 billion for the six months ended June 30, 2020 and for the year ended December 31, 2019 , respectively, representing 68.3 percent and 66.8 percent of average earning assets for the respective periods.

The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

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Furthermore, we can obtain overnight borrowings from the FRB via the discount window as a contingency for additional liquidity.

At March 31, 2020 , our borrowing capacity under the Federal Reserve's discount window was $1.8 billion .

At June 30, 2020 , our traditional borrowing capacity, excluding PPP loans, under the Federal Reserve's discount window was $1.6 billion .

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase).

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $1.0 billion to $2.1 billion at March 31, 2020 , as compared to December 31, 2019 .

The increase in both short-term and long-term borrowings was primarily driven by our CFP goal to increase our liquidity levels.

As of March 31, 2020, the short-term borrowings mainly consisted of FHLB advances totaling $1.5 billion, with weighted interest rates well below 1.0 percent and federal funds purchased totaling $457 million.

In addition, we obtained $723 million of new long-term FHLB advances with maturities between three and five years at a combined weighted average rate of 1.89 during the first quarter 2020.

Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at March 31, 2020 and December 31, 2019 , respectively.

The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the periods ended March 31, 2020 and December 31, 2019 :

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $1.0 billion to $2.1 billion at June 30, 2020 , as compared to December 31, 2019 .

The increase in both short-term borrowings was primarily driven by our goal to increase liquidity levels in response to the COVID-19 crisis, as well as funding of SBA PPP loan originations in the second quarter 2020.

As of June 30, 2020 , the short-term borrowings mainly consisted of FHLB advances totaling $1.2 billion with a weighted interest rate of 0.55 percent and federal funds purchased totaling $678.9 million.

Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at June 30, 2020 and December 31, 2019 , respectively.

The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended June 30, 2020 and December 31, 2019 :

($ in thousands)

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Valley's ability to maintain quarterly dividends to its preferred and common shareholders is heavily dependent on the ability of its principal subsidiary, the Bank, to pay dividends to Valley.

However, we cannot predict the extent of the economic decline due to COVID-19 or other factors that may result in inadequate earnings (primarily by the Bank), regulatory restrictions and limitations, changes in our capital requirements, or a decision to increase capital by retention of earnings, that may result in Valley's inability or determination by its Board not to pay dividends at current levels, or at all.

However, we cannot accurately predict the extent of the economic decline due to COVID-19 or other factors that may result in inadequate earnings (primarily by the Bank), regulatory restrictions and limitations, changes in our capital requirements, or a decision to increase capital by retention of earnings, that may result in Valley's inability or determination by its Board not to pay dividends at current levels, or at all.

Investment Securities Portfolios

As of March 31, 2020 , we had $49.7 million , $1.7 billion and $2.3 billion in equities, available for sale debt securities and held to maturity debt securities, respectively.

As of June 30, 2020 , we had $54.4 million , $1.7 billion and $2.1 billion in equities, available for sale debt securities and held to maturity debt securities, respectively.

Our equity securities portfolio was comprised of a money market mutual fund and, to a lesser extent, investments in public and private Community Reinvestment Act funds.

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Treasury securities, U.S.

government agency securities, tax-exempt and taxable issuances of states and political subdivisions (including special revenue bonds), residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds issued by banks at March 31, 2020 .

There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae.

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Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of March 31, 2020 included in the table below and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment during the first quarter 2020 and, as a result, no allowance for credit losses for available for sale debt securities at March 31, 2020 .

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and six months ended June 30, 2020 and, as a result, no allowance for credit losses for available for sale debt securities at June 30, 2020 .

Held to maturity debt securities.

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Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level.

At March 31, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.6 million.

See Note 7 to the consolidated financial statements for additional information regarding our allowance for credit losses for held to maturity securities.

At June 30, 2020 , held to maturity debt securities were carried net of allowance for credit losses totaling $1.6 million .

We recorded a provision of $41 thousand and $800 thousand during three and six months ended June 30, 2020 , respectively, and no net charge-offs of debt securities in the respective periods.

See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities.

The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities.

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For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio.

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at March 31, 2020 :

March 31, 2020

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at June 30, 2020 :

June 30, 2020

(in thousands)

Held to maturity investment grades:

Non-investment grade

Total investment securities held to maturity

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Split rated securities with two ratings are categorized at the higher of the rating levels.

The held to maturity portfolio includes $109.8 million in investments not rated by the rating agencies with aggregate unrealized losses of $7.5 million at March 31, 2020 .

The investment securities held to maturity portfolio includes $104.3 million in investments not rated by the rating agencies with aggregate unrealized losses of $7.8 million at June 30, 2020 .

The unrealized losses for this category included $7.5 million of unrealized losses related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million .

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Consumer loans

Includes net unearned discount and deferred loan fees of $76.4 million at March 31, 2020 and unearned premiums and deferred loan fees of $12.6 million , $18.3 million , $19.6 million and $20.5 million at March 31, 2020 , December 31, 2019 , September 30, 2019 and June 30, 2019, respectively.

Net unearned discounts and deferred loan fees at March 31, 2020 include the non-credit discount on PCD loans.

Loans increased $728.9 million to approximately $30.4 billion at March 31, 2020 from December 31, 2019 .

During the first quarter 2020 , we originated $148 million of residential mortgage loans for sale (rather than held for investment) and sold approximately $196 million , including $30 million of pre-existing loans from our residential mortgage loan portfolio.

Residential mortgage loans held for sale totaled $58.9 million and $76.1 million at March 31, 2020 and December 31, 2019 , respectively.

Additionally, upon our adoption of the CECL standard on January 1, 2020, we recorded a $61.6 million gross-up for PCD loans that increased the amortized cost basis of loans with a corresponding increase to the allowance for credit losses.

Total commercial and industrial loans increased $172.7 million , or 14.3 percent on an annualized basis, from December 31, 2019 to approximately $5.0 billion at March 31, 2020 .

Excluding the $25.5 million related to the CECL adoption gross-up, the increase was mostly driven by draws of revolving lines from existing relationships due to the impact of the COVID-19 pandemic on economic and market conditions;

and to a lesser extent, by new small to middle market lending relationships within our markets.

In addition, our premium finance division grew $28.5 million from December 31, 2019 .

Commercial real estate loans (excluding construction loans) increased $393.5 million , or 9.8 percent on an annualized basis to $16.4 billion at March 31, 2020 from December 31, 2019 .

Excluding the $27.4 million related to the CECL adoption gross-up, the increase was mainly due to continued strong loan volumes in our primary markets in Florida, New Jersey and New York and some migration of completed construction projects to permanent

During the first quarter 2020, we have experienced an active refinance market which is driven by a favorable interest rate market resulting in steady and controlled growth throughout our footprint.

Construction loans increased $80.0 million to $1.7 billion at March 31, 2020 from December 31, 2019 mainly driven by loan advances on new and existing construction projects during the first quarter 2020 .

Total residential mortgage loans increased $101.9 million to approximately $4.5 billion at March 31, 2020 from December 31, 2019 , largely driven by high levels of refinance activity.

The loan growth was partially offset by the sale of $196 million loans, including $30 million of pre-existing loans from our residential mortgage loan portfolio during the first quarter 2020 .

New and refinanced residential mortgage loan originations totaled approximately $358.9 million for the first quarter 2020 , as compared to $504.6 million and $254.1 million for the fourth quarter 2019 and first quarter 2019 , respectively.

Home equity loans totaled $481.8 million at March 31, 2020 , a decrease of $5.5 million from December 31, 2019 , largely due to normal repayments that outpaced new loan origination activity.

Automobile loans decreased by $14.9 million to $1.4 billion at March 31, 2020 , as compared to December 31, 2019 .

The first quarter annualized decline was 4.1 percent , due to lower application volumes as compared to the fourth quarter 2019 .

The decrease was largely due to tightening our underwriting standards and COVID-19 impact.

During the second half of March 2020, auto dealerships in our primary market areas were shut down as a result of shelter-in-place restrictions in connection with the pandemic.

Our Florida dealership network contributed $28.3 million in auto loan originations, representing approximately 21 percent of Valley's total new auto loan production during the first quarter 2020 , as compared to $40.8 million, representing approximately 24 percent during the fourth quarter 2019 .

Other consumer loans increased $1.1 million to $914.6 million at March 31, 2020 , as compared to $913.4 million at December 31, 2019 , mostly due to higher volumes of new collateralized personal lines of credit as compared to the fourth quarter 2019 .

Includes net unearned discount and deferred loan fees of $131.3 million and $76.4 million at June 30, 2020 and March 31, 2020 , respectively, and net unearned premiums and deferred loan fees of $12.6 million , $18.3 million and $19.6 million at December 31, 2019 , September 30, 2019 and June 30, 2019, respectively.

Net unearned discounts and deferred loan fees at June 30, 2020 and March 31, 2020 include the non-credit discount on PCD loans as well as $62.1 million of net unearned fees related to SBA PPP loans at June 30, 2020 .

During the second quarter 2020 , we originated $296 million of residential mortgage loans for sale (rather than held for investment) and sold approximately $237 million .

Residential mortgage loans held for sale totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020 , respectively.

Total commercial and industrial loans increased $1.9 billion from March 31, 2020 to approximately $6.9 billion at June 30, 2020 largely due to the $2.2 billion of SBA PPP loan originations in the second quarter.

Excluding the SBA PPP loans, commercial and industrial loans decreased $328.4 million, or 26.3 percent on an annualized basis, at June 30, 2020 compared to March 31, 2020 as the lack of economic activity has weighed on loan demand in our markets.

Additionally, commercial and industrial line utilization moderately declined from March 31, 2020 .

Commercial real estate loans (excluding construction loans) increased $181.6 million , or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 from March 31, 2020 mainly due to a strong refinance market driven by historic low interest rates and slower repayment activity in the second quarter 2020.

Construction loans decreased $5.7 million to $1.7 billion at June 30, 2020 from March 31, 2020 mainly due to migration of completed existing construction projects to permanent financing during the second quarter 2020.

Total residential mortgage loans decreased $73.8 million to approximately $4.4 billion at June 30, 2020 from March 31, 2020 largely due to higher mortgage banking sales activity.

New and refinanced residential mortgage loan originations totaled approximately $494.2 million for the second quarter 2020 , as compared to $358.9 million and $347.1 million for the first quarter 2020 and second quarter 2019 , respectively.

Of the total originations for the second quarter 2020 , $296 million of residential mortgage loans were originated for sale rather than held for investment and sold approximately $237 million of these loans.

We expect to continue to sell a large portion of our new fixed rate residential mortgage loan originations during the remainder of 2020 assuming the low level of market interest rates continues and we are able to maintain an appropriate mix of residential mortgage loans on our balance sheet.

Home equity loans totaled $471.1 million at June 30, 2020 , and decreased $10.6 million from March 31, 2020 largely due to normal repayments that outpaced new loan origination and line activity.

Automobile loans decreased by $67.2 million to $1.4 billion at June 30, 2020 as compared to March 31, 2020 .

The second quarter annualized decline was 18.7 percent due to lower application volumes as compared to the first quarter 2020 largely due to the COVID-19 impact.

During the second quarter 2020, auto dealerships in our primary market areas were largely shut down as a result of shelter-in-place restrictions in connection with the pandemic.

Our Florida dealership network contributed $14.3 million in auto loan originations, representing approximately 20 percent of Valley's total new auto loan production during the second quarter 2020 , as compared to $28.3 million, representing approximately 21 percent, during the first quarter 2020 .

Other consumer loans decreased $23.6 million to $890.9 million at June 30, 2020 , as compared to $914.6 million at March 31, 2020 mostly due to lower volumes of new collateralized personal lines of credit as compared to the first quarter 2020 .

Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey, which could present a geographic and credit risk due to the recent economic downturn within these regions caused by the COVID-19 pandemic and the uncertain path forward to restart the U.S.

To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan, to guard against a potential downward turn in any one economic sector.

In the early stage of the second quarter of 2020, COVID-related economic shutdowns in our markets have slowed both new originations and unexpected paydowns.

As traditional origination activity has slowed we have diverted resources to managing the demands of the PPP.

We received approximately 13,000 loan requests and originated 5,100 loans totaling $1.6 billion under the first phase of the program.

Our expectation is that a large amount, between 80% and 85% of loans made under this program will be either fully or partially forgiven and are expected to come off our balance sheet in the near-term.

During the second quarter COVID-related economic shutdowns in our markets have slowed both new loan originations and contractual principal and interest payments.

As traditional commercial origination activity has slowed, we focused additional resources on assisting our clients through the economic crisis and managing the demands of the SBA PPP loan forgiveness.

As of mid-July 2020, we had originated approximately 12,800 PPP loans with an aggregate balance of $2.3 billion before unearned loan fees and costs.

Our expectation is that approximately 75 percent of loans made under this program will be either fully or partially forgiven and are expected to come off our balance sheet over the next 12 months.

During the early stages of the third quarter 2020, we have seen some improved levels of commercial loan activity, solid new and refinanced residential mortgage loan volumes, as well as better auto loan applications activity from borrowers with strong credit scores.

Non-performing Assets

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GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and not subject to delinquency classification in the same manner as loans originated by Valley.

Under the new CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at March 31, 2020 .

Non-performing assets include non-accrual loans, other real estate owned (OREO), other repossessed assets (which primarily consists of automobiles and taxi medallions) and non-accrual debt securities at March 31, 2020 .

Under the CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at June 30, 2020 and March 31, 2020 .

Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest.

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OREO is acquired through foreclosure on loans secured by land or real estate.

OREO and other repossessed assets are reported at the lower of cost or fair value, less cost to sell at the time of acquisition and at the lower of cost or fair value, less estimated costs to sell, thereafter.

Our non-performing assets increased $116.1 million to $220.5 million at March 31, 2020 as compared to December 31, 2019 , largely due to non-accrual PCD loans totaling approximately $74.4 million added to this category under CECL during the first quarter 2020, as well as additional non-accrual taxi medallion loans within the commercial and industrial loan portfolio.

Non-performing assets as a percentage of total loans and non-performing assets totaled 0.72 percent and 0.35 percent at March 31, 2020 and December 31, 2019 , respectively (as shown in the table below).

OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell.

Our non-performing assets increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020 , mainly due to a $4.7 million increase in non-accrual loans, partially offset by a decline in OREO during the second quarter 2020.

Non-performing assets as a percentage of total loans and non-performing assets totaled 0.69 percent and 0.72 percent at June 30, 2020 and March 31, 2020 , respectively (as shown in the table below).

For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio.

The following table sets forth by loan category accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:

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PCI loans were accounted for on a pool basis and are were not subject to delinquency classification.

Loans past due 30 to 59 days increased $70.4 million to $117.0 million at March 31, 2020 as compared to December 31, 2019 .

The increase was mostly due to higher commercial real estate delinquencies driven by a few large loans totaling approximately $30 million included in this category at March 31, 2020 .

In addition, loans past due 30 to 59 days included matured performing commercial real estate and construction loans that were in the normal process of

renewal totaling $4.3 million and $5.0 million at March 31, 2020 , respectively.

Within the same delinquency category, residential mortgage loans included PCD loans totaling approximately $10.0 million at March 31, 2020 .

Loans past due 60 to 89 days increased $20.9 million to $35.3 million at March 31, 2020 as compared to December 31, 2019 mainly due to several large commercial real estate and commercial and industrial loans totaling $13.8 million and $4.5 million, respectively, included in this delinquency category.

The residential mortgage category included $3.3 million of PCD delinquencies at March 31, 2020 .

Loans past due 90 days or more and still accruing interest decreased $218 thousand to $7.1 million at March 31, 2020 as compared to $7.3 million at December 31, 2019 .

Loans past due 30 to 59 days decreased $48.7 million to $68.3 million at June 30, 2020 as compared to March 31, 2020 due to improved performance across most categories.

Commercial real estate loan delinquencies within this category decreased by $27.8 million as compared to March 31, 2020 mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020.

In addition, commercial real estate and construction loans decreased mainly due to matured performing commercial real estate and

construction loans totaling $4.3 million and $5.0 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020 .

Loans past due 60 to 89 days decreased $21.6 million to $13.7 million at June 30, 2020 as compared to March 31, 2020 mainly due to matured performing commercial real estate and commercial and industrial loans totaling $13.8 million and $4.5 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020 .

Loans past due 90 days or more and still accruing interest increased $4.0 million to $11.1 million at June 30, 2020 as compared to $7.1 million at March 31, 2020 .

All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans increased $112.9 million to $205.9 million at March 31, 2020 as compared to $93.1 million at December 31, 2019 largely due to non-accrual PCD loans totaling approximately $74.4 million and the reclassification of approximately $37 million of previously accruing taxi medallion loans to non-accrual status during the first quarter of 2020.

Valley has worked with borrowers impacted by COVID-19 by providing loan modifications, and as of May 6, 2020 had approximately 7,400 consumers and commercial borrowers with loans in forbearance.

Valley will continue to work with customers seeking flexibility on loan terms and conditions due to the pandemic in accordance with prudent banking principles and bank regulatory guidance.

In addition, Valley was proactive in securing financing through the SBA PPP for its small business customers.

Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to COVID-19.

These industries include doctor and surgery centers, retail trade, hotels and hospitality, restaurants and food service, and entertainment and recreation.

As of March 31, 2020, Valley had outstanding loans of approximately $2.2 billion to borrowers in these industries representing approximately 7 percent of total outstanding loans.

Industries that may have secondary exposure to the COVID-19 pandemic include nursing and residential care, wholesale trade, manufacturing, and child care and education.

As of March 31, 2020, Valley had outstanding loans of approximately $2.4 billion to borrowers in these industries representing approximately 8 percent of total outstanding loans.

The large majority of loans to the aforementioned industries were pass-rated under Valley’s internal risk rating system as of March 31, 2020.

As of May 6, 2020, Valley had loans in forbearance representing approximately 17 percent of our loans in the aforementioned industries.

During the first quarter 2020 , we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $102.8 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at March 31, 2020 .

Non-accrual loans increased $4.7 million to $210.6 million at June 30, 2020 as compared to $205.9 million at March 31, 2020 .

The increase in non-accrual loans was partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020 .

Non-accrual loans represented 0.65 percent of total loans at June 30, 2020 compared to 0.68 percent at March 31, 2020 .

During the second quarter 2020 , we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $99.8 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at June 30, 2020 .

Due to continued negative trends in market valuations of the underlying taxi medallion collateral, a weak operating environment and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020.

At March 31, 2020 , non-accrual taxi medallion loans totaling $109.8 million had related reserves of $56.8 million within the allowance for loan losses.

At June 30, 2020 , non-accrual taxi medallion loans totaling $106.8 million had related reserves of $61.6 million within the allowance for loan losses as compared to $109.8 million with related reserves of $56.8 million at March 31, 2020 .

Valley's historical taxi medallion lending criteria had been conservative regarding capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances.

However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at March 31, 2020 (See the "Allowance for Credit Losses" section below).

Potential further declines in the market valuation of taxi medallions could also negatively impact the future performance of this portfolio.

For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $17.3 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at March 31, 2020 .

OREO properties increased $784 thousand to $10.2 million at March 31, 2020 from $9.4 million at December 31, 2019 .

Sales of OREO properties resulted in net gains of $157 thousand and $881 thousand for the three months ended March 31, 2020 , respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million at March 31, 2020 .

Other repossessed assets increased $2.6 million to $3.8 million at March 31, 2020 from December 31, 2019 mainly due to the repossession of 14 taxi medallions from our non-performing taxi medallion portfolio during the first quarter 2020.

See the "Allowance for Credit Losses" section below for information on charge-offs related to taxi medallion loans, including those resulting from repossessions during the first quarter 2020.

However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at June 30, 2020 (See the "Allowance for Credit Losses" section below).

Potential further declines in the market valuation of taxi medallions and the stressed operating environment within both New York City and Chicago due to COVID-19 could also negatively impact the future performance of this portfolio.

For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $16.0 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at June 30, 2020 .

OREO properties decreased $1.9 million to $8.3 million at June 30, 2020 from $10.2 million at March 31, 2020 due to sales of several properties.

Sales of OREO properties resulted in net gains of $274 thousand and $431 thousand for the three and six months ended June 30, 2020 , respectively, as compared to net gains of $857 thousand and $1.7 million for the three and six months ended June 30, 2019 , respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million at June 30, 2020 .

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted.

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) decreased $25.0 million to $48.0 million at March 31, 2020 as compared to $73.0 million at December 31, 2019 .

Performing TDRs consisted of 85 loans at March 31, 2020 .

On an aggregate basis, the $48.0 million in performing TDRs at March 31, 2020 had a modified weighted average interest rate of approximately 4.93 percent as compared to a pre-modification weighted average interest rate of 4.84 percent .

These modifications complied with the CARES Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019.

Generally, the modification terms allow for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

As of March 31, 2020, Valley granted temporary modifications on approximately 2,100 loans, resulting in an immaterial amount of deferred interest payments.

Under the applicable guidance, none of these loans were considered TDRs as of March 31, 2020.

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $5.9 million to $53.9 million at June 30, 2020 as compared to $48.0 million at March 31, 2020 .

Performing TDRs consisted of 87 loans at June 30, 2020 .

On an aggregate basis, the $53.9 million in performing TDRs at June 30, 2020 had a modified weighted average interest rate of approximately 4.92 percent as compared to a pre-modification weighted average interest rate of 4.72 percent .

Loan Forbearance.

In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers.

Generally, the modification terms allow for a

deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers.

Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.

Higher Risk COVID-19 Credit Exposures .

Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to COVID-19.

These industries include doctor and surgery centers, retail trade, hotels and hospitality, restaurants and food service, and entertainment and recreation.

As of June 30, 2020, Valley had outstanding loans of approximately $2.1 billion to borrowers in these industries representing approximately 7 percent of total outstanding loans.

Industries that may have secondary exposure to the COVID-19 pandemic include nursing and residential care, wholesale trade, manufacturing, and child care and education.

As of June 30, 2020, Valley had outstanding loans of approximately $2.4 billion to borrowers in these industries representing approximately 7.8 percent of total outstanding loans.

The large majority of loans to the aforementioned industries were pass-rated under Valley’s internal risk rating system as of June 30, 2020.

As of July 10, 2020, Valley had loans in forbearance representing approximately 12 percent of our loans in the aforementioned industries.

Allowance for Credit Losses for Loans

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Effective January 1, 2020, we adopted the new CECL standard, which is based on lifetime expected credit losses rather than incurred losses.

Valley recorded a $99.6 million increase to its allowance for credit losses for loans, including reserves of $61.6 million related to PCD loans.

At adoption, Valley recorded a $99.6 million increase to its allowance for credit losses for loans, including reserves of $61.6 million related to PCD loans.

See Note 5 to the consolidated financial statements for further details on the Day 1 CECL adoption.

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(i) lending policies and procedures, (ii) current business conditions and economic developments that affect the loan collectability;

(iii) concentration risks by size, type, and geography, new markets, (iv) the volume and migration of loans to non-performing status, and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

(iii) concentration risks by size, type, and geography (iv) the potential volume and migration of of loan forbearances to non-performing s tatus , and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan.

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The model projects economic variables under each scenario based on detailed statistical analyses.

have identified and selected key variables that most closely correlated to our historical credit performance, which include:

We have identified and selected key variables that most closely correlated to our historical credit performance, which include:

GDP, unemployment and the Case-Shiller Home Price Index.

For the first quarter ended March 31, 2020 , we incorporated a probability weighted three-scenario economic forecast, including Moody's Scenario S-4, which includes the following assumptions related to the COVID-19 pandemic:

For the second quarter 2020, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios.

The S-4 forecast is the most severe economic scenario and includes the following assumptions:

Assumes that the COVID-19 crisis will persist and continue to meaningfully impact the economy;

National unemployment rate peaks at 16.9 percent in the second quarter of 2020 and will remain elevated throughout the remainder of the year.

National unemployment rate will remain elevated throughout the remainder of the year and peak at 13.2 percent in the fourth quarter 2021;

Federal funds interest rates will remain at or near zero for foreseeable future;

A prolonged downturn in the economy until the fourth quarter of 2021.

A prolonged downturn in the economy until the fourth quarter 2021.

The allowance for credit losses for loans methodology and accounting policy are fully described in Note 8 to the consolidated financial statements.

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Three Months Ended

Six Months Ended

($ in thousands)

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Annualized ratio of net charge-offs to average loans outstanding

Allowance for credit losses for loans as a % of total loans

The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.

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Periods prior to March 31, 2020 represent the allowance and provision for unfunded letters of credit only .

Net loan charge-offs totaled $4.8 million for the first quarter 2020 as compared to $5.6 million and $5.3 million for the fourth quarter 2019 and first quarter 2019, respectively.

The decrease in net loan charge-offs as compared to the fourth quarter 2019 was mainly due to better performance within the commercial and industrial loan category in the first quarter 2020 , partially offset by lower recoveries.

The taxi medallion loan charge-offs totaled $1.3 million, $2.9 million and $1.3 million for the first quarter 2020 , fourth quarter 2019 and the first quarter 2019 , respectively.

Net loan charge-offs totaled $14.8 million for the second quarter 2020 as compared to $4.8 million and $3.0 million for the first quarter 2020 and second quarter 2019 , respectively.

The increase in net loan charge-offs was largely due to the partial charge-off of one commercial and industrial loan totaling $7.8 million for the second quarter 2020 .

Additionally, gross loan charge-offs related to taxi medallion loans totaled $3.2 million, $1.3 million and $2.3 million for the second quarter 2020 , first quarter 2020 and second quarter 2019 , respectively.

The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.

During the first quarter 2020 , we recorded a $33.9 million provision for credit losses as compared to $5.4 million and $8.0 million for the fourth quarter 2019 and the first quarter 2019 , respectively.

The increase in the first quarter 2020 provision as compared to the fourth quarter 2019 was mainly due to higher reserves recorded under CECL due to forecasted credit deterioration driven by the impact of the COVID-19 pandemic and loan growth, as well as higher specific reserves for non-accrual taxi medallion loans.

During the second quarter 2020 , we recorded a $41.1 million provision for credit losses as compared to $33.9 million and $2.1 million for the first quarter 2020 and the second quarter 2019 , respectively.

The second quarter 2020 provision mainly reflects the reserve build caused by deterioration in Valley's view of the macroeconomic outlook since the end of the first quarter, higher specific reserves associated with our taxi medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers.

The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:

March 31, 2020

December 31, 2019

June 30, 2020

March 31, 2020

June 30, 2019

($ in thousands)

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Total consumer loans

Total allowance for credit losses

Total allowance for loan losses

Allowance for unfunded credit commitments

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Prior periods reflect the allowance for credit losses for loans under the incurred loss model.

The allowance for credit losses, comprised of our allowance for loan losses and unfunded commitments (including letters of credit), as a percentage of total loans was 0.96 percent , 0.55 percent and 0.63 percent at March 31, 2020 , December 31, 2019 and March 31, 2019 , respectively.

The increase at March 31, 2020 was largely due to the reserves related to PCD loans included in the Day 1 CECL adoption adjustment to the allowance for credit losses for loans and the reserve build under CECL during the first quarter 2020 related to the impact of COVID-19 and other factors.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.99 percent , 0.96 percent and 0.61 percent at June 30, 2020 , March 31, 2020 and June 30, 2019 , respectively.

At June 30, 2020 , the allowance allocations for credit losses as a percentage of total loans increased for most loan categories as compared to March 31, 2020 .

However, the allocated reserves as a percentage of commercial and industrial loans declined by 0.63 percent due to $2.2 billion of SBA PPP loans with no related allowance at June 30, 2020 .

PPP loans originated in the second quarter 2020 are 100 percent guaranteed by the SBA and totaled approximately $2.2 billion at June 30, 2020 .

Our allowance of credit losses for loans as a percentage of non-PPP loans was 1.06 percent at June 30, 2020 .

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity.

At March 31, 2020 and December 31, 2019 , shareholders’ equity totaled approximately $4.4 billion and represented 11.3 percent and 11.7 percent of total assets, respectively.

During the three months ended March 31, 2020 , total shareholders’ equity increased by $36.8 million primarily due to (i) net income of $87.3 million , (ii) an increase in other comprehensive income of $25.6 million , and (iii) a $232 thousand increase attributable to the effect of our stock incentive plan.

At June 30, 2020 and December 31, 2019 , shareholders’ equity totaled approximately $4.5 billion and $4.4 billion , which represented 10.7 percent and 11.7 percent of total assets, respectively.

During the six months ended June 30, 2020 , total shareholders’ equity increased by $90.3 million primarily due to (i) net income of $182.9 million , (ii) an increase in other comprehensive income of $27.3 million , and (iii) a $4.4 million increase attributable to the effect of our stock incentive plan.

These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $96.1 million , and (ii) a $28.2 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2020.

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We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent , Tier 1 capital to risk-weighted assets ratio of 6.0 percent , ratio of total capital to risk-weighted assets of 8.0 percent , and minimum leverage ratio of 4.0 percent , plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes.

As of March 31, 2020 and December 31, 2019 , Valley and Valley National Bank exceeded all capital adequacy requirements (see tables below).

As of June 30, 2020 and December 31, 2019 , Valley and Valley National Bank exceeded all capital adequacy requirements (see tables below).

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025.

Additionally, 25 percent of the first quarter 2020 reserve build (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at March 31, 2020 and December 31, 2019 :

Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) net of taxes for the six months ended June 30, 2020 will be phased in over the same time frame.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2020 and December 31, 2019 :

Minimum Capital

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($ in thousands)

As of March 31, 2020

As of June 30, 2020

Total Risk-based Capital

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Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share.

Our retention ratio was 47.6 percent for the three months ended March 31, 2020 as compared to 49.4 percent for the year ended December 31, 2019 .

Our retention ratio decreased slightly from the year ended December 31, 2019 mainly due to our higher provision for credit losses under CECL during the first quarter 2020, which was negatively impacted by forecasted losses caused by the COVID-19 pandemic.

Cash dividends declared amounted to $0.11 per common share for each of the three months ended March 31, 2020 and 2019 .

Our retention ratio was approximately 50.0 percent for the six months ended June 30, 2020 as compared to 49.4 percent for the year ended December 31, 2019 .

Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2020 and 2019 .

The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.

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Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend.

However, the FRB recently reiterated its long-standing guidance that banking organizations should consult them before declaring dividends in excess of earnings for the corresponding quarter.

The renewed guidance was largely due to the increased risk of the COVID-19 pandemic negatively impacting the future level of bank earnings.

See the risk factors at Part II, Item 1A of this report for additional information.

Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis