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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-03-10 · 1185 added, 946 removed, 1568 unchanged (58% of the section changed)

Financial Statements and Supplementary Data

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

4 unchanged sentences

Equity securities

29,378 41,410

Available for sale debt securities

Held to maturity debt securities (fair value of $2,358,720 at December 31, 2019 and $2,034,943 at December 31, 2018)

1,339,473 1,566,801

Held to maturity debt securities (net of allowance for credit losses of $ 1,428 at December 31, 2020)

2,171,583 2,336,095

Total investment securities 3,540,434 3,944,306

Loans held for sale, at fair value 301,427 76,113

Loans 32,217,112 29,699,208

Allowance for loan losses ( 340,243 ) ( 161,759 )

Net loans 31,876,869 29,537,449

Premises and equipment, net 319,797 334,533

2 unchanged sentences

Accrued interest receivable 106,230 105,637

Goodwill 1,382,442 1,373,625

Other intangible assets, net 70,449 86,772

Other assets 971,961 717,600

Total Assets $ 40,686,076 $ 37,436,020

Non-interest bearing $ 9,205,266 $ 6,710,408

1 unchanged sentence

Savings, NOW and money market 16,015,658 12,757,484

Time 6,714,678 9,717,945

Total deposits 31,935,602 29,185,837

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Series A ( 4,600,000 shares issued at December 31, 2020 and December 31, 2019)

111,590 111,590

Series B ( 4,000,000 shares issued at December 31, 2020 and December 31, 2019)

98,101 98,101

Common stock ( no par value, authorized 650,000,000 shares;

issued 403,881,488 shares at December 31, 2020 and 403,322,773 shares at December 31, 2019)

141,746 141,423

Surplus 3,637,468 3,622,208

Retained earnings 611,158 443,559

1 unchanged sentence

Treasury stock, at cost ( 22,490 common shares at December 31, 2020 and 44,383 common shares at December 31, 2019)

( 225 ) ( 479 )

Total Shareholders’ Equity 4,592,120 4,384,188

2 unchanged sentences

2020 Form 10-K 72

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,

2020 2019 2018

(in thousands, except for share data)

2 unchanged sentences

Interest and dividends on investment securities:

Interest on other short-term investments

Taxable 70,249 86,926 87,306

Tax-exempt 14,563 17,420 21,504

Dividends 11,644 12,023 13,209

Interest on federal funds sold and other short-term investments 2,556 5,723 3,236

Total interest income 1,383,719 1,321,000 1,159,248

2 unchanged sentences

Savings, NOW and money market 76,169 145,177 108,394

Time 106,067 166,693 81,959

Interest on short-term borrowings 11,372 47,862 45,930

2 unchanged sentences

Net Interest Income 1,118,904 898,048 857,203

Provision for credit losses

Provision for credit losses for held to maturity securities 635 — —

Provision for credit losses for loans 125,087 24,218 32,501

Net Interest Income After Provision for Credit Losses 993,182 873,830 824,702

3 unchanged sentences

Service charges on deposit accounts 18,257 23,636 26,817

Losses on securities transactions, net

Gains (losses) on securities transactions, net 524 ( 150 ) ( 2,342 )

Other-than-temporary impairment losses on securities — ( 2,928 ) —

Portion recognized in other comprehensive income (before taxes)

Net impairment losses on securities recognized in earnings

Fees from loan servicing 10,352 9,794 9,319

Gains on sales of loans, net 42,251 18,914 20,515

Gains (losses) on sales of assets, net

(Losses) gains on sales of assets, net ( 1,891 ) 78,333 ( 2,401 )

Bank owned life insurance 10,083 8,232 8,691

Other 83,643 55,634 45,607

Total non-interest income 183,032 214,520 134,052

8 unchanged sentences

Telecommunication expenses 10,737 9,883 12,102

Other 71,875 63,063 69,357

Total non-interest expense 646,148 631,555 629,061

1 unchanged sentence

Income tax expense 139,460 147,002 68,265

Net Income 390,606 309,793 261,428

Dividends on preferred stock 12,688 12,688 12,688

1 unchanged sentence

2020 Form 10-K

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME—(Continued)

Years Ended December 31,

2020 2019 2018

(in thousands, except for share data)

Earnings Per Common Share:

Basic $ 0.94 $ 0.88 $ 0.75

Diluted 0.93 0.87 0.75

Cash Dividends Declared Per Common Share 0.44 0.44 0.44

Weighted Average Number of Common Shares Outstanding:

Basic 403,754,356 337,792,270 331,258,964

Diluted 405,046,207 340,117,808 332,693,718

See accompanying notes to consolidated financial statements.

2020 Form 10-K 74

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,

2020 2019 2018

(in thousands)

Net income $ 390,606 $ 309,793 $ 261,428

Other comprehensive income (loss), net of tax:

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Net gains (losses) arising during the period 27,845 39,262 ( 22,932 )

Less reclassification adjustment for net losses (gains) included in net income

Less reclassification adjustment for net (gains) losses included in net income ( 377 ) 119 2,237

Total 27,468 39,381 ( 20,695 )

Unrealized gains and losses on derivatives (cash flow hedges)

1 unchanged sentence

Less reclassification adjustment for net losses included in net income

2,074 1,291 2,494

Total ( 177 ) 302 4,368

Defined benefit pension plan

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Amortization of prior service (credit) cost ( 98 ) ( 93 ) 146

Amortization of net loss

Amortization of actuarial net loss 721 188 447

Total ( 2,795 ) ( 2,466 ) ( 6,558 )

Total other comprehensive income (loss) 24,496 37,217 ( 22,885 )

2 unchanged sentences

2020 Form 10-K

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Preferred Stock

Common Stock Accumulated

Preferred Stock Shares Amount Surplus Retained

Earnings Other

Comprehensive

Loss Treasury

Shareholders’

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Reclassification due to the adoption of ASU No.

— — — — 480 ( 480 ) — —

Reclassification due to the adoption of ASU No.

— — — — 61 ( 61 ) — —

Adjustment due to the adoption of ASU No.

— — — — ( 17,611 ) — — ( 17,611 )

Balance - January 1, 2018 209,691 264,469 92,727 2,060,356 199,663 ( 46,546 ) ( 337 ) 2,515,554

Other comprehensive income, net of tax

Preferred Stock Issued

Net income — — — — 261,428 — — 261,428

Other comprehensive loss, net of tax

— — — — — ( 22,885 ) — ( 22,885 )

Cash dividends declared:

Preferred stock, Series A, $ 1.56 per share

— — — — ( 7,188 ) — — ( 7,188 )

Preferred stock, Series B, $ 1.38 per share

— — — — ( 5,500 ) — — ( 5,500 )

Common Stock, $ 0.44 per share

— — — — ( 146,346 ) — — ( 146,346 )

Effect of stock incentive plan, net

— 1,955 771 21,022 ( 2,415 ) — ( 2,198 ) 17,180

Common stock issued

— 65,007 22,742 715,121 — — 348 738,211

Balance - December 31, 2018 $ 209,691 331,431 $ 116,240 $ 2,796,499 $ 299,642 $ ( 69,431 ) $ ( 2,187 ) $ 3,350,454

Reclassification due to the adoption of ASU No.

Adjustment due to the adoption of ASU No.

— — — — 4,414 — — 4,414

Adjustment due to the adoption of ASU No.

— — — — ( 1,446 ) — — ( 1,446 )

Balance - January 1, 2019 209,691 331,431 116,240 2,796,499 302,610 ( 69,431 ) ( 2,187 ) 3,353,422

Other comprehensive loss, net of tax

Net income — — — — 309,793 — — 309,793

Other comprehensive income, net of tax

— — — — — 37,217 — 37,217

Cash dividends declared:

Preferred stock, Series A, $ 1.56 per share

— — — — ( 7,188 ) — — ( 7,188 )

Preferred stock, Series B, $ 1.38 per share

— — — — ( 5,500 ) — — ( 5,500 )

Common Stock, $ 0.44 per share

— — — — ( 154,689 ) — — ( 154,689 )

Effect of stock incentive plan, net

— 726 291 15,346 ( 1,467 ) — 1,708 15,878

Common stock issued

— 71,121 24,892 810,363 — — — 835,255

Balance - December 31, 2019 $ 209,691 403,278 $ 141,423 $ 3,622,208 $ 443,559 $ ( 32,214 ) $ ( 479 ) $ 4,384,188

2020 Form 10-K 76

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY—(Continued)

Preferred Stock

Common Stock Accumulated

Preferred Stock Shares Amount Surplus Retained

Earnings Other

Comprehensive

Loss Treasury

Shareholders’

($ in thousands)

Balance - December 31, 2019 $ 209,691 403,278 $ 141,423 $ 3,622,208 $ 443,559 $ ( 32,214 ) $ ( 479 ) $ 4,384,188

Adjustment due to the adoption of ASU No.

2016-13 — — — — ( 28,187 ) — — ( 28,187 )

Balance - January 1, 2020 209,691 403,278 141,423 3,622,208 415,372 ( 32,214 ) ( 479 ) 4,356,001

Net income — — — — 390,606 — — 390,606

Other comprehensive income, net of tax

— — — — — 24,496 — 24,496

Cash dividends declared:

Preferred stock, Series A, $ 1.56 per share

— — — — ( 7,188 ) — — ( 7,188 )

Preferred stock, Series B, $ 1.38 per share

— — — — ( 5,500 ) — — ( 5,500 )

Common Stock, $ 0.44 per share

— — — — ( 179,277 ) — — ( 179,277 )

Effect of stock incentive plan, net

Common stock issued

— 581 323 15,260 ( 2,855 ) — 254 12,982

Balance - December 31, 2020 $ 209,691 403,859 $ 141,746 $ 3,637,468 $ 611,158 $ ( 7,718 ) $ ( 225 ) $ 4,592,120

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2020 Form 10-K

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

2020 2019 2018

(in thousands)

Cash flows from operating activities:

Net income $ 390,606 $ 309,793 $ 261,428

Adjustments to reconcile net income to net cash provided by operating activities:

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Net amortization of premiums and accretion of discounts on securities and borrowings

38,315 29,512 38,454

Amortization of other intangible assets 24,645 18,080 18,416

Losses on securities transactions, net

(Gains) losses on securities transactions, net ( 524 ) 150 2,342

Proceeds from sales of loans held for sale 1,019,841 509,448 398,350

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Originations of loans held for sale ( 1,211,227 ) ( 537,985 ) ( 406,087 )

(Gains) losses on sales of assets, net

Losses (gains) on sales of assets, net 1,891 ( 78,333 ) 2,401

Net deferred income tax (benefit) expense ( 5,060 ) 15,228 ( 11,780 )

2 unchanged sentences

Accrued interest receivable ( 593 ) 1,440 ( 9,183 )

Other assets ( 311,760 ) ( 163,330 ) ( 33,144 )

Accrued expenses and other liabilities 58,234 57,882 ( 7,562 )

3 unchanged sentences

Equity securities:

Purchases ( 8,337 ) ( 14,776 ) —

Sales 28,439 24,748 —

Held to maturity debt securities:

Purchases ( 682,509 ) ( 701,879 ) ( 264,721 )

Maturities, calls and principal repayments 824,477 424,475 241,077

Available for sale debt securities:

Purchases ( 333,971 ) ( 30,392 ) ( 289,554 )

Sales 30,020 271,901 44,377

Maturities, calls and principal repayments 555,589 316,024 255,031

1 unchanged sentence

Proceeds from sales of real estate property and equipment 19,111 109,043 7,786

Proceeds from sales of loans held for investments 30,020 1,234,022 289,633

Purchases of real estate property and equipment ( 24,607 ) ( 23,375 ) ( 26,440 )

2 unchanged sentences

2020 Form 10-K 78

VALLEY NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

Years Ended December 31,

2020 2019 2018

(in thousands)

4 unchanged sentences

Repayments of long-term borrowings ( 667,739 ) ( 890,000 ) ( 750,682 )

Proceeds from issuance of preferred stock, net

Cash dividends paid to preferred shareholders ( 12,688 ) ( 12,688 ) ( 15,859 )

2 unchanged sentences

Common stock issued, net 2,202 2,957 2,704

Other, net ( 612 ) ( 492 ) —

Net cash provided by financing activities 2,780,655 673,449 2,548,481

10 unchanged sentences

Lease right of use assets obtained in exchange for operating lease liabilities

16,062 312,143 —

Non-cash assets acquired:

2 unchanged sentences

Investment securities held to maturity — 4,877 214,217

Loans — 3,378,358 3,736,984

Premises and equipment — 23,585 62,066

1 unchanged sentence

Accrued interest receivable — 11,781 12,123

Goodwill — 297,777 394,028

Other intangible assets — 20,690 45,906

Other assets — 50,873 100,059

Total non-cash assets acquired $ — $ 4,277,113 $ 4,922,820

Liabilities assumed:

Deposits $ — $ 2,924,716 $ 3,564,843

Short-term borrowings — 10,500 649,979

8 unchanged sentences

2020 Form 10-K

VALLEY NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Valley National Bancorp, a New Jersey Corporation (Valley), is a bank holding company whose principal wholly-owned subsidiary is Valley National Bank (the “Bank”), a national banking association providing a full range of commercial, retail and trust and investment services largely through its offices and ATM network throughout northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn and Queens, Long Island, Florida and Alabama.

The Bank is subject to intense competition from other financial services companies and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities.

The Bank is subject to intense competition from other financial service providers and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities.

Valley National Bank’s subsidiaries are all included in the consolidated financial statements of Valley.

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The Bank’s subsidiaries also include real estate investment trust subsidiaries (the “REIT” subsidiaries) which own real estate related investments and a REIT subsidiary which owns some of the real estate utilized by the Bank and related real estate investments.

Except for Valley’s REIT subsidiaries, all subsidiaries mentioned above are directly or indirectly wholly-owned by the Bank.

Because each REIT subsidiary must have 100 or more shareholders to qualify as a REIT, each REIT subsidiary has issued less than 20 percent of its outstanding non-voting preferred stock to individuals, most of whom are non-senior management Bank employees.

Except for Valley’s REIT subsidiaries and its insurance agency (10% of which is owned by the insurance agency's co-CEOs), all subsidiaries mentioned above are directly or indirectly wholly-owned by the Bank.

The Bank owns the remaining preferred stock and all the common stock of the REITs.

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Certain prior period amounts have been reclassified to conform to the current presentation.

Significant Estimates.

In preparing the consolidated financial statements in conformity with U.S.

GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated.

Material estimates that are particularly susceptible to change are:

the allowance for loan losses, purchased credit-impaired loans, the evaluation of goodwill and other intangible assets for impairment, and income taxes.

Material estimates that require application of management’s most difficult, subjective or complex judgment and are particularly susceptible to change include:

the allowance for credit losses, the evaluation of goodwill and other intangible assets for impairment, and income taxes.

Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary.

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The current economic environment has increased the degree of uncertainty inherent in these material estimates.

Actual results may differ from those estimates.

Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other banks (including the Federal Reserve Bank of New York) and, from time to time, overnight federal funds sold.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a percentage of deposits.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank based on a

2020 Form 10-K 80

percentage of deposits.

These reserve balances totaled $ 896.1 million and $ 114.4 million at December 31, 2020 and 2019, respectively.

2 unchanged sentences

Investment securities classified as held-to-maturity are those that management has the positive intent and ability to hold until maturity.

Investment securities held-to-maturity are carried at amortized cost, adjusted for amortization

2019 Form 10-K

of premiums and accretion of discounts using the level-yield method over the contractual term of the securities, adjusted for actual prepayments, or to call date if the security was purchased at premium.

Investment securities held-to-maturity are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts using the level-yield method over the contractual term of the securities, adjusted for actual prepayments, or to call date if the security was purchased at premium.

Investment securities classified as available-for-sale are carried at fair value with unrealized holding gains and losses reported as a component of other comprehensive income or loss, net of tax.

3 unchanged sentences

Security transactions are recorded on a trade-date basis.

Quarterly, Valley evaluates its investment securities classified as held to maturity and available for sale for other-than-temporary impairment.

Valley's evaluation of other-than-temporary impairment considers factors that include, among others, the causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility;

and the severity and duration of the decline.

For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not it is probable that current and/or future contractual cash flows have been or may be impaired.

Valley also assesses the intent and ability to hold the securities (as well as the likelihood of a near-term recovery), and the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis.

In assessing the level of other-than-temporary impairment attributable to credit loss, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security.

If a determination is made that a debt security is other-than-temporarily impaired, Valley will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors.

The credit related component will be recognized as an other-than-temporary impairment charge in non-interest income.

The non-credit related component will be recorded as an adjustment to accumulated other comprehensive income (loss), net of tax.

When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.

See the “Other-Than-Temporary Impairment Analysis” section of Note 4 for further discussion.

Interest income on investments includes amortization of purchase premiums and discounts.

Valley discontinues the recognition of interest on debt securities if the securities meet both of the following criteria:

(i) regularly scheduled interest payments have not been paid or have been deferred by the issuer, and (ii) full collection of all contractual principal and interest payments is not deemed to be the most likely outcome, resulting in the recognition of other-than-temporary impairment of the security.

Allowance for Credit Losses for Held to Maturity Debt Securities

On January 1, 2020, Valley adopted Accounting Standards Update (ASU) No.

2016-13, which requires us to estimate and recognize an allowance for credit losses for held to maturity debt securities using the current expected credit loss methodology (CECL).

Valley's CECL model includes a zero loss expectation for certain securities within the held to maturity portfolio, and therefore Valley is not required to estimate an allowance for credit losses related to these securities.

After an evaluation of qualitative factors, Valley identified the following securities types which it believes qualify for this exclusion:

Treasury securities, U.S.

agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds commonly referred to as Tax Exempt Mortgage Securities (TEMS).

To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third-party.

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.

The model is adjusted for a probability weighted multi-scenario economic forecast to estimate future credit losses.

Valley uses 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 investment security.

The economic forecast methodology and governance for debt securities is aligned with Valley's economic forecast used for the loan portfolio.

Accrued interest receivable is excluded from the estimate of credit losses.

See the "New Authoritative Accounting Guidance" section below and Note 4 for more details regarding our adoption of ASU No.

2016-13 and the allowance for credit losses for held to maturity securities.

Impairment of Available for Sale Debt Securities

The impairment model for available for sale debt securities differs from the CECL methodology applied to held to maturity debt securities because the available for sale debt securities are measured at fair value rather than amortized cost.

Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis.

In performing an assessment of whether any decline in fair value is due to a credit loss, Valley considers the extent to which the fair value is less than the amortized cost, changes in credit ratings, any adverse economic conditions, as well as all relevant information at the individual security level, such as credit deterioration of the issuer or collateral underlying the security.

In assessing the impairment, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security.

If it is determined that the decline in fair value was due to credit losses, an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis.

The non-credit related decrease in the fair value, such as a decline due to changes in market interest rates, is recorded in other comprehensive income, net of tax.

Valley also assesses the intent to sell the securities (as well as the likelihood of a near-term recovery).

If Valley intends to sell

2020 Form 10-K

an available for sale debt security or it is more likely than not that Valley will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings.

See Note 4 for additional information.

Prior to January 1, 2020, Valley evaluated its investment securities classified as held to maturity and available for sale for other-than temporary impairment.

Valley's evaluation of other-than-temporary impairment considered factors that included, among others, the causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility;

and the severity and duration of the decline.

Valley also assessed the intent and ability to hold the securities (as well as the likelihood of a near-term recovery), and the intent to sell the securities and whether it is more likely than not that Valley was required to sell the securities before the recovery of their amortized cost basis.

Once a debt security was deemed to be other-than-temporarily impaired, it was written down to fair value with the estimated credit related component was recognized as an other-than-temporary impairment charge in non-interest income.

The non-credit related component was recorded as an adjustment to accumulated other comprehensive income (loss), net of tax.

Loans Held for Sale

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Loans and Loan Fees

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans and premium or discounts on purchased loans, except for purchased credit deteriorated (PCD) loans recorded at the purchase price, including non-credit discounts, plus the allowance for credit losses expected at the time of acquisition.

Loan origination and commitment fees, net of related costs are deferred and amortized as an adjustment of loan yield over the estimated life of the loans approximating the effective interest method.

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When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.

Payments received on non-accrual loans are generally applied against principal.

Cash collections from non-accrual loans are generally credited to the loan balance, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible.

A loan in which the borrowers’ obligation has not been released in bankruptcy courts may be restored to an accruing basis when it becomes well secured and is in the process of collection, or all past due amounts become current under the loan agreement and collectability is no longer doubtful.

Purchased Credit-Impaired Loans

Purchased credit-impaired (PCI) loans are loans acquired at a discount (that is due, in part, to credit quality).

Valley's PCI loan portfolio primarily consists of loans acquired in business combinations subsequent to 2011.

The PCI loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses.

Interest income on PCI loans has been accounted for based on the acquired loans’ expected cash flows.

The PCI loans may be aggregated and

2019 Form 10-K

accounted for as a pool of loans if the loans being aggregated have common risk characteristics.

A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow.

The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool.

Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or an allowance for loan losses.

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses.

Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).

Valley had no allowance reserves related to PCI loans at December 31, 2019 and 2018 .

On a quarterly or more frequent basis, the Bank evaluates the remaining contractual required payments due and estimates of cash flows expected to be collected for the underlying loans of each PCI loan pool.

These evaluations require the continued use of key assumptions and estimates, similar to the initial estimate of fair value.

Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference.

For the pools with better than expected cash flows, the forecasted increase is recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

See Note 5 for additional information.

PCI loans that may have been classified as non-performing loans by an acquired bank are no longer classified as non-performing because these loans are accounted for on a pooled basis.

Management’s judgment is required in classifying loans in pools as performing loans, and is dependent on having a reasonable expectation about the timing and amount of the pool cash flows to be collected, even if certain loans within the pool are contractually past due.

Allowance for Credit Losses

The allowance for credit losses (the “allowance”) is increased through provisions charged against current earnings and additionally by crediting amounts of recoveries received, if any, on previously charged-off loans.

The allowance is reduced by charge-offs on loans or unfunded letters of credit which are determined to be a loss, in accordance with established policies, when all efforts of collection have been exhausted.

The allowance is maintained at a level estimated to absorb probable credit losses inherent in the loan portfolio as well as other credit risk related charge-offs.

The allowance is based on ongoing evaluations of the probable estimated losses inherent in the non-PCI loan portfolio and off-balance sheet unfunded letters of credit, as well as reserves for impairment of PCI loans subsequent to their acquisition date.

As discussed under the “Purchased Credit-Impaired Loans” section above, Valley had no allowance reserves related to PCI loans at December 31, 2019 and 2018 .

The Bank’s methodology for evaluating the appropriateness of the allowance includes grouping the loan portfolio into loan segments based on common risk characteristics, tracking the historical levels of classified loans and delinquencies, estimating the appropriate loss look-back and loss emergence periods related to historical losses for each loan segment, providing specific reserves on impaired loans, and assigning incremental reserves where necessary based upon qualitative and economic outlook factors including numerous variables, such as the nature and trends of recent loan charge-offs.

Additionally, the volume of non-performing loans, concentration risks by size, type, and geography, new markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, loan review and economic conditions are taken into consideration.

The allowance for loan losses consists of four elements:

(i) specific reserves for individually impaired credits, (ii) reserves for adversely classified, or higher risk rated, loans that are not impaired, (iii) reserves for other loans based on historical loss factors (using the appropriate loss look-back and loss emergence periods) adjusted for both internal and external qualitative risk factors to Valley, including the aforementioned factors, as well as changes in both organic and purchased loan portfolio volumes, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing, and (iv) an allowance for PCI loan pools impaired subsequent to the acquisition date, if applicable.

The Credit Risk Management Department individually evaluates non-accrual (non-homogeneous) commercial and industrial loans and commercial real estate loans over $ 250 thousand and all troubled debt restructured loans.

The value of an impaired loan is measured based upon the underlying anticipated method of payment consisting of either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent, and its payment is expected solely based on the underlying collateral.

If the value of an impaired loan is less than its carrying amount, impairment is recognized through a provision to the allowance for loan losses.

Collateral dependent impaired loan balances are written down to the estimated current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s

Allowance for Credit Losses for Loans

As noted previously, Valley adopted ASU No.

2016-13 on January 1, 2020, and thus 2020 follows the current expected credit losses methodology.

Prior periods have been reported in accordance with previously applicable GAAP, which followed the incurred credit losses methodology.

The following policies noted are under the current expected credit losses methodology.

A summary of Valley’s previous policies under the incurred credit losses methodology follows at the end of this section.

The allowance for credit losses (ACL) is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loans.

Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Provisions for credit losses for loans and recoveries on loan previously charged-off by Valley are added back to the allowance.

Under CECL, Valley's methodology to establish the allowance for credit losses for loans has two basic components:

(1) a collective reserve component for estimated lifetime expected credit losses for pools of loans that share common risk characteristics and (2) an individual reserve component for loans that do not share common risk characteristics.

Previously, an allowance for loan losses was recognized based on probable incurred losses.

Reserves for loans that share common risk characteristics.

Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances.

In estimating the component of the

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collection process.

If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for loan losses.

Accrual of interest is discontinued on an impaired loan when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of all principal and interest is doubtful.

Residential mortgage loans and consumer loans usually consist of smaller balance homogeneous loans that are collectively evaluated for impairment, and are specifically excluded from the impaired loan portfolio, except where the loan is classified as a troubled debt restructured loan.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of the loans.

Loans are evaluated based on an internal credit risk rating system for the commercial and industrial loan and commercial real estate loan portfolio segments and non-performing loan status for the residential and consumer loan portfolio segments.

allowance on a collective basis, Valley uses a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics.

The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses.

The model's expected losses based on loss history are adjusted for qualitative factors.

Among other things, these adjustments include and account for differences in:

(i) the impact of the reasonable and supportable economic forecast, probability weightings and reversion period, (ii) other asset specific risks to the extent they do not exist in the historical loss information, and (iii) net expected recoveries of charged off loan balances.

These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses.

The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors.

The expected credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis.

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 on a straight-line basis.

The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses that is governed by a cross-functional committee.

The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information.

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

Valley has identified and selected key variables that most closely correlated to its historical credit performance, which include:

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

The loan credit quality data utilized in the transition matrix model is based on an internal credit risk rating system for the commercial and industrial loan and commercial real estate loan portfolio segments and delinquency aging status for the residential and consumer loan portfolio segments.

Loans are risk-rated based on an internal credit risk grading process that evaluates, among other things:

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Loans with a grade that is below “Pass” grade are adversely classified.

See Note 5 for details.

Any change in the credit risk grade of adversely classified performing and/or non-performing loans affects the amount of the related allowance.

Once a loan is adversely classified, the assigned relationship manager and/or a special assets officer in conjunction with the Credit Risk Management Department analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically assign a valuation allowance for loan losses to the loan.

Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Loans identified as losses by management are charged-off.

Once a loan is adversely classified, the assigned relationship manager and/or a special assets officer in conjunction with the Credit Risk Management Department analyzes the loan to determine whether the loan is a collateral dependent asset (i.e., repayment is expected to be provided substantially through the sale or operation of the collateral) and the need to specifically assign a specific valuation allowance for loan losses to the loan, as discussed further below.

Reserves for loans that that do not share common risk characteristics.

Valley measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of collateral dependent, troubled debt restructured ( TDR) loans, and expected TDR loans, based on the amount of lifetime expected credit losses calculated on those loans and charge-offs of those amounts determined to be uncollectible.

Factors considered by Valley in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

Collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process.

The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.

Valley elected to exclude accrued interest on loans from the amortized cost of loans held for investment.

The accrued interest is presented separately in the consolidated statements of financial condition.

Loans charge-offs.

Loans rated as "loss" within Valley's internal rating system are charged-off.

Commercial loans are generally assessed for full or partial charge-off to the net realizable value for collateral dependent loans when a loan is between 90 or 120 days past due or sooner if it is probable that a loan may not be fully collectable.

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Unsecured consumer loans are generally fully charged-off when the loan is 150 days past due.

Under the incurred credit losses methodology utilized in the prior periods, the allowance for credit losses was maintained at a level estimated to absorb probable credit losses inherent in the loan portfolio, as well as other credit risk related charge-offs.

The allowance is based on ongoing evaluations of the probable estimated losses inherent in the non-purchase credit impaired

2020 Form 10-K

(PCI) loan portfolio and off-balance sheet unfunded letters of credit, as well as reserves for impairment of PCI loans subsequent to their acquisition date.

Valley had no allowance reserves related to PCI loans at December 31, 2019.

The Bank’s methodology for evaluating the appropriateness of the allowance included grouping the loan portfolio into loan segments based on common risk characteristics, tracking the historical levels of classified loans and delinquencies, estimating the appropriate loss look-back and loss emergence periods related to historical losses for each loan segment, providing specific reserves on impaired loans, and assigning incremental reserves where necessary based upon qualitative and economic outlook factors including numerous variables, such as the nature and trends of recent loan charge-offs.

The allowance for loan losses consists of four elements:

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of the loans.

Loans are risk-rated based on an internal credit risk grading process that evaluates, among other things:

(i) the obligor’s ability to repay;

(ii) the underlying collateral, if any;

and (iii) the economic environment and industry in which the borrower operates.

The allowance allocations for other loans (i.e., risk rated loans that are not adversely classified and loans that are not risk rated) are calculated by applying historical loss factors for each loan portfolio segment to the applicable outstanding loan portfolio balances.

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The management analysis includes an evaluation of loan portfolio volumes, the composition and concentrations of credit, credit quality and current delinquency trends.

See Notes 5 and 6 for Valley’s loan credit quality and additional allowance disclosures.

Allowance for Unfunded Credit Commitments

The allowance for unfunded credit commitments consists of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit valued using a similar CECL methodology as used for loans.

Management's estimate of expected losses inherent in these off-balance sheet credit exposures also incorporates estimated utilization rate over the commitment's contractual period or an expected pull-through rate for new loan commitments.

The allowance for unfunded credit commitments is included in accrued expenses and other liabilities on the consolidated statements of financial condition.

See Note 5 for a discussion of Valley’s loan credit quality and additional allowance for credit losses.

Lessor Arrangements.

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ROU assets are amortized into net occupancy and equipment expense over the expected lives of the leases.

Lease liabilities are discounted to their net present values on the balance sheet based on incremental borrowing rates as determined at the lease commencement dates using quoted interest rates for readily available borrowings, such as fixed rate FHLB advances, with similar terms as the lease obligations.

Lease liabilities are reduced by actual lease payments.

2020 Form 10-K 84

Lease liabilities are discounted to their net present values on the balance sheet based on incremental borrowing rates as determined at the lease commencement dates using quoted interest rates for readily available borrowings, such as fixed rate FHLB borrowings, with similar terms as the lease obligations.

Lease liabilities are reduced by actual lease payments.

See Note 6 for additional information on Valley's lease related assets and obligations.

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Valley acquires other real estate owned (OREO) through foreclosure on loans secured by real estate.

OREO is reported at the lower of cost or fair value, as established by a current appraisal (less estimated costs to sell), and is included in other assets.

OREO is reported at the lower of cost or fair value, as established by a current appraisal (less estimated costs to sell) and it is included in other assets.

Any write-downs at the date of foreclosure are charged to the allowance for loan losses.

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OREO totaled $ 5.1 million and $ 9.4 million at December 31, 2020 and 2019, respectively.

OREO included foreclosed residential real estate properties totaling $ 2.1 million and $ 852 thousand at December 31, 2019 and 2018 , respectively.

OREO included foreclosed residential real estate properties totaling $ 1.0 million and $ 2.1 million at December 31, 2020 and 2019, respectively.

Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $ 1.9 million and $ 2.8 million at December 31, 2020 and 2019, respectively.

Intangible assets resulting from acquisitions under the acquisition method of accounting consist of goodwill and other intangible assets (see “Other Intangible Assets” below).

Goodwill is not amortized and is subject to an annual assessment for impairment.

Currently, the goodwill impairment analysis is generally a two-step test.

However, Valley may choose to perform an optional qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test for one or more units in future periods.

During 2019 and 2018 , Valley elected to perform step one of the two-step goodwill impairment test for all of its reporting units.

Goodwill is allocated to Valley’s reporting unit, which is a business segment or one level below, at the date goodwill is actually recorded.

If the carrying value of a reporting unit exceeds its estimated fair value, a second step in the analysis is performed to determine the amount of impairment, if any.

The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

If the carrying value of a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded equal to the excess amount in the current period earnings.

Valley reviews goodwill annually or more frequently if a triggering event indicates impairment may have occurred, to determine potential impairment by determining if the fair value of the reporting unit has fallen below the carrying value.

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired and is not amortized.

The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.

Goodwill is subject to annual tests for impairment or more often, if events or circumstances indicate it may be impaired.

Prior to January 1, 2020, goodwill impairment was determined using a two-step quantitative test.

On January 1, 2020, Valley adopted ASU No.

2017-04, which simplified the impairment test by eliminating the step two requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge.

Instead, an impairment loss is recognized if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the unit (formerly step one of the two-step test).

Goodwill is allocated to Valley's reporting unit, which is a business segment or one level below, at the date goodwill is recorded.

Under current accounting guidance, Valley may choose to perform an optional qualitative assessment to determine whether it is necessary to perform the single-step quantitative goodwill impairment test for one or more reporting units each annual period.

Valley reviews goodwill for impairment annually during the second quarter using a quantitative test, or more frequently if a triggering event indicates impairment may have occurred.

Our determination of whether or not goodwill is impaired requires us to make judgments, and use significant estimates and assumptions regarding estimated future cash flows.

If we change our strategy or if market conditions shift, our judgments may change, which may result in adjustments to the recorded goodwill balance.

Other Intangible Assets

Other intangible assets primarily consist of loan servicing rights (largely generated from loan servicing retained by the Bank on residential mortgage loan originations sold in the secondary market to government sponsored enterprises), core deposits (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) and customer lists obtained through acquisitions.

2020 Form 10-K

deposits (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) and, to a much lesser extent, customer lists obtained through acquisitions.

Other intangible assets are amortized using various methods over their estimated lives and are periodically evaluated for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows.

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See further details regarding loan servicing rights below.

2019 Form 10-K

Loan Servicing Rights

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Subsequently, the loan servicing rights are carried at the lower of unamortized cost or market (i.e., fair value).

The fair values of the loan servicing rights for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that various assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and inflation.

The fair values of the loan servicing rights for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third party vendor that uses various inputs and assumptions, including but not limited to, prepayment speeds, internal rate of return (“discount rate”), servicing cost, ancillary income, float rate, tax rate, and inflation.

The prepayment speed and the discount rate are considered two of the most significant inputs in the model.

The unamortized costs associated with acquiring loan servicing rights, net of any valuation allowances, are included in other intangible assets in the consolidated statements of financial condition and are accounted for using the amortization method.

Unamortized costs associated with acquiring loan servicing rights, net of any valuation allowances, are included in other intangible assets in the consolidated statements of financial condition and are accounted for using the amortization method.

Valley amortizes the loan servicing assets in proportion to and over the period of estimated net servicing revenues.

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Compensation expense for restricted stock units, restricted stock and stock option awards (i.e., non-vested stock awards) is based on the fair value of the award on the date of the grant and is recognized ratably over the service period of the award.

Beginning in 2019, Valley's long-term incentive compensation plan was amended for award grantees that are eligible for retirement to include a service period requirement, in which an award will vest at one-twelve per month after the grant date.

Beginning in 2019, Valley's long-term incentive compensation plan was amended to include a service period requirement for award grantees who are eligible for retirement pursuant to which an award will vest at one-twelfth per month after the grant date, which requires the grantees to continue service with Valley for one year in order for the award to fully vest.

Compensation expense for these awards is amortized monthly over a one year period after the grant date.

Prior to 2019, award grantees that were eligible for retirement did not have a service period requirement.

Prior to 2019, award grantees who were eligible for retirement did not have a service period requirement.

Compensation expense for these awards is recognized immediately in earnings.

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The fair value of each option granted is estimated using a binomial option pricing model.

The fair value of restricted stock awards is based upon the last sale price reported for Valley’s common stock on the date of grant or the last sale price reported preceding such date, except for performance-based stock awards with a market condition.

The fair value of restricted stock units and awards is based upon the last sale price reported for Valley’s common stock on the date of grant or the last sale price reported preceding such date, except for performance-based stock awards with a market condition.

The grant date fair value of a performance-based stock award that vests based on a market condition is determined by a third party specialist using a Monte Carlo valuation model.

Se e Note 13 for additional information.

See Note 12 for additional information.

Fair Value Measurements

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Revenue Recognition

On January 1, 2018, Valley adopted Accounting Standards Update No.

2014-09, “Revenue from Contracts with Customers (Topic 606)" and subsequent related updates that modify the guidance used to recognize revenue from contracts with customers for transfers of goods and services and transfers of non-financial assets, unless those contracts are within the scope of other guidance.

The adoption did not materially change Valley's recognition of revenues within the scope of Topic 606.

Valley's revenue contracts generally have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable, or distinct from other obligations within the contracts.

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(i) trust and investment services income from investment management, investment advisory, trust, custody and other products;

(ii) service charges on deposit accounts from checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities;

and (iii) other income from fee income related to derivative interest rate swaps executed with commercial loan customers, and fees from interchange, wire transfers, credit cards, safe deposit box, ACH, lockbox and various other products and services-related income.

(ii) service charges on deposit accounts from

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checking accounts, savings accounts, overdrafts, insufficient funds, ATM transactions and other activities;

Valley uses the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements.

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The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

See Note 14 for details regarding the impact of the Tax Act enacted by the U.S.

government on December 22, 2017.

Valley maintains a reserve related to certain tax positions that management believes contain an element of uncertainty.

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The following table shows the calculation of both basic and diluted earnings per common share for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

(in thousands, except for share data)

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Basic weighted-average number of common shares outstanding

403,754,356 337,792,270 331,258,964

Common stock equivalents 1,291,851 2,325,538 1,434,754

Diluted weighted-average number of common shares outstanding

405,046,207 340,117,808 332,693,718

Earnings per common share:

Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of performance-based restricted stock units, common stock options and warrants to purchase Valley’s common shares.

Common stock options with exercise prices that exceed the average market price of Valley’s common stock during the periods presented have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation.

Average outstanding anti-dilutive warrants and, to a lesser extent, common stock

Basic $ 0.94 $ 0.88 $ 0.75

Diluted 0.93 0.87 0.75

2020 Form 10-K

options equaled approximately 288 thousand , 2.1 million , and 3.1 million of common shares for the years ended December 31, 2019 , 2018 and 2017 , respectively.

All of the outstanding warrants expired unexercised in the fourth quarter 2018.

Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units and common stock options to purchase Valley’s common shares.

Common stock options with exercise prices that exceed the average market price of Valley’s common stock during the periods presented may have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation along with restricted stock units.

Potential anti-dilutive weighted common shares totaled approximately 1.7 million, 288 thousand, and 2.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Preferred and Common Stock Dividends

Valley issued 4.6 million shares and 4.0 million shares of non-cumulative perpetual preferred stock in June 2015 and August 2017, respectively, which were initially recorded at fair value.

Valley issued 4.6 million and 4.0 million shares of non-cumulative perpetual preferred stock in June 2015 and August 2017, respectively, which were initially recorded at fair value.

See Note 18 for additional details on the preferred stock issuances.

The preferred shares are senior to Valley common stock, whereas the current year dividends must be paid before Valley can pay dividends to its common stockholders.

Preferred dividends declared are deducted from net income for computing income available to common stockholders and earnings per common share computations.

Cash dividends to both preferred and common stockholders are payable and accrued when declared by Valley's Board of Directors.

The preferred shares are senior to Valley common stock, whereas the current year dividends must be paid before Valley can pay dividends to its common shareholders.

Preferred dividends declared are deducted from net income for computing income available to common shareholders and earnings per common share computations.

Cash dividends to both preferred and common shareholders are payable and accrued when declared by Valley's Board of Directors.

Treasury Stock

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Derivative Instruments and Hedging Activities

As part of its asset/liability management strategies and to accommodate commercial borrowers, Valley has used interest rate swaps and caps to hedge variability in cash flows or fair values caused by changes in interest rates.

As part of its asset/liability management strategies and to accommodate commercial borrowers, Valley has used interest rate swaps to hedge variability in cash flows or fair values caused by changes in interest rates.

Valley also uses derivatives not designated as hedges for non-speculative purposes to (1) manage its exposure to interest rate movements related to a service for commercial lending customers, (2) share the risk of default on the interest rate swaps related to certain purchased or sold loan participations through the use of risk participation agreements and (3) manage the interest rate risk of mortgage banking activities with customer interest rate lock commitments and forward contracts to sell residential mortgage loans.

Valley also has hybrid instruments, consisting of market linked certificates of deposit with an embedded swap contract.

Valley records all derivatives as assets or liabilities at fair value on the consolidated statements of financial condition.

Valley records all derivatives including embedded derivatives as assets or liabilities at fair value on the consolidated statements of financial condition.

Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

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Changes in fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

Valley calculates the credit valuation adjustments to the fair value of derivatives designated as fair value hedges on a net basis by counterparty portfolio, as an accounting policy election under the provisions of ASU No.

Valley calculates the credit valuation adjustments to the fair value of derivatives designated as fair value hedges on a net basis by counterparty portfolio, as an accounting policy election.

New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2020.

Accounting Standards Update (ASU) No.

2016-02, “Leases (Topic 842)” and subsequent related updates require lessees to recognize leases on balance sheet and disclose key information about leasing arrangements.

The new standard establishes a right-of-use model that requires lessees to recognize a ROU asset and related lease liability for all leases with a term longer than 12 months.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities.

Leases continue to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

Effective January 1, 2019, Valley adopted ASU No.

2016-02 (and subsequent related updates) and recorded ROU assets of approximately $ 216 million (net of the reversal of the deferred rent liability at such date) and lease obligations of approximately $ 241 million .

Valley elected the "package of practical expedients," as permitted under the transition guidance within Topic 842.

The practical expedients enable Valley to carry forward lease classifications under the prior accounting guidance (Topic 840).

Additionally, the expedients enable the use of hindsight, through which Valley reassessed the likelihood of extending leases under

2019 Form 10-K

extension clauses available to Valley.

This shortened the expected lives of certain leases.

As a result, Valley recorded a $ 4.4 million (net of tax) credit adjustment to the opening balance of retained earnings as of January 1, 2019.

Valley also made accounting policy elections to (i) separate non-lease components from its lease obligations with the non-lease components being charged to earnings when incurred and to (ii) exclude short-term leases of 12 months or less from the balance sheet.

The comparative periods prior to the adoption date of Topic 842 will continue to be presented in the financial statements in accordance with prior GAAP (Topic 840).

See Note 7 for the additional required disclosures.

2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities" shortens the amortization period for certain callable debt securities held at a premium.

2017-08 requires the premium to be amortized to the earliest call date.

The accounting for securities held at a discount does not change and the discount continues to be amortized as an adjustment to yield over the contractual life (to maturity) of the instrument.

2017-08 was effective for Valley on January 1, 2019 and was applied using the modified retrospective method, resulting in a cumulative-effect adjustment to the opening balance of retained earnings totaling $ 1.4 million (net of tax) as of January 1, 2019.

2017-08 did not have a significant impact on Valley's consolidated financial statements.

2019-01, "Leases (Topic 842):

Codification Improvements" reinstates the fair value exception in ASC 840, in which lessors will measure fair value, at lease commencement, as cost, reflecting any applicable volume or trade discounts.

2019-01 also requires lessors that are depository or lending institutions in the scope of Topic 842 to classify the principal portion of lease payments received under sales-type and direct financing leases as cash flows from investing activities.

The interest portion of those and all lease payments received under operating leases are classified as cash flows from operating activities.

Effective January 1, 2019, Valley early adopted ASU No.

2019-01 concurrent with its adoption of Topic 842.

The adoption of ASU No.

2019-01 did not have a material impact on Valley's consolidated financial statements.

New Accounting Guidance Adopted in the First Quarter 2020

2016-13, "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments.

The FASB issued an amendment to replace today's incurred loss impairment methodology with a new current credit loss (CECL) model.

Under the new guidance, Valley will be required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses.

The guidance also requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Valley anticipates utilizing 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.

The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and purchased financial assets with credit deterioration (PCD) assets.

It also applies to certain off-balance sheet credit exposures.

In November 2019, the FASB issued ASU No.

2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses", which clarifies that expected recoveries of amounts previously written off or expected to be written off should be included in the estimate of allowance for credit losses for purchased financial assets with credit deterioration, provides certain transition relief for TDR accounting when the discounted cash flow method is used to estimate credit losses, allows entities to elect to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements, and clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial assets when electing a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of the financial asset and the fair value of collateral securing the financial asset as of the reporting date.

Valley will adopt the new CECL accounting guidance effective January 1, 2020 using the modified retrospective approach for all financial assets measured at amortized cost (except for PCD loans) and off-balance sheet credit exposures.

Valley has established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used upon adoption.

At December 31, 2019, Valley’s loan portfolio totaled $ 29.7 billion with a corresponding allowance for loan losses ("ALL") of $ 161.8 million under current GAAP.

Based on Valley's current CECL model results that it has performed alongside the current ALL process, Valley estimates that the adoption of the new guidance will result in an increase to the allowance for credit losses, including the reserve for off-balance sheet credit exposures (included within other liabilities), of $ 30 million to $ 40 million , excluding PCD loans.

Valley elected the prospective transition approach for PCD loans that were previously classified as purchased-credit impaired (PCI) loans.

Under this guidance, Valley is not required to reassess whether PCI loans met the PCD loans criteria as of the date of the date of adoption.

For PCD loans, the allowance for credit losses recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding allowance for credit losses, and therefore results in no expected impact to the cumulative effect adjustment to retained earnings.

The anticipated increase to

2019 Form 10-K

the allowance for credit losses related to PCD loans is $ 60 million to $ 65 million .

The remaining non-credit discount will be accreted into interest income over the life of the loans at the effective interest rate effective January 1, 2020.

For other assets within the scope of the new CECL accounting guidance, such as debt securities held-to-maturity, trade and other receivables, management expects the impact from the adoption to be inconsequential.

Valley is reviewing the performance of its most recent model run, including certain qualitative adjustments and certain assumptions related to the reserve for off-balance sheet credit exposures .

As Valley finalizes the implementation of the new guidance in the first quarter of 2020, final decisions by management will result in the specific January 1, 2020 allowance for credit losses impact being established and the related impact to the financial statements and disclosures.

Valley does not expect the adoption of the new CECL accounting guidance to have a significant impact on Valley’s regulatory capital ratios.

2019-11, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses" amends or clarifies the guidance in ASC 326 on credit losses.

(i) permits entities to record a negative allowance when measuring the expected credit losses for a PCD financial asset, not to exceed the total amount of the amortized cost basis previously written off and expected to be written off, (ii) provides transition relief for troubled debt restructurings, (iii) provides disclosure relief for accrued interest receivable and (iv) offers a practical expedient for financial assets secured by collateral maintenance provisions (e.g., the borrower is contractually required to adjust the amount of the collateral securing the financial asset).

Valley adopted ASU No.

2019-11 on January 1, 2020.

The adoption of this ASU is not expected to have a significant impact on the presentation of Valley's consolidated financial statements.

2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.

The most significant provisions of the ASU relate to how companies will estimate expected credit losses under Topic 326 by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured.

The FASB issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new CECL model.

Valley adopted ASU No.

2019-04 on January 1, 2020.

See more details regarding our adoption of Topic 326 and ASU No.

2016-13 above.

2016-13 on January 1, 2020 using the modified retrospective approach for all financial assets measured at amortized cost (except for PCD loans) and off-balance sheet credit exposures.

At adoption, Valley recorded a $ 100.4 million increase to its allowance for credit losses, including reserves of $ 92.5 million, $ 7.1 million and $ 793 thousand

2020 Form 10-K 88

related to loans, unfunded credit commitments and held to maturity debt securities, respectively.

Of the $ 92.5 million in loan reserves, $ 61.6 million represents PCD loan related reserves which were recognized through a gross-up that increased the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore resulted in no impact to shareholders' equity.

The remaining non-credit discount of $ 97.7 million related to PCD loans is accreted into interest income over the life of the loans at the effective interest rate effective January 1, 2020.

Valley elected the prospective transition approach for PCD loans that were previously classified as purchased-credit impaired (PCI) loans.

Under this guidance, Valley was not required to reassess whether PCI loans met the PCD loans criteria as of the date of the date of adoption.

The non-PCD loan related increase to the allowance for credit losses of $ 38.8 million, including the reserves for unfunded loan commitments and held to maturity debt securities, was offset in shareholders' equity and deferred tax assets.

See Notes 4 and 5 for allowance for credit losses required disclosures.

Reporting periods prior to the adoption date are presented in accordance with previously applicable GAAP.

2017-04, "Intangibles - Goodwill and Other (Topic 350):

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An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

2017-04 is effective for Valley for its annual and interim, if applicable, goodwill impairment tests in fiscal years beginning January 1, 2020.

2017-04 was effective for Valley on January 1, 2020 and Valley applied this new guidance in its annual goodwill impairment test performed during the second quarter 2020.

New Accounting Guidance Issued in 2020.

2020-04, "Reference Rate Reform (Topic 848)" provides optional expedients and exceptions for applying U.S.

GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria.

Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met.

In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met.

A one-time election to sell and/or transfer held to maturity debt securities that reference a rate affected by reference rate reform is also allowed.

2020-04 became effective for all entities as of March 12, 2020 and can apply to all LIBOR reference rate modifications any time through December 31, 2022.

Management is currently evaluating the impact of the ASU on Valley’s consolidated financial statements.

Valley has established a working group to identify and prepare fall back language and replacement provisions.

In addition, the working group is evaluating substitute indices for LIBOR and testing Valley's models and systems that currently use LIBOR to ensure reference rates change readiness.

New Accounting Guidance Adopted in the First Quarter 2021.

2020-08, "Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs" provides clarification and affects the guidance previously issued by ASU No.

2017-08 “Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities.” ASU No.

2020-08 clarifies that an entity should reevaluate whether a debt security with multiple call dates is within the scope of paragraph 310-20-35-33.

For each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the premium should be amortized to the next call date, unless the guidance to consider estimated prepayments is applied.

Valley adopted ASU No.

2020-08 on January 1, 2021.

This new guidance is not expected to have a significant impact on Valley’s consolidated financial statements.

2021-01 "Reference Rate Reform (Topic 848)" extends some of Topic 848’s optional expedients to derivative contracts impacted by the discounting transition, including for derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued.

2021-01 is effective for all entities immediately upon issuance and may be elected retrospectively to eligible modifications as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date within the interim period including January 7, 2021.

2021-01 is not expected to have a significant impact on Valley’s consolidated financial statements.

2020 Form 10-K

BUSINESS COMBINATIONS (Note 2)

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Oritani had approximately $ 4.3 billion in assets, $ 3.4 billion in net loans and $ 2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations.

The acquisition represents a significant addition to Valley's New Jersey franchise, and meaningfully enhanced its presence in the Bergen County market.

The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to merger.

The acquisition represented a significant addition to Valley's New Jersey franchise, and meaningfully enhanced its presence in the Bergen County market.

The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to the merger.

The total consideration for the acquisition was approximately $ 835.3 million, consisting of 71.1 million shares of Valley common stock and the outstanding Oritani stock-based awards.

Merger expenses totaled $ 16.6 million for the year ended December 31, 2019 , which primarily related to salary and employee benefits and other expenses are included in non-interest expense on the consolidated statements of income.

2019 Form 10-K

The following table sets forth assets acquired, and liabilities assumed in the Oritani acquisition, at their estimated fair values as of the closing date of the transaction:

December 1, 2019

(in thousands)

Assets acquired:

Cash and cash equivalents

Equity securities

Investment securities available for sale

Investment securities held to maturity

Premises and equipment

Bank owned life insurance

Accrued interest receivable

Other intangible assets

Other assets:

Deferred tax assets

FHLB and FRB stock

Total other assets

Total assets acquired

Liabilities assumed:

Non-interest bearing

Savings, NOW and money market

Total deposits

Short-term borrowings

Long-term borrowings

Accrued expense and other liabilities

Total liabilities assumed

Common stock issued in acquisition

The determination of the fair value of the assets acquired and liabilities assumed required management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and subject to change.

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information (existing at the date of closing) relative to closing date fair values becomes available.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the Oritani acquisition.

Cash and cash equivalents.

The estimated fair values of cash and cash equivalents approximate their stated face amounts, as these financial instruments are either due on demand or have short-term maturities.

Investment securities.

The estimated fair values of the investment securities were calculated utilizing Level 2 inputs.

The prices for these instruments are obtained through an independent pricing service when available, or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities.

The prices are derived from market quotations and matrix pricing.

The fair value measurements consider observable data that may include dealer quotes, market

2019 Form 10-K

spreads, cash flows, the U.S.

Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

The acquired loan portfolio was segregated into categories for valuation purposes primarily based on loan type (commercial, commercial real estate, multifamily, residential, and consumer) and credit risk rating.

The estimated fair values were computed by discounting the expected cash flows from the respective portfolios to present value based on estimated market rates.

Management estimated the cash flows expected to be collected at the acquisition date by using valuation models that incorporated loan contractual characteristics (such as payment type, amortization type, and term to maturity) as well as estimates of key valuation assumptions (such as prepayment speeds, default rates, and loss severity rates).

Prepayment assumptions were developed by reference to recent or historical prepayment speeds observed for loans with similar underlying characteristics.

Prepayment assumptions were influenced by many factors, including, but not limited to, forward interest rates, loan and collateral types, vintage, coupon band, and payment status.

Default and loss severity rates were developed by reference to recent or historical default and loss rates observed for loans with similar underlying characteristics.

Default and loss severity assumptions were influenced by many factors, including, but not limited to, underwriting processes and documentation, vintages, collateral types, collateral locations, estimated collateral values, loan-to-value ratios, and debt-to-income ratios.

The expected cash flows from the acquired loan portfolios were discounted to present value based on estimated market rates.

The market rates were estimated using a buildup approach based on the following components:

funding cost, servicing cost, and consideration of liquidity premium.

In addition, coupon rates for recently originated loans and available market data regarding origination rates were also considered in the analysis.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used.

While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from the acquired loans will be accreted to interest income over the remaining term of the loans in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 5 for further details.

Other intangible assets.

Other intangible assets mostly consisting of core deposit intangibles (CDI) are measures of the value of non-maturity checking, savings, NOW and money market deposits that are acquired in a business combination.

The fair value of the CDI is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding.

The CDI is amortized over an estimated useful life of 10 years to approximate the existing deposit relationships acquired.

The fair values of deposit liabilities with no stated maturity (i.e., non-interest bearing accounts and savings, NOW and money market accounts) are equal to the carrying amounts payable on demand.

The fair values of certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered on deposits with similar characteristics and remaining maturities.

Short-term borrowings.

The short-term borrowings consist of FHLB advances.

The carrying amounts approximate their fair values because they frequently re-price to a market rate.

Long-term borrowings.

The fair values of long-term borrowings consisting of FHLB advances were estimated by discounting the estimated future cash flows using market discount rates for borrowings with similar characteristics, terms and remaining maturities.

See Note 11 for further details.

2019 Form 10-K

Had the acquisition of Oritani taken place on the beginning of the annual periods presented, Valley’s revenues (defined as the sum of net interest income and non-interest income), net income, basic earnings per share, and diluted earnings per share would have equaled the amounts indicated in the following table for the years ended December 31, 2019 and 2018 :

(in thousands, except per share data)

Merger expenses totaled $ 1.9 million and $ 16.6 million for the years ended December 31, 2020 and 2019, respectively, which primarily related to salary and employee benefits, as well as professional and legal, net occupancy and equipment, and other expenses.

These expenses are included in non-interest expense on the consolidated statements of income.

During 2020, Valley revised the estimated fair values of the acquired assets as of the Oritani acquisition date due to additional information obtained that existed as of December 1, 2019.

The adjustments mostly related to the fair value of certain loans, current taxes payable and the valuation of deferred tax assets as of the acquisition date.

These adjustments resulted in an $ 8.8 million increase in goodwill (see Note 8 for amount of goodwill as allocated to Valley's business segments).

Had the acquisition of Oritani taken place on the beginning of the following annual periods presented, Valley’s revenues (defined as the sum of net interest income and non-interest income), net income, basic earnings per share, and diluted earnings per share would have equaled the amounts indicated in the following table for the years ended December 31, 2019 and 2018:

(in thousands, except per share data) Unaudited

Revenues $ 1,219,887 $ 1,106,012

Net income 361,079 313,977

Basic earnings per share 0.86 0.75

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(USAB) headquartered in Clearwater, Florida.

USAB, largely through its wholly-owned subsidiary, USAmeriBank, had approximately $ 5.1 billion in assets, $ 3.7 billion in net loans and $ 3.6 billion in deposits, after purchase accounting adjustments, and maintained a branch network of 29 offices at December 31, 2018 .

The acquisition represented a significant addition to Valley’s Florida presence, primarily in the Tampa Bay market.

The acquisition also brought Valley to the Birmingham, Montgomery, and Tallapoosa areas in Alabama, where USAB maintained 15 of its branches.

The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned prior to merger.

The common shareholders of USAB received 6.1 shares of Valley common stock for each USAB share they owned prior to the merger.

The total consideration for the acquisition was approximately $ 737 million, consisting of 64.9 million shares of Valley common stock and the outstanding USAB stock-based awards.

Merger expenses totaled $ 17.4 million for the year ended December 31, 2018, which primarily related to salary and employee benefits and other expenses are included in non-interest expense on the consolidated statements of income.

Had the acquisition of USAB taken place on January 1, 2017 Valley’s revenues (defined as the sum of net interest income and non-interest income), net income, basic earnings per share, and diluted earnings per share would have equaled the amounts indicated in the following table for the year ended December 31, 2017 :

(in thousands, except per share data)

Basic earnings per share

Diluted earnings per share

FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES (Note 3)

Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

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in Active Markets

for Identical Assets (Level 1)

Significant Other

for Identical Assets (Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(in thousands)

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Equity securities (1)

$ 26,379 $ 18,600 $ — $ —

Available for sale debt securities:

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Obligations of states and political subdivisions

79,950 — 79,135 815

Residential mortgage-backed securities 1,090,022 — 1,090,022 —

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Loans held for sale (2)

301,427 — 301,427 —

Other assets (3)

387,452 — 387,452 —

Total assets $ 2,054,731 $ 69,993 $ 1,976,144 $ 815

Other liabilities (3)

$ 156,281 $ — $ 156,281 $ —

Total liabilities $ 156,281 $ — $ 156,281 $ —

Non-recurring fair value measurements:

Collateral dependent impaired loans (3)

Collateral dependent loans $ 35,228 $ — $ — $ 35,228

Loan servicing rights 15,603 — — 15,603

Foreclosed assets 7,387 — — 7,387

Total $ 58,218 $ — $ — $ 58,218

2020 Form 10-K

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in Active Markets

for Identical Assets (Level 1)

Significant Other

for Identical Assets (Level 1) Significant Other

Observable Inputs

(Level 2) Significant

(in thousands)

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Investment securities:

Available for sale:

Equity securities at fair value $ 41,410 $ 41,410 $ — $ —

Available for sale debt securities:

Treasury securities 50,943 50,943 — —

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Obligations of states and political subdivisions

170,051 — 169,371 680

Residential mortgage-backed securities 1,254,786 — 1,254,786 —

Corporate and other debt securities 61,778 — 61,778 —

Total available for sale

Total available for sale debt securities 1,566,801 50,943 1,515,178 680

Loans held for sale (2)

76,113 — 76,113 —

Other assets (3)

158,532 — 158,532 —

Total assets $ 1,842,856 $ 92,353 $ 1,749,823 $ 680

Other liabilities (3)

$ 43,926 $ — $ 43,926 $ —

Total liabilities $ 43,926 $ — $ 43,926 $ —

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Foreclosed assets 10,807 — — 10,807

Total $ 51,473 $ — $ — $ 51,473

(1) Includes equity securities measured as net asset value (NAV) per share (or its equivalent) as a practical expedient totaling $ 7.8 million at December 31, 2020.

These securities have not been classified in the fair value hierarchy.

(2) Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $ 286.4 million and $ 74.5 million at December 31, 2020 and 2019, respectively.

(3) Derivative financial instruments are included in this category.

Excludes PCI loans.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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Equity Securities.

Fair values of equity securities, consisting of one publicly traded mutual fund, are derived from quoted market prices in active markets.

Available for sale securities.

Treasury securities, certain corporate and other debt securities, and certain preferred equity securities are reported at fair value utilizing Level 1 inputs.

The fair value of equity securities largely consists of a publicly traded mutual fund, a Community Reinvestment Act (CRA) investment fund that is carried at quoted prices in active markets and privately held CRA funds measured at NAV.

Available for sale debt securities.

Treasury securities are reported at fair value utilizing Level 1 inputs.

The majority of other investment securities are reported at fair value utilizing Level 2 inputs.

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Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

In addition, Valley reviews the volume and level of activity for all available for sale securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.

Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived

2020 Form 10-K 92

from market observable data.

In calculating the fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, Valley prepared its best estimate of the present value of the cash flows to determine an internal price estimate.

In determining the internal price, Valley utilized recent financial information and developments provided by the issuer, as well as other unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing of the defaulted security.

A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at December 31, 2019 .

A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at December 31, 2020 and 2019.

See Note 4 for additional information regarding this impaired security.

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Derivatives are reported at fair value utilizing Level 2 inputs.

The fair value of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analyses using observed market inputs, such as the LIBOR and Overnight Index Swap rate curves.

The fair values of Valley’s derivatives are determined using third party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR, Overnight Index Swap and Secured Overnight Financing Rate (SOFR) curves f or all cleared derivatives.

The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at December 31, 2020 and 2019), is determined based on the current market prices for similar instruments.

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Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The following valuation techniques were used for certain non-financial assets measured at fair value on a non-recurring basis, including impaired loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Impaired loans.

Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and are commonly referred to as “collateral dependent impaired loans.” Collateral values are estimated using Level 3 inputs, consisting of individual appraisals that are significantly adjusted based on customized discounting criteria.

At December 31, 2019 , certain appraisals may be discounted based on specific market data by location and property type.

During 2019 and 2018 , collateral dependent impaired loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses and/or a specific valuation allowance allocation based on the fair value of the underlying collateral.

The collateral dependent loan charge-offs to the allowance for loan losses totaled $ 2.1 million and $ 638 thousand for the years ended December 31, 2019 and 2018 , respectively.

These collateral dependent impaired loans with a total recorded investment of $ 74.6 million and $ 73.7 million at December 31, 2019 and 2018 , respectively, were reduced by specific valuation allowance allocations totaling $ 35.5 million and $ 28.5 million to a reported total net carrying amount of $ 39.1 million and $ 45.2 million at December 31, 2019 and 2018 , respectively.

The following valuation techniques were used for certain non-financial assets measured at fair value on a non-recurring basis, including collateral dependent loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Collateral dependent loans.

Collateral dependent loans are loans where foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and substantially all of the repayment is expected from the collateral.

Collateral values are estimated using Level 3 inputs, consisting of individual third-party appraisals that may be adjusted based on certain discounting criteria.

Certain real estate appraisals may be discounted based on specific market data by location and property type.

At December 31, 2020, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses based on the fair value of the underlying collateral.

The collateral dependent loan direct charge-offs to the allowance for loan losses totaled $ 4.5 million and $ 2.1 million for the years ended December 31, 2020 and 2019, respectively.

At December 31, 2020, collateral dependent loans, primarily consisting of taxi medallion loans, with a total amortized cost of $ 104.4 million and $ 74.6 million at December 31, 2020 and 2019, respectively, were reduced by specific allowance for loan losses allocations totaling $ 69.1 million and $ 35.5 million to a reported total net carrying amount of $ 35.2 million and $ 39.1 million at December 31, 2020 and 2019, respectively.

Loan servicing rights.

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Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value.

At December 31, 2019 , certain loan servicing rights were re-measured at fair value totaling $ 1.6 million .

Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $ 36 thousand , $ 388 thousand and $ 429 thousand for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Certain loan servicing rights were re-measured at fair value totaling $ 15.6 million and $ 1.6 million at December 31, 2020 and 2019, respectively.

See Note 8 for additional information.

Foreclosed assets.

Certain foreclosed assets (consisting of other real estate owned and other repossessed assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed assets.

The fair value of a foreclosed asset, upon initial recognition, is typically estimated using Level 3 inputs, consisting of an appraisal that is adjusted based on customized discounting criteria, similar to the criteria used for impaired loans described above.

There were no adjustments to the appraisals of foreclosed assets at December 31, 2019 .

During the years ended December 31, 2019 and 2018 , foreclosed assets measured at fair value upon initial

Certain foreclosed assets (consisting of other real estate owned and other repossessed assets included in other assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value using Level 3 inputs, consisting of a third-party appraisal less estimated cost to sell.

When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses.

If further declines in the estimated fair value

2020 Form 10-K

recognition or subsequent re-measurement totaled $ 10.8 million and $ 5.7 million , respectively.

The charge-offs of foreclosed assets to the allowance for loan losses totaled $ 3.0 million and $ 2.0 million for the years ended December 31, 2019 and 2018 , respectively.

The re-measurement of foreclosed assets at fair value subsequent to their initial recognition resulted in losses of $ 896 thousand , $ 390 thousand and $ 361 thousand included in non-interest expense for the years ended December 31, 2019 , 2018 and 2017 , respectively.

of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense.

The adjustments to the appraisals of foreclosed assets ranged from 1.5 percent to 22 percent at December 31, 2020 and were no t material at December 31, 2019.

Other Fair Value Disclosures

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The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at December 31, 2020 and 2019 were as follows:

Hierarchy Carrying

Amount Fair Value Carrying

Amount Fair Value

(in thousands)

Financial assets

Cash and due from banks

Interest bearing deposits with banks

Cash and due from banks Level 1 $ 257,845 $ 257,845 $ 256,264 $ 256,264

Interest bearing deposits with banks Level 1 1,071,360 1,071,360 178,423 178,423

Equity securities (1)

Level 3 2,999 2,999 — —

Held to maturity debt securities:

Treasury securities

government agency securities

Obligations of states and political subdivisions

Residential mortgage-backed securities

Trust preferred securities

Corporate and other debt securities

Total investment securities held to maturity

Accrued interest receivable

Treasury securities Level 1 68,126 75,484 138,352 144,113

government agency securities Level 2 6,222 6,513 7,345 7,362

Obligations of states and political subdivisions Level 2 470,259 484,506 500,705 513,607

Residential mortgage-backed securities Level 2 1,550,306 1,589,655 1,620,119 1,629,572

Trust preferred securities Level 2 37,348 30,033 37,324 31,382

Corporate and other debt securities Level 2 40,750 41,421 32,250 32,684

Total held to maturity debt securities (2)

2,173,011 2,227,612 2,336,095 2,358,720

Net loans Level 3 31,876,869 31,635,060 29,537,449 28,964,396

Accrued interest receivable Level 1 106,230 106,230 105,637 105,637

Federal Reserve Bank and Federal Home Loan Bank stock (3)

Level 2 250,116 250,116 214,421 214,421

Financial liabilities

Deposits without stated maturities

Deposits with stated maturities

Short-term borrowings

Long-term borrowings

Junior subordinated debentures issued to capital trusts

Deposits without stated maturities Level 1 25,220,924 25,220,924 19,467,892 19,467,892

Deposits with stated maturities Level 2 6,714,678 6,639,022 9,717,945 9,747,867

Short-term borrowings Level 1 1,147,958 1,151,478 1,093,280 1,081,879

Long-term borrowings Level 2 2,295,665 2,405,345 2,122,426 2,181,401

Junior subordinated debentures issued to capital trusts Level 2 56,065 57,779 55,718 53,889

Accrued interest payable (4)

Level 1 18,839 18,839 33,066 33,066

(1) Represents equity securities without a readily determinable fair value measured at costs less impairment, if any.

(2) The carrying amount is presented gross without the allowance for credit losses.

(3) Included in other assets.

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Equity Securities

Equity securities carried at fair value totaled $ 41.4 million at December 31, 2019 .

Valley's equity securities consist of one publicly traded money market mutual fund held in trust to secure Valley's assumed obligations under certain former Oritani non-qualified director and employee benefit plans.

See Note 13 for further details.

Equity securities carried at fair value totaled $ 29.4 million and $ 41.4 million at December 31, 2020 and 2019, respectively.

At December 31, 2020, Valley's equity securities consisted of one publicly traded money market mutual fund, CRA investments both public traded and privately held and, to a lesser extent, equity securities without readily determinable fair values.

Available for Sale Debt Securities

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The age of unrealized losses and fair value of related securities available for sale at December 31, 2020 and 2019 were as follows:

Twelve Months

Twelve Months More than

Twelve Months Total

Fair Value Unrealized

Losses Fair Value Unrealized

(in thousands)

December 31, 2020

Treasury securities

government agency securities

$ — $ — $ 1,479 $ ( 13 ) $ 1,479 $ ( 13 )

Obligations of states and political subdivisions:

Obligations of states and state agencies

— — 1,010 ( 32 ) 1,010 ( 32 )

Municipal bonds 6,777 ( 69 ) — — 6,777 ( 69 )

Total obligations of states and political subdivisions

6,777 ( 69 ) 1,010 ( 32 ) 7,787 ( 101 )

Residential mortgage-backed securities

41,418 ( 500 ) 27,911 ( 273 ) 69,329 ( 773 )

Corporate and other debt securities

12,517 ( 32 ) — — 12,517 ( 32 )

Total $ 60,712 $ ( 601 ) $ 30,400 $ ( 318 ) $ 91,112 $ ( 919 )

December 31, 2019

1 unchanged sentence

government agency securities

— — 1,783 ( 19 ) 1,783 ( 19 )

Obligations of states and political subdivisions:

Obligations of states and state agencies

18,540 ( 21 ) 8,755 ( 62 ) 27,295 ( 83 )

Municipal bonds — — 13,177 ( 86 ) 13,177 ( 86 )

Total obligations of states and political subdivisions

18,540 ( 21 ) 21,932 ( 148 ) 40,472 ( 169 )

Residential mortgage-backed securities

240,412 ( 1,194 ) 282,798 ( 4,068 ) 523,210 ( 5,262 )

Corporate and other debt securities

The unrealized losses on investment debt securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads) and, in some cases, lack of liquidity in the marketplace.

The total number of security positions in the securities available for sale portfolio in an unrealized loss position at December 31, 2019 was 182 as compared to 545 at December 31, 2018 .

The unrealized losses existing for more than twelve months for the residential mortgage-backed securities category of the available for sale portfolio at December 31, 2019 were largely related to several investment grade securities mainly issued by Ginnie Mae, Fannie Mae, and Freddie Mac.

As of December 31, 2019 , the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $ 1.0 billion .

5,139 ( 111 ) — — 5,139 ( 111 )

Total $ 289,110 $ ( 1,347 ) $ 306,513 $ ( 4,235 ) $ 595,623 $ ( 5,582 )

Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position at December 31, 2020 was 58 as compared to 182 at December 31, 2019.

As of December 31, 2020, the fair value of securities available for sale that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $ 789.0 million.

2020 Form 10-K

The contractual maturities of investment debt securities available for sale at December 31, 2019 are set forth in the following table.

The contractual maturities of available for sale debt securities at December 31, 2020 are set forth in the following table.

Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties.

1 unchanged sentence

December 31, 2020

Amortized Cost

Amortized Cost Fair Value

(in thousands)

5 unchanged sentences

Total investment securities available for sale $ 1,293,506 $ 1,339,473

Actual maturities of debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

Actual maturities of available for sale debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

The weighted-average remaining expected life for residential mortgage-backed securities available for sale was 3.4 years at December 31, 2020.

Impairment Analysis of Available for Sale Debt Securities

Valley's available for sale debt securities portfolio includes corporate bonds and revenue bonds, among other securities.

These types of securities may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S.

economy and its potential negative effect on the future performance of the security issuers, including due to the economic effects of COVID-19 pandemic.

Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis.

See Note 1 for further information regarding Valley's accounting policy.

Valley has evaluated available for sale debt securities that are in an unrealized loss position as of December 31, 2020 included in the table above and has determined that the declines in fair value are mainly attributable to market volatility, not 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 year ended December 31, 2020 and, as a result, there was no allowance for credit losses for available for sale debt securities at December 31, 2020.

During 2019, Valley recognized a $ 2.9 million impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above).

The impairment was due to severe credit deterioration disclosed by the issuer in the second quarter 2019, as well as the issuer's default on its contractual payment.

At December 31, 2020, the non-accruing impaired security had an adjusted amortized cost and fair value of $ 680 thousand and $ 815 thousand, respectively.

At December 31, 2020, the revenue bonds, included in the obligations of states and political subdivisions, are a mix of municipal bonds with investment grade ratings or non-rated revenue bonds mostly secured by Ginnie Mae securities that are commonly referred to as Tax Exempt Mortgage Securities (TEMS) and paying in accordance with their contractual terms.

2020 Form 10-K 98

1 unchanged sentence

The amortized cost, gross unrealized gains and losses and fair value of investment debt securities held to maturity at December 31, 2020 and 2019 were as follows:

Losses Fair Value

(in thousands)

6 unchanged sentences

Total obligations of states and political subdivisions

470,259 14,352 ( 105 ) 484,506

Residential mortgage-backed securities 1,550,306 39,603 ( 254 ) 1,589,655

9 unchanged sentences

Total obligations of states and political subdivisions

500,705 13,441 ( 539 ) 513,607

Residential mortgage-backed securities 1,620,119 14,803 ( 5,350 ) 1,629,572

4 unchanged sentences

The age of unrealized losses and fair value of related securities held to maturity at December 31, 2020 and 2019 were as follows:

Twelve Months

Twelve Months More than

Twelve Months Total

Fair Value Unrealized

Losses Fair Value Unrealized

(in thousands)

December 31, 2020

government agency securities

Obligations of states and political subdivisions $ 5,546 $ ( 105 ) $ — $ — $ 5,546 $ ( 105 )

Obligations of states and state agencies

Municipal bonds

Total obligations of states and political subdivisions

Residential mortgage-backed securities

21,599 ( 245 ) 2,470 ( 9 ) 24,069 ( 254 )

Trust preferred securities — — 28,630 ( 7,365 ) 28,630 ( 7,365 )

Corporate and other debt securities 10,749 ( 1 ) — — 10,749 ( 1 )

Total $ 37,894 $ ( 351 ) $ 31,100 $ ( 7,374 ) $ 68,994 $ ( 7,725 )

December 31, 2019

2 unchanged sentences

Obligations of states and state agencies

11,178 ( 55 ) 32,397 ( 474 ) 43,575 ( 529 )

Municipal bonds — — 798 ( 10 ) 798 ( 10 )

Total obligations of states and political subdivisions

11,178 ( 55 ) 33,195 ( 484 ) 44,373 ( 539 )

Residential mortgage-backed securities

307,885 ( 1,387 ) 254,915 ( 3,963 ) 562,800 ( 5,350 )

Trust preferred securities — — 29,990 ( 5,981 ) 29,990 ( 5,981 )

Corporate and other debt securities — — 4,980 ( 20 ) 4,980 ( 20 )

The unrealized losses on investment debt securities available for sale are primarily due to changes in interest rates (including, in certain cases, changes in credit spreads), and in some cases, lack of liquidity in the marketplace.

The total number of security positions in the securities held to maturity portfolio in an unrealized loss position at December 31, 2019 was 82 as compared to 378 at December 31, 2018 .

The unrealized losses existing for more than twelve months within the residential mortgage-backed securities category of the held to maturity portfolio at December 31, 2019 were largely related to investment grade securities issued by Ginnie Mae and Fannie Mae.

The unrealized losses existing for more than twelve months for trust preferred securities at December 31, 2019 primarily related to four non-rated single-issuer securities, issued by bank holding companies.

All single-issuer trust preferred securities classified as held to maturity are paying in accordance with their terms, have no deferrals of interest or defaults and, if applicable, the issuers meet the regulatory capital requirements to be considered “well-capitalized institutions” at December 31, 2019 .

Total $ 324,246 $ ( 1,483 ) $ 323,080 $ ( 10,448 ) $ 647,326 $ ( 11,931 )

Within the securities held to maturity portfolio, the total number of security positions in an unrealized loss position at December 31, 2020 was 13 as compared to 82 at December 31, 2019.

As of December 31, 2020, the fair value of debt securities held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law was $ 1.4 billion.

The contractual maturities of investments in debt securities held to maturity at December 31, 2020 are set forth in the table below.

Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages

2019 Form 10-K

underlying the securities may be prepaid without any penalties.

Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties.

Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.

December 31, 2020

Amortized Cost

Amortized Cost Fair Value

(in thousands)

5 unchanged sentences

Total investment securities held to maturity $ 2,173,011 $ 2,227,612

Actual maturities of held to maturity debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.

The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 4.2 years at December 31, 2020.

Other-Than-Temporary Impairment Analysis

Valley records impairment charges on its investment debt securities when the decline in fair value is considered other-than-temporary.

Numerous factors, including lack of liquidity for re-sales of certain investment securities;

decline in the creditworthiness of the issuer;

absence of reliable pricing information for investment securities;

adverse changes in business climate;

adverse actions by regulators;

or unanticipated changes in the competitive environment could have a negative effect on Valley’s investment portfolio and may result in other-than-temporary impairment on certain investment securities in future periods.

Among other securities, Valley's investments in trust preferred securities, bank issued corporate bonds and special revenue bonds may pose a higher risk of future impairment charges to Valley as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.

For the single-issuer trust preferred, corporate, and other debt securities, Valley reviews each portfolio to determine if all the securities are paying in accordance with their terms and have no deferrals of interest or defaults.

A deferral event by a bank holding company for which Valley holds trust preferred securities may require the recognition of an other-than-temporary impairment charge if Valley determines that it is more likely than not that all contractual interest and principal cash flows may not be collected.

Among other factors, the probability of the collection of all interest and principal determined by Valley in its impairment analysis declines if there is an increase in the estimated deferral period of the issuer.

Additionally, a FDIC receivership for any single-issuer would result in an impairment and significant loss.

Including the other factors outlined above, Valley analyzes the performance of the issuers on a quarterly basis, including a review of performance data from the issuers’ most recent bank regulatory report, if applicable, to assess their credit risk and the probability of impairment of the contractual cash flows of the applicable security.

All of the issuers had capital ratios at December 31, 2019 that were at or above the minimum amounts to be considered a “well-capitalized” financial institution, if applicable, and/or have maintained performance levels adequate to support the contractual cash flows of the trust preferred securities.

During 2019, Valley recognized a $ 2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above).

The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter 2019, as well as the issuer's default on its contractual payment.

At December 31, 2019 , the impaired security had an adjusted amortized cost and fair value of $ 680 thousand .

Comparatively, there were no other-than-temporary impairment losses on securities recognized in earnings for the years ended December 31, 2018 and 2017 .

The impaired special revenue bond was not accruing interest as of December 31, 2019 .

At December 31, 2019 , approximately 41.5 percent of the $ 670.8 million carrying value of obligations of states and political subdivisions were issued by the states of (or municipalities within) New Jersey, Utah, Texas, and Idaho.

The obligations of states and political subdivisions mainly consist of general obligation bonds and, to lesser extent, special revenue bonds with amortized cost and fair value totaling $ 294.9 million and $ 299.0 million , respectively, at December 31, 2019 .

Special revenue bonds were largely issued by the Utah, Idaho, Florida and other state housing authorities, as well Port Authority of New York and New Jersey.

As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, Valley's Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information.

Exclusive of the impaired security, these investments are a mix of bonds with investment grade ratings or not rated paying in accordance with their

2020 Form 10-K 100

contractual terms.

The vast majority of the bonds not rated by the rating agencies are state housing finance agency revenue bonds secured by Ginnie Mae securities that are commonly referred to as Tax Exempt Mortgage Securities (TEMS).

Valley will continue to closely monitor the special revenue bond portfolio as part of its quarterly impairment analysis.

Management does not believe that any individual unrealized loss as of December 31, 2019 included in the investment portfolio tables above represents other-than-temporary impairment as management mainly attributes the declines in fair value to changes in interest rates and market volatility, not credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management believes there are no credit losses on these securities, except for the impaired special revenue bond discussed above.

Credit Quality Indicators

Valley monitors the credit quality of the held to maturity debt securities utilizing the most current credit ratings from external rating agencies.

The following table summarizes the amortized cost of held to maturity debt securities by external credit rating at December 31, 2020 and 2019.

AAA/AA/A Rated BBB rated Non-investment grade rated Non-rated Total

(in thousands)

December 31, 2020

Treasury securities $ 68,126 $ — $ — $ — $ 68,126

government agency securities 6,222 — — — 6,222

Obligations of states and political subdivisions:

Obligations of states and state agencies 228,286 — 5,650 28,826 262,762

Municipal bonds 166,408 — — 41,089 207,497

Total obligations of states and political subdivisions

394,694 — 5,650 69,915 470,259

Residential mortgage-backed securities 1,550,306 — — — 1,550,306

Trust preferred securities — — — 37,348 37,348

Corporate and other debt securities — 5,000 — 35,750 40,750

Total investment securities held to maturity $ 2,019,348 $ 5,000 $ 5,650 $ 143,013 $ 2,173,011

December 31, 2019

Treasury securities $ 138,352 $ — $ — $ — $ 138,352

government agency securities 7,345 — — — 7,345

Obligations of states and political subdivisions:

Obligations of states and state agencies 248,533 5,722 — 43,199 297,454

Municipal bonds 202,642 — — 609 203,251

Total obligations of states and political subdivisions

451,175 5,722 — 43,808 500,705

Residential mortgage-backed securities 1,620,119 — — — 1,620,119

Trust preferred securities — — — 37,324 37,324

Corporate and other debt securities — 5,000 — 27,250 32,250

Total investment securities held to maturity $ 2,216,991 $ 10,722 $ — $ 108,382 $ 2,336,095

Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations.

At December 31, 2020, most of the obligations of states and political subdivisions were rated investment grade and a large portion of the "non-rated" category included TEMS securities secured by Ginnie Mae securities.

Trust preferred securities consist of non-rated single-issuer securities, issued by bank holding companies.

Corporate bonds consist of debt primarily issued by banks.

Allowance for Credit Losses for Held to Maturity Debt Securities

Valley has a zero loss expectation for certain securities within the held to maturity portfolio, and therefore it is not required to estimate an allowance for credit losses related to these securities under the CECL standard.

After an evaluation of qualitative factors, Valley identified the following securities types which it believes qualify for this exclusion:

Treasury securities, U.S.

agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds called TEMS.

See Note 1 for further details.

At December 31, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $ 1.4 million.

Valley recorded a provision for credit losses of $ 635 thousand during the year December 31, 2020.

There were no net charge-offs of debt securities in the respective periods.

Realized Gains and Losses

2020 Form 10-K

Gross gains and losses realized on sales, maturities and other securities transactions included in earnings for the years ended December 31, 2020, 2019 and 2018 were as follows:

2020 2019 2018

(in thousands)

Sales transactions:

$ 665 $ — $ 1,769

Gross losses ( 9 ) — ( 3,881 )

$ 656 $ — $ ( 2,112 )

Maturities and other securities transactions:

Net losses on securities transactions

Net losses on sales transactions in 2018 (as presented in the table above) primarily related to the sales of equity securities previously classified as available for sale, certain municipal securities acquired from USAB and all of Valley's private label mortgage-backed securities classified as available for sale, including securities that were previously impaired.

2019 Form 10-K

LOANS (Note 5)

$ 34 $ 67 $ 42

Gross losses ( 166 ) ( 217 ) ( 272 )

$ ( 132 ) $ ( 150 ) $ ( 230 )

Net gains (losses) on securities transactions $ 524 $ ( 150 ) $ ( 2,342 )

Net gains on sales transactions for the year ended December 31, 2020 (as presented in the table above) primarily related to the sales of $ 30 million of certain available for sale municipal securities.

Net losses on sales transactions in 2018 primarily related to the sales of equity securities previously classified as available for sale, certain municipal securities acquired from USAB and all of Valley's private label mortgage-backed securities classified as available for sale, including securities that were previously impaired.

LOANS AND ALLOWANCE FOR CREDIT LOSSES FOR LOANS (Note 5)

The detail of the loan portfolio as of December 31, 2020 and 2019 was as follows:

December 31, 2019

December 31, 2018

(in thousands)

2 unchanged sentences

Commercial real estate 16,724,998 15,996,741

Construction 1,745,825 1,647,018

Total commercial real estate loans

18,470,823 17,643,759

Residential mortgage 4,183,743 4,377,111

Home equity 431,553 487,272

Automobile 1,355,955 1,451,623

Other consumer 913,330 913,446

Total consumer loans 2,700,838 2,852,341

Total loans include net unearned premiums and deferred loan costs totaling $ 12.6 million and $ 21.5 million at December 31, 2019 and 2018 , respectively.

The outstanding balances (representing contractual balances owed to Valley) for PCI loans totaled $ 6.8 billion and $ 4.4 billion at December 31, 2019 and 2018 , respectively.

Valley transferred $ 436.5 million and $ 289.6 million of residential mortgage loans from the loan portfolio to loans held for sale in 2019 and 2018 , respectively.

Valley transferred $ 798 million of commercial real estate loans from the loan portfolio to loans held for sale in 2019 .

Excluding the loan transfers, there were no other sales or transfers of loans from the held for investment portfolio during 2019 and 2018 .

Purchased Credit-Impaired Loans

PCI loans are accounted for in accordance with ASC Subtopic 310-30 and are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses), and aggregated and accounted for as pools of loans based on common risk characteristics.

The difference between the undiscounted cash flows expected at acquisition and the initial carrying amount (fair value) of the PCI loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each pool.

Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or a valuation allowance.

Reclassifications of the non-accretable difference to the accretable yield may occur subsequent to the loan acquisition dates due to increases in expected cash flows of the loan pools.

See Note 1 for additional information.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the PCI loans acquired in the Oritani acquisition as of December 1, 2019 (See Note 2 for more details):

December 1, 2019

(in thousands)

Contractually required principal and interest

Contractual cash flows not expected to be collected (non-accretable difference)

Expected cash flows to be collected

Interest component of expected cash flows (accretable yield)

Fair value of acquired loans

Total loans $ 32,217,112 $ 29,699,208

* Includes $ 2.2 billion of loans originated under the SBA Paycheck Protection Program (PPP), net of unearned fees totaling $ 43.2 million at December 31, 2020.

Total loans include net unearned discounts and deferred loan fees of $ 95.8 million at December 31, 2020 and net unearned premiums and deferred loan costs totaling and $ 12.6 million at December 31, 2019.

Net unearned discounts and deferred loan fees at December 31, 2020 include the non-credit discount on PCD loans and net unearned fees related to PPP loans.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $ 90.2 million and $ 86.3 million at December 31, 2020 and December 31, 2019, respectively, and is presented separately in the consolidated statements of financial condition.

Valley transferred and sold $ 30.0 million and $ 436.5 million of residential mortgage loans from the loan portfolio to loans held for sale in 2020 and 2019, respectively.

Valley transferred and sold $ 798 million of commercial real estate loans

2020 Form 10-K 102

The following table presents changes in the accretable yield for PCI loans for the years ended December 31, 2019 and 2018 :

(in thousands)

Balance, beginning of period

Net (decrease) increase in expected cash flows

Balance, end of period

The net (decrease) increase in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools.

The net decrease in the expected cash flows totaling approximately $ 11.0 million for the year ended December 31, 2019 was largely due to the high volume of contractual principal prepayments caused by the low level of market interest rates.

The net increase in the expected cash flows totaling $ 269.8 million for the year ended December 31, 2018 was largely due to higher interest rates and increased construction loan balances (mainly acquired from USAB) captured in the cash flow reforecast in the fourth quarter 2018 .

from the loan portfolio to loans held for sale in 2019.

Excluding the loan transfers, there were no other sales of loans from the held for investment portfolio during the years December 31, 2020 and 2019.

Related Party Loans

6 unchanged sentences

New loans and advances 71,356

Repayments ( 25,012 )

Outstanding at end of year $ 239,625

1 unchanged sentence

Credit risk management.

For all of its loan types discussed below, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite.

For all loan types discussed below, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite.

Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually.

9 unchanged sentences

Whenever possible, Valley will obtain the personal guarantee of the borrower’s principals to mitigate the risk.

Unsecured loans, when made, are generally granted to the Bank’s most credit worthy borrowers.

Unsecured commercial and industrial loans totaled $ 606.1 million and $ 580.5 million at December 31, 2019 and 2018 , respectively.

The commercial portfolio also includes taxi medallion loans, most of which consist of loans to fleet owners of New York City medallions.

At December 31, 2019 , the taxi medallion loans totaled $ 114.8 million and were classified as either substandard

2019 Form 10-K

or doubtful loans.

While most of the taxi medallion loans within the portfolio at December 31, 2019 are currently performing to their contractual terms, negative trends in the market valuations of the underlying taxi medallion collateral and a decline in borrower cash flows, among other factors, could impact the future performance of this portfolio.

Unsecured loans, when m ade, are generally granted to the Bank’s most credit worthy borrowers.

Unsecured commercial and industrial loans totaled $ 2.7 billion (including $ 2.2 billion of SBA guaranteed PPP loans) and $ 606.1 million at December 31, 2020 and 2019, respectively.

The commercial portfolio also includes taxi medallion loans totaling approximately $ 97.5 million with related reserves of $ 66.4 million at December 31, 2020.

All of these loans are on non-accrual status due to ongoing weakness exhibited in the taxi industry caused by strong competition from alternative ride-sharing services and the economic stress caused by COVID-19 pandemic.

Commercial real estate loans .

7 unchanged sentences

These loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk.

Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment substantially dependent on the successful completion and sale, or lease, of the project.

Non-revolving construction loans often involve the disbursement of substantially all committed funds with repayment

2020 Form 10-K

substantially dependent on the successful completion and sale, or lease, of the project.

Sources of repayment for these types of loans may be from pre-committed permanent loans from other lenders, sales of developed property, or an interim loan commitment from Valley until permanent financing is obtained elsewhere.

25 unchanged sentences

Unsecured consumer loans totaled approximately $ 49.4 million and $ 53.9 million, including $ 8.8 million and $ 8.2 million of credit card loans, at December 31, 2020 and 2019, respectively.

Valley believes the aggregate risk exposure to unsecured loans and lines of credit was not significant at December 31, 2019 .

Management believes the aggregate risk exposure to unsecured loans and lines of credit was not significant at December 31, 2020.

2020 Form 10-K 104

Credit Quality

The following tables present past due, non-accrual and current loans (excluding PCI loans, which are accounted for on a pool basis) by loan portfolio class at December 31, 2019 and 2018 :

The following table presents past due, current and non-accrual loans without an allowance for credit losses by loan portfolio class (including PCD loans) at December 31, 2020:

Past Due and Non-Accrual Loans

Accruing Loans

90 Days Or More

Loans 60-89 Days

Loans 90 Days or More

Past Due Loans Non-Accrual

Loans Current

Loans Non-Accrual Loans Without Allowance for Credit Losses

(in thousands)

3 unchanged sentences

Commercial real estate 35,030 1,326 993 46,879 84,228 16,640,770 16,724,998 32,416

Construction 315 — — 84 399 1,745,426 1,745,825 —

Total commercial real estate loans

35,345 1,326 993 46,963 84,627 18,386,196 18,470,823 32,416

Residential mortgage 17,717 10,351 3,170 25,817 57,055 4,126,688 4,183,743 11,610

Consumer loans:

Home equity 953 492 — 4,936 6,381 425,172 431,553 50

Automobile 8,056 1,107 245 338 9,746 1,346,209 1,355,955 —

Other consumer 1,248 224 26 535 2,033 911,297 913,330 —

Total consumer loans 10,257 1,823 271 5,809 18,160 2,682,678 2,700,838 50

Total $ 69,712 $ 15,752 $ 13,541 $ 185,282 $ 284,287 $ 31,932,825 $ 32,217,112 $ 48,151

2020 Form 10-K

The following table presents past due, non-accrual and current loans by loan portfolio class at December 31, 2019.

At December 31, 2019, purchased credit-impaired (PCI) loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level.

The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the table above at December 31, 2020.

Past Due and Non-Accrual Loans

Accruing Loans

90 Days Or More

Loans 60-89 Days

Loans 90 Days Or More

Past Due Non-Accrual

Loans Current

(in thousands)

3 unchanged sentences

Commercial real estate 2,560 4,026 579 9,004 16,169 10,886,724 5,093,848

Construction 1,486 1,343 — 356 3,185 1,492,532 151,301

Total commercial real estate loans 4,046 5,369 579 9,360 19,354 12,379,256 5,245,149

1 unchanged sentence

Consumer loans:

Home equity 1,051 80 — 1,646 2,777 373,243 111,252

Automobile 11,482 1,581 681 334 14,078 1,437,274 271

Other consumer 1,171 866 30 224 2,291 900,411 10,744

Total consumer loans 13,704 2,527 711 2,204 19,146 2,710,928 122,267

Total $ 46,593 $ 14,315 $ 7,318 $ 93,058 $ 161,284 $ 22,908,325 $ 6,629,599

If interest on non-accrual loans had been accrued in accordance with the original contractual terms, such interest income would have amounted to approximately $ 6.2 million , $ 2.5 million, and $ 3.6 million for the years ended December 31, 2020, 2019 and 2018, respectively;

none of these amounts were included in interest income during these periods.

Credit quality indicators .

Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes.

Under Valley’s internal risk rating system, loan relationships could be classified as “Pass,” “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected.

Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable.

Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below.

Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories but pose weaknesses that deserve management’s close attention are deemed Special Mention.

Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk.

Risk ratings are updated any time the situation warrants.

2020 Form 10-K 106

Impaired loans .

Impaired loans, consisting of non-accrual commercial and industrial loans and commercial real estate loans over $ 250 thousand and all loans which were modified in troubled debt restructurings, are individually evaluated for impairment.

PCI loans are not classified as impaired loans because they are accounted for on a pool basis.

The following table presents information about impaired loans by loan portfolio class at December 31, 2019 and 2018 :

The following table presents the internal loan classification risk by loan portfolio class by origination year (including PCD loans) based on the most recent analysis performed at December 31, 2020:

Amortized Cost Basis by Origination Year

December 31, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total

(in thousands)

December 31, 2019

Commercial and industrial

Commercial real estate:

Pass $ 3,058,596 $ 605,112 $ 556,284 $ 212,215 $ 162,483 $ 337,484 $ 1,677,559 $ 350 $ 6,610,083

Special Mention 819 10,236 2,135 9,502 10,228 14,165 49,883 51 97,019

Substandard 5,215 3,876 12,481 1,798 4,215 12,965 18,913 462 59,925

Doubtful — 5,203 1 17,010 2,596 69,871 — — 94,681

Total commercial and industrial $ 3,064,630 $ 624,427 $ 570,901 $ 240,525 $ 179,522 $ 434,485 $ 1,746,355 $ 863 $ 6,861,708

Commercial real estate

Total commercial real estate loans

Pass $ 3,096,549 $ 3,052,076 $ 2,230,047 $ 1,767,528 $ 1,798,137 $ 3,916,990 $ 199,145 $ 15,532 $ 16,076,004

Special Mention 50,193 68,203 44,336 48,813 66,845 109,295 1,705 — 389,390

Substandard 18,936 17,049 30,997 59,618 11,541 118,725 2,531 — 259,397

Doubtful — — — — — 207 — — 207

Total commercial real estate $ 3,165,678 $ 3,137,328 $ 2,305,380 $ 1,875,959 $ 1,876,523 $ 4,145,217 $ 203,381 $ 15,532 $ 16,724,998

Pass $ 145,246 $ 120,800 $ 111,174 $ 15,497 $ 47,971 $ 20,029 $ 1,199,034 $ — $ 1,659,751

Special Mention — 1,043 — — 9,996 17,414 47,311 — 75,764

Substandard — 26 246 2,628 17 380 7,013 — 10,310

Total construction $ 145,246 $ 121,869 $ 111,420 $ 18,125 $ 57,984 $ 37,823 $ 1,253,358 $ — $ 1,745,825

2020 Form 10-K

For residential mortgages, automobile, home equity and other consumer loan portfolio classes, Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

The following table presents the amortized cost in those loan classes (including PCD loans) based on payment activity by origination year as of December 31, 2020:

Amortized Cost Basis by Origination Year

December 31, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total

(in thousands)

Residential mortgage

Performing $ 730,764 $ 778,161 $ 684,761 $ 582,650 $ 380,723 $ 943,616 $ 64,798 $ — $ 4,165,473

90 days or more past due — 3,085 4,212 3,464 4,144 3,365 — — 18,270

Total residential mortgage $ 730,764 $ 781,246 $ 688,973 $ 586,114 $ 384,867 $ 946,981 $ 64,798 $ — $ 4,183,743

Consumer loans

Total consumer loans

Performing $ 8,580 $ 10,634 $ 11,756 $ 8,886 $ 5,340 $ 15,393 $ 318,869 $ 50,879 $ 430,337

90 days or more past due — — — — 25 83 378 730 1,216

Total home equity 8,580 10,634 11,756 8,886 5,365 15,476 319,247 51,609 431,553

Performing 426,121 438,181 272,075 151,523 50,853 16,550 — — 1,355,303

90 days or more past due 19 108 173 223 35 94 — — 652

Total automobile 426,140 438,289 272,248 151,746 50,888 16,644 — — 1,355,955

Other Consumer

Performing 12,271 5,558 6,815 1,112 1,077 5,314 880,748 — 912,895

90 days or more past due — — — — — 22 5 408 435

Total other consumer 12,271 5,558 6,815 1,112 1,077 5,336 880,753 408 913,330

Total Consumer $ 446,991 $ 454,481 $ 290,819 $ 161,744 $ 57,330 $ 37,456 $ 1,200,000 $ 52,017 $ 2,700,838

The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019:

Credit exposure—

by internally assigned risk rating Special Total Non-PCI

Pass Mention Substandard Doubtful Loans

(in thousands)

December 31, 2019

1 unchanged sentence

Commercial real estate 10,781,587 77,884 42,560 862 10,902,893

Commercial real estate

Total commercial real estate loans

Residential mortgage

Consumer loans:

Total consumer loans

Interest income recognized on a cash basis for impaired loans classified as non-accrual was not material for the years ended December 31, 2019 , 2018 and 2017 .

Construction 1,487,877 7,486 354 — 1,495,717

Total $ 16,251,917 $ 119,088 $ 109,425 $ 62,163 $ 16,542,593

2020 Form 10-K 108

The following table presents, by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2019 , 2018 and 2017 :

For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019:

Credit exposure—

by payment activity Performing

Loans Non-Performing

Loans Total Non-PCI

(in thousands)

December 31, 2019

Residential mortgage $ 3,784,084 $ 12,858 $ 3,796,942

Home equity 374,374 1,646 376,020

Automobile 1,451,018 334 1,451,352

Other consumer 902,478 224 902,702

Total $ 6,511,954 $ 15,062 $ 6,527,016

The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of December 31, 2019:

Credit exposure— Performing Non-Performing Total

by payment activity Loans Loans PCI Loans

(in thousands)

December 31, 2019

Commercial and industrial $ 653,997 $ 28,017 $ 682,014

Commercial real estate 5,065,388 28,460 5,093,848

Commercial real estate

Total commercial real estate loans

Construction 148,692 2,609 151,301

Residential mortgage 571,006 9,163 580,169

Consumer loans:

Total consumer loans

Consumer 120,356 1,911 122,267

Total $ 6,559,439 $ 70,160 $ 6,629,599

Troubled debt restructured loans .

1 unchanged sentence

If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR).

Valley’s PCI loans are excluded from the TDR disclosures below because they are evaluated for impairment on a pool by pool basis.

When an individual PCI loan within a pool is modified as a TDR, it is not removed from its pool.

All TDRs are classified as impaired loans and are included in the impaired loan disclosures above.

The majority of the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods.

The concessions rarely result in the forgiveness of principal or accrued interest.

At the adoption of ASU 2016-13, Valley was not required to reassess whether modifications to individual PCI loans prior to January 1, 2020 met the TDR loan criteria.

Generally the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods.

The concessions may also involve payment deferrals but rarely result in the forgiveness of principal or accrued interest.

In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans.

4 unchanged sentences

2020 Form 10-K

The following table presents non-PCI loans by loan class modified as TDRs during the years ended December 31, 2019 and 2018 .

The following table presents pre- and post-modification amortized cost of loans by loan class modified as TDRs (excluding PCI loans prior to the adoption of ASU 2016-13) during the years ended December 31, 2020 and 2019.

The pre-modification and post-modification outstanding recorded investments disclosed in the table below represent the loan carrying amounts immediately prior to the modification and the carrying amounts at December 31, 2020 and 2019, respectively.

Troubled Debt

Restructurings

Pre-Modification

Recorded Investment

Post-Modification

Restructurings Number of

Contracts Pre-Modification

Recorded Investment Post-Modification

Recorded Investment

3 unchanged sentences

Commercial real estate 6 24,683 21,654

Commercial real estate

Total commercial real estate

Residential mortgage 12 2,377 2,323

Consumer 1 72 70

Total 61 $ 73,222 $ 66,726

December 31, 2019

1 unchanged sentence

Commercial real estate 2 3,143 3,098

Commercial real estate

Total commercial real estate

Residential mortgage 2 376 374

The total TDRs presented in the table above had allocated specific reserves for loan losses that totaled $ 36.0 million and $ 6.5 million at December 31, 2019 and 2018 , respectively.

These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment disclosed in Note 6.

There were $ 4.9 million in loan charge-offs related to loans modified as TDRs for the year ended December 31, 2019 .

However, there were no loan charge-offs related to loans modified as TDRs during 2018 .

At December 31, 2019 , the commercial and industrial loan category in the above table largely consisted of non-performing and performing TDR taxi cab medallion loans classified as substandard and non-accrual doubtful loans.

The non-PCI loans modified as TDRs within the previous 12 months and for which there was a payment default ( 90 or more days past due) for the years ended December 31, 2019 and 2018 were as follows:

Consumer 2 215 207

Total 117 $ 81,515 $ 77,182

The total TDRs presented in the table above had allocated a specific allowance for loan losses that totaled $ 21.1 million and $ 36.0 million at December 31, 2020 and 2019, respectively.

There were $ 7.7 million and $ 4.9 million in loan charge-offs related to loans modified as TDRs for the years ended December 31, 2020 and 2019, respectively .

At December 31, 2020, the commercial and industrial loan category in the above table mostly consisted of non-accrual TDR taxi medallion loans classified as substandard and doubtful.

Valley did not extend any commitments to lend additional funds to borrowers whose loans have been modified as TDRs during the year ended December 31, 2020.

Loans modified as TDRs (excluding PCI loan modifications prior to the adoption of ASU 2016-13) in the years ended December 31, 2020 and 2019, and for which there was a payment default ( 90 or more days past due) were as follows:

Years Ended December 31,

Troubled Debt Restructurings Subsequently Defaulted

Troubled Debt Restructurings Subsequently Defaulted Number of

Contracts Recorded

Investment Number of

Contracts Recorded

($ in thousands)

1 unchanged sentence

Residential mortgage 1 247 1 154

Credit quality indicators .

Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes.

Loans rated as Pass do not currently

Total 28 $ 23,494 44 $ 31,936

Coronavirus Aid, Relief, and Economic Security (CARES) Act loan modifications .

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 were insignificant, when requested by customers.

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 up to 90 days, which Valley may extend for an additional 90 days.

Any extensions beyond this period were made in accordance with applicable regulatory guidance.

As of December 31, 2020, Valley had approximately $ 361 million of outstanding loans remaining in their payment deferral period under short-term modifications.

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

Collateral dependent loans.

Loans are collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.

When Valley determines that foreclosure is probable, the collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process.

2020 Form 10-K 110

pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk.

Risk ratings are updated any time the situation warrants.

The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019 and 2018 .

Credit exposure—

by internally assigned risk rating

Total Non-PCI

The following table presents collateral dependent loans by class as of December 31, 2020:

(in thousands)

December 31, 2019

Commercial and industrial $ 106,239

Commercial real estate 41,562

December 31, 2018

Commercial and industrial

Commercial real estate

At December 31, 2019 , the commercial and industrial loans rated substandard and doubtful in the above table were mainly comprised of performing TDR taxi medallion loans and non-accrual taxi medallion loans, respectively.

The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019 and 2018 :

Credit exposure—

by payment activity

Non-Performing

Total Non-PCI

(in thousands)

December 31, 2019

Residential mortgage 28,176

Other consumer

December 31, 2018

Residential mortgage

Other consumer

2019 Form 10-K

Valley evaluates the credit quality of its PCI loan pools based on the expectation of the underlying cash flows of each pool, derived from the aging status and by payment activity of individual loans within the pool.

The following table presents the recorded investment in PCI loans by class based on individual loan payment activity as of December 31, 2019 and 2018 :

Credit exposure—

Non-Performing

by payment activity

Home equity 50

Total $ 176,027

Commercial and industrial loans reported in the table above are primarily collateralized by taxi medallions.

Commercial real estate loans are collateralized by real estate and construction loans.

Residential and home equity loans are collateralized by residential real estate.

Purchased Credit-Impaired Loans

The table below includes disclosure requirements prior to the adoption of ASU No.

2016-13 on January 1, 2020, and presents changes in the accretable yield for PCI loans for the year ended December 31, 2019:

(in thousands)

December 31, 2019

Commercial and industrial

Commercial real estate

Residential mortgage

December 31, 2018

Commercial and industrial

Commercial real estate

Residential mortgage

ALLOWANCE FOR CREDIT LOSSES (Note 6)

The allowance for credit losses consists of the allowance for loan losses and the allowance for unfunded letters of credit.

Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio and unfunded letter of credit commitments at the balance sheet date.

The allowance for loan losses is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio, including unexpected additional credit impairment of PCI loan pools subsequent to acquisition.

There was no allowance allocation for PCI loan losses at December 31, 2019 and 2018 .

The following table summarizes the allowance for credit losses at December 31, 2019 and 2018 :

Balance, beginning of period $ 875,958

Acquisition 600,178

Accretion ( 214,415 )

Net decrease in expected cash flows ( 10,995 )

Balance, end of period $ 1,250,726

The net decrease in expected cash flows for certain pools of loans (included in the table above) is recognized prospectively as an adjustment to the yield over the estimated remaining life of the individual pools.

Allowance for Credit Losses for Loans

The allowance for credit losses for loans under the new CECL standard adopted on January 1, 2020, consisted of the allowance for loan losses and the allowance for unfunded credit commitments.

Prior periods reflect the allowance for credit losses for loans under the incurred loss model under the previously applicable U.S.

The following table summarizes the allowance for credit losses for loans at December 31, 2020 and 2019:

(in thousands)

Components of allowance for credit losses:

Components of allowance for credit losses for loans:

Allowance for loan losses $ 340,243 $ 161,759

Allowance for unfunded letters of credit

Total allowance for credit losses

The following table summarizes the provision for credit losses for the years ended December 31, 2019 , 2018 and 2017 :

Allowance for unfunded credit commitments 11,111 2,845

Total allowance for credit losses for loans $ 351,354 $ 164,604

2020 Form 10-K

The following table summarizes the provision for credit losses for loans for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

(in thousands)

Components of provision for credit losses:

Components of provision for credit losses for loans:

Provision for loan losses $ 123,922 $ 25,809 $ 31,661

Provision for unfunded letters of credit

Total provision for credit losses

2019 Form 10-K

Provision for unfunded credit commitments 1,165 ( 1,591 ) 840

Total provision for credit losses for loans $ 125,087 $ 24,218 $ 32,501

The following table details the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2020 and 2019:

and Industrial

and Industrial Commercial

Real Estate Residential

Mortgage Consumer Total

(in thousands)

2 unchanged sentences

Beginning balance $ 104,059 $ 45,673 $ 5,060 $ 6,967 $ 161,759

Impact of ASU 2016-13 adoption* 15,169 49,797 20,575 6,990 92,531

Beginning balance, adjusted 119,228 95,470 25,635 13,957 254,290

Loans charged-off ( 34,630 ) ( 767 ) ( 598 ) ( 9,294 ) ( 45,289 )

8 unchanged sentences

Charged-off loans recovered 2,397 1,237 66 2,606 6,306

Net recoveries (charge-offs)

Net (charge-offs) recoveries ( 10,863 ) 1,079 ( 60 ) ( 6,065 ) ( 15,909 )

Provision for loan losses 23,966 ( 5,056 ) 79 6,820 25,809

Ending balance $ 104,059 $ 45,673 $ 5,060 $ 6,967 $ 161,759

* Includes a $ 61.6 million increase representing the estimated expected credit losses for PCD loans as a result of the adoption of CECL on January 1, 2020.

Valley incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at December 31, 2020.

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

The increase in the allowance for credit losses for loans from January 1, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate, as well as other qualitative factors.

2020 Form 10-K 112

The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology for the years ended December 31, 2019 and 2018 .

Loans individually evaluated for impairment represent Valley’s impaired loans.

Loans acquired with discounts related to credit quality represent Valley’s PCI loans.

and Industrial

The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the allowance measurement methodology for the years ended December 31, 2020 and 2019.

and Industrial Commercial

Real Estate Residential

Mortgage Consumer Total

(in thousands)

1 unchanged sentence

Allowance for loan losses:

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for impairment

Collectively evaluated for impairment

Loans acquired with discounts related to credit quality

Individually evaluated for credit losses $ 73,063 $ 1,338 $ 1,206 $ 264 $ 75,871

Collectively evaluated for credit losses 58,007 162,775 27,667 15,923 264,372

Total $ 131,070 $ 164,113 $ 28,873 $ 16,187 $ 340,243

Individually evaluated for credit losses $ 131,057 $ 61,754 $ 35,151 $ 1,631 $ 229,593

Collectively evaluated for credit losses 6,730,651 18,409,069 4,148,592 2,699,207 31,987,519

Total $ 6,861,708 $ 18,470,823 $ 4,183,743 $ 2,700,838 $ 32,217,112

December 31, 2019

Allowance for loan losses:

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for credit losses $ 36,662 $ 1,338 $ 518 $ 58 $ 38,576

Collectively evaluated for credit losses 67,397 44,335 4,542 6,909 123,183

Total $ 104,059 $ 45,673 $ 5,060 $ 6,967 $ 161,759

Individually evaluated for credit losses $ 100,860 $ 51,242 $ 10,689 $ 853 $ 163,644

Collectively evaluated for credit losses 4,043,123 12,347,368 3,786,253 2,729,221 22,905,965

Loans acquired with discounts related to credit quality

682,014 5,245,149 580,169 122,267 6,629,599

Total $ 4,825,997 $ 17,643,759 $ 4,377,111 $ 2,852,341 $ 29,699,208

Impaired loans .

Impaired loans disclosures presented below as of December 31, 2019 represent requirements prior to the adoption of ASU No.

2016-13 on January 1, 2020.

PCI loans were not classified as impaired loans because they are accounted for on a pool basis and were paying as expected.

The following table presents information about impaired loans by loan portfolio class at December 31, 2019:

Allowance Recorded

Allowance Total

Investment Unpaid

Balance Related

(in thousands)

December 31, 2019

Commercial and industrial $ 14,617 $ 86,243 $ 100,860 $ 114,875 $ 36,662

Commercial real estate:

Commercial real estate 26,046 24,842 50,888 51,258 1,338

Construction 354 — 354 354 —

Total commercial real estate loans 26,400 24,842 51,242 51,612 1,338

Residential mortgage 5,836 4,853 10,689 11,800 518

Consumer loans:

Home equity 366 487 853 956 58

Total consumer loans 366 487 853 956 58

Total $ 47,219 $ 116,425 $ 163,644 $ 179,243 $ 38,576

Interest income recognized on a cash basis for impaired loans classified as non-accrual was not material for the years ended December 31, 2019 and 2018.

2020 Form 10-K

LEASES (Note 6)

The following table presents the components of the right of use (ROU) assets and lease liabilities in the consolidated statements of position by lease type at December 31, 2019 .

The following table presents the components of the right of use (ROU) assets and lease liabilities in the consolidated statements of financial condition by lease type at December 31, 2020 and 2019.

(in thousands)

1 unchanged sentence

Finance leases 760 874

Total $ 252,053 $ 285,129

Lease liabilities:

1 unchanged sentence

Finance leases 1,427 1,789

In March 2019, Valley closed a sale-leaseback transaction for 26 properties, consisting of 25 branches and 1 corporate office, for an aggregate sales price of $ 100.5 million .

As a result, Valley recorded a pre-tax net gain totaling $ 78.5 million during the first quarter 2019.

Additionally, Valley recorded ROU assets and lease obligations totaling $ 78.4 million , respectively, for the lease of the 26 properties with an expected term of 12.0 years .

The lease was determined to be an operating lease and Valley expects to record lease costs of approximately $ 7.9 million within occupancy and equipment expense on a straight-line basis annually over the term of the lease.

2019 Form 10-K

The following table presents the components by lease type, of total lease cost recognized in the consolidated statements of income for the year ended December 31, 2019 :

Total $ 276,675 $ 309,849

Net occupancy and equipment expense included lease cost of $ 29.0 million, net of sublease income of $ 3.5 million, for the year ended December 31, 2018.

In 2019, Valley closed a sale-leaseback transaction for 26 properties, consisting of 25 branches and 1 corporate office, for an aggregate sales price of $ 100.5 million.

As a result, Valley recorded a pre-tax net gain totaling $ 78.5 million in 2019.

Additionally, Valley recorded ROU assets and lease obligations totaling $ 78.4 million, respectively, for the lease of the 26 properties with an expected term of 12.0 years and operating lease costs of $ 7.9 million within occupancy and equipment expense on a straight-line basis annually over the term of the lease.

The following table presents the components by lease type, of total lease cost recognized in the consolidated statements of income for the years ended December 31, 2020 and 2019:

(in thousands)

7 unchanged sentences

Total lease cost (included in net occupancy and equipment expense) $ 39,162 $ 35,218

The following table presents supplemental cash flow information related to leases for the year ended December 31, 2019 :

The following table presents supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019:

(in thousands)

3 unchanged sentences

Financing cash flows from finance leases 612 492

The following table presents supplemental information related to leases at December 31, 2019 :

2020 Form 10-K 114

The following table presents supplemental information related to leases at December 31, 2020 and 2019:

Weighted-average remaining lease term

Operating leases

Finance leases

Operating leases 12.3 years 12.8 years

Finance leases 2.0 years 3.0 years

Weighted-average discount rate

2 unchanged sentences

The following table presents a maturity analysis of lessor and lessee arrangements outstanding as of December 31, 2020:

Direct Financing and Sales-Type Leases

Operating Leases

Finance Leases

Lessor Lessee

Direct Financing and Sales-Type Leases Operating Leases Finance Leases

(in thousands)

2021 $ 188,580 $ 35,175 $ 769

2022 166,076 32,788 769

2023 139,589 29,288 11

2024 103,498 28,036 —

2025 59,049 26,991 —

Thereafter 40,126 194,732 —

Total lease payments 696,918 347,010 1,549

present value discount ( 53,369 ) ( 71,762 ) ( 122 )

The total net investment in direct financing and sales-type leases was $ 478.8 million and $ 327.3 million at December 31, 2019 and 2018 , respectively, comprised of $ 477.1 million and $ 326.2 million in lease receivables and $ 1.7 million and

2019 Form 10-K

$ 1.1 million in unguaranteed residuals, respectively.

Total $ 643,549 $ 275,248 $ 1,427

The total net investment in direct financing and sales-type leases was $ 643.5 million and $ 478.8 million at December 31, 2020 and 2019, respectively, comprised of $ 641.3 million and $ 477.1 million in lease receivables and $ 2.2 million and $ 1.7 million in unguaranteed residuals, respectively.

Total lease income was $ 25.2 million, $ 19.4 million and $ 14.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.

The following table presents minimum aggregate lease payments in accordance with ASC Topic 840 at December 31, 2018 :

Sublease Income

(in thousands)

Total lease payments

Net occupancy and equipment expense included lease cost of $ 29.0 million and $ 27.7 million , net of sublease income of $ 3.5 million and $ 3.9 million , for the years ended December 31, 2018 and 2017 , respectively.

PREMISES AND EQUIPMENT, NET (Note 8)

PRE MISES AND EQUIPMENT, N ET (Note 7)

At December 31, 2020 and 2019, premises and equipment, net consisted of:

(in thousands)

Land $ 90,379 $ 93,594

Buildings 214,476 220,140

Leasehold improvements 88,898 85,042

4 unchanged sentences

Depreciation and amortization of premises and equipment included in non-interest expense for the years ended December 31, 2020, 2019 and 2018 was approximately $ 30.6 million, $ 29.4 million, and $ 27.6 million, respectively.

2020 Form 10-K

GOODWILL AND OTHER INTANGIBLE ASSETS (Note 8)

1 unchanged sentence

Business Segment / Reporting Unit*

Management Consumer

Lending Commercial

Lending Investment

Management Total

(in thousands)

6 unchanged sentences

This reporting unit is included in the Consumer Lending segment for financial reporting purposes.

2019 Form 10-K

The goodwill from business combinations during 2019 and 2018 set forth in the table above relates to the Oritani and USAB acquisitions, respectively.

Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date.

During 2020, goodwill from business combinations reflects the effect of the combined adjustments to the estimated fair values of certain loans, current taxes payable and deferred tax assets as of the acquisition date.

See Note 2 for further details.

There was no impairment of goodwill during the years ended December 31, 2019 , 2018 and 2017 .

There was no imp airment of goodwill during the years ended December 31, 2020, 2019 and 2018.

The following tables summarize other intangible assets as of December 31, 2020 and 2019:

Assets Accumulated

Amortization Valuation

Allowance Net

(in thousands)

2 unchanged sentences

Core deposits 101,160 ( 53,747 ) — 47,413

Other 3,945 ( 2,854 ) — 1,091

Total other intangible assets $ 208,255 $ ( 136,941 ) $ ( 865 ) $ 70,449

2 unchanged sentences

Core deposits 101,160 ( 40,384 ) — 60,776

Other 3,945 ( 2,634 ) — 1,311

Total other intangible assets $ 199,932 $ ( 113,113 ) $ ( 47 ) $ 86,772

4 unchanged sentences

No impairment was recognized during the years ended December 31, 2020, 2019 and 2018.

2020 Form 10-K 116

The following table summarizes the change in loan servicing rights during the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

(in thousands)

10 unchanged sentences

Loan servicing rights are accounted for using the amortization method.

See Note 1 for more details.

As shown in the above table, Valley recorded net impairment charges on its loan servicing rights totaling $ 818 thousand for the year ended December 31, 2020 and net recoveries impairment charges totaling $ 36 thousand and $ 388 thousand for the years ended December 31, 2019 and 2018, respectively.

The Bank is a servicer of residential mortgage loan portfolios, and it is compensated for loan administrative services performed for mortgage servicing rights of loans originated and sold by the Bank, and to a lesser extent, purchased mortgage servicing rights.

2 unchanged sentences

Valley recognized amortization expense on other intangible assets, including net recoveries of impairment charges on loan servicing rights (reflected in the table above), of $ 24.6 million, $ 18.1 million and $ 18.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

2019 Form 10-K

The following table presents the estimated amortization expense of other intangible assets over the next five-year period:

Loan Servicing

Year Loan Servicing

Deposits Other

(in thousands)

2021 $ 5,391 $ 11,607 $ 206

2022 3,969 9,876 191

2023 2,933 8,146 131

2024 2,210 6,537 117

2025 1,688 4,929 103

2020 Form 10-K

DEPOSITS (Note 9)

1 unchanged sentence

Interest expense on time deposits of $250 thousand or more totaled approximately $ 4.5 million, $ 5.8 million and $ 6.6 million in 2020, 2019 and 2018, respectively.

The scheduled maturities of time deposits as of December 31, 2019 are as follows:

The scheduled maturities of time deposits as of December 31, 2020 were as follows:

(in thousands)

2021 $ 5,877,581

Thereafter 69,329

Total time deposits $ 6,714,678

6 unchanged sentences

Securities sold under agreements to repurchase 147,958 153,280

Federal funds purchased

Total short-term borrowings $ 1,147,958 $ 1,093,280

The weighted average interest rate for short-term borrowings was 0.38 percent and 1.68 percent at December 31, 2020 and 2019, respectively.

2019 Form 10-K

Short-term FHLB advances totaling $ 200 million were hedged with cash flow interest rate swaps at December 31, 2020.

See Note 15 for additional details.

Long-Term Borrowings

2 unchanged sentences

FHLB advances, net (1)

Securities sold under agreements to repurchase

$ 1,592,252 $ 1,480,012

Subordinated debt, net (2)

403,413 292,414

Securities sold under agreements to repurchase 300,000 350,000

Total long-term borrowings $ 2,295,665 $ 2,122,426

1 unchanged sentence

(2) Subordinated debt is presented net of unamortized debt issuance costs totaling $ 2.7 million and $ 1.2 million at December 31, 2020 and 2019, respectively.

In 2019, Valley prepaid $ 635.0 million of the long-term FHLB advances.

These prepaid borrowings had contractual maturity dates in 2021 and 2022 and a total average interest rate of 3.93 percent .

The debt prepayment was funded by cash proceeds from the sale of commercial real estate loans and overnight borrowings.

The transaction was accounted for as an early debt extinguishment resulting in a loss of $ 32.0 million , reported within non-interest expense, for the year ended December 31, 2019.

FHLB Advances.

The long-term FHLB advances had a weighted average interest rate of 2.23 percent and 3.13 percent at December 31, 2019 and 2018 , respectively.

These FHLB advances are secured by pledges of certain eligible collateral, including but not limited to, U.S.

Long-term FHLB advances had a weighted average interest rate of 2.02 percent and 2.23 percent at December 31, 2020 and 2019, respectively.

FHLB advances are secured by pledges of certain eligible collateral, including but not limited to, U.S.

government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans.

Valley assumed $ 430.1 million of FHLB advances in connection with the Oritani acquisition on December 1, 2019.

Long-term FHLB advances totaling $ 900 million were hedged with cash flow interest rate swaps at December 31, 2020.

See Note 15 for additional details.

2020 Form 10-K 118

Long-Term Borrowings

The long-term FHLB advances at December 31, 2020 are scheduled for contractual balance repayments as follows:

(in thousands)

2021 $ 552,519

Total long-term FHLB advances $ 1,589,694

There are no FHLB advances with scheduled repayments in years 2021 and thereafter, reported in the table above, which are callable for early redemption by the FHLB during 2021.

In December 2020, Valley prepaid $ 534.3 million of long-term FHLB advances scheduled to mature in 2021 and 2022 with a weighted average effective interest rate of 2.48 percent.

The transaction was funded with excess cash liquidity and accounted for as an early debt extinguishment resulting in a loss of $ 9.7 million reported within non-interest expense for the year ended December 31, 2020.

In December 2019, Valley prepaid $ 635.0 million of long-term FHLB advances.

These prepaid borrowings had contractual maturity dates in 2021 and 2022 and a weighted average interest rate of 3.93 percent.

The debt prepayment was funded by cash proceeds from the sale of commercial real estate loans and overnight borrowings.

The transaction was also accounted for as an early debt extinguishment and resulted in a loss of $ 32.0 million for the year ended December 31, 2019.

Subordinated Debt.

In June 2015, Valley issued $ 100 million of 4.55 percent subordinated debentures (notes) due July 30, 2025 with no call dates or prepayments allowed unless certain conditions exist.

On June 5, 2020, Valley issued $ 115 million of 5.25 percent Fixed-to-Floating Rate subordinated notes issued in due June 15, 2030 and callable in whole or in part on or after June 15, 2025 or upon the occurrence of certain events.

Interest on the subordinated notes during the initial five-year term through June 15, 2025 is payable semi-annually on June 15 and December 15.

Thereafter, interest is expected to be set based on Three-Month Term SOFR plus 514 basis points and paid quarterly through maturity of the notes.

The subordinated notes had a net carrying value of $ 113.3 million at December 31, 2020.

At December 31, 2020, Valley also had the following subordinated debt outstanding:

• $ 100 million of 4.55 percent subordinated debentures (notes) issued in June 2015 and due June 30, 2025 with no call dates or prepayments allowed unless certain conditions exist.

Interest on the subordinated notes is payable semi-annually in arrears on June 30 and December 30 of each year.

The subordinated notes had a net carrying value of $ 99.5 million and $ 99.4 million at December 31, 2020 and 2019, respectively.

In September 2013, Valley issued $ 125 million of its 5.125 percent subordinated notes due September 27, 2023 with no call dates or prepayments allowed, unless certain conditions exist.

• $ 125 million of 5.125 percent subordinated notes issued in September 2013 and due September 27, 2023 with no call dates or prepayments allowed, unless certain conditions exist.

Interest on the subordinated debentures is payable semi-annually in arrears on March 27 and September 27 of each year.

2 unchanged sentences

The subordinated notes had a net carrying value of $ 130.5 million and $ 132.4 million at December 31, 2020 and 2019, respectively.

2019 Form 10-K

On January 1, 2018, Valley assumed $ 60 million of 6.25 percent subordinated notes, in connection with the acquisition of USAB.

• $ 60 million of 6.25 percent subordinated notes, assumed on January 1, 2018 in connection with the acquisition of USAB.

The notes are due April 1, 2026 callable beginning April 1, 2021.

3 unchanged sentences

The long-term repos had a weighted average interest rate of 3.37 percent and 1.94 percent at December 31, 2020 and 2019, respectively.

The long-term repos at December 31, 2019 are scheduled for contractual balance repayments as follows:

(in thousands)

Total long-term securities sold under agreements to repurchase

Long-term repos outstanding as of December 31, 2020 all have maturities in 2021.

In September 2020, Valley prepaid $ 50 million of long-term institutional repo borrowings with an interest rate of 3.70 percent and an original contractual maturity date in January 2022.

The debt prepayment was funded by excess cash liquidity.

2020 Form 10-K

The transaction was accounted for as an early debt extinguishment resulting in a loss of $ 2.4 million for the year ended December 31, 2020.

Pledged Securities.

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JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS (Note 11)

All of the statutory trusts presented in the table below were acquired in past bank acquisitions, including the Aliant Statutory Trust II acquired from USAB on January 1, 2018.

All of the statutory trusts presented in the table below were acquired in past bank acquisitions.

These trusts were established for the sole purpose of issuing trust preferred securities and related trust common securities.

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The table below summarizes the outstanding junior subordinated debentures and the related trust preferred securities issued by each trust as of December 31, 2020 and 2019:

Capital Trust III

State Bancorp

Capital Trust I

State Bancorp

Capital Trust II

Aliant Statutory Trust II

Capital Trust III State Bancorp

Capital Trust I State Bancorp

Capital Trust II Aliant Statutory Trust II

($ in thousands)

2 unchanged sentences

Carrying value (1)

$ 24,743 $ 9,125 $ 8,599 $ 13,598

Contractual principal balance 24,743 10,310 10,310 15,464

1 unchanged sentence

Carrying value (1)

$ 24,743 $ 9,025 $ 8,468 $ 13,482

Contractual principal balance 24,743 10,310 10,310 15,464

Annual interest rate

Stated maturity date

July 30, 2037

November 7, 2032

January 23, 2034

December 15, 2036

Initial call date

July 30, 2017

November 7, 2007

January 23, 2009

December 15, 2011

Annual interest rate 3-mo.

LIBOR+ 3.45 %

LIBOR+ 2.85 %

Stated maturity date July 30, 2037 November 7, 2032 January 23, 2034 December 15, 2036

Initial call date July 30, 2017 November 7, 2007 January 23, 2009 December 15, 2011

Trust Preferred Securities:

December 31, 2020 and 2019

Annual distribution rate

Issuance date

October 29, 2002

December 19, 2003

December 14, 2006

Face value $ 24,000 $ 10,000 $ 10,000 $ 15,000

Annual distribution rate 3-mo.

LIBOR+ 3.45 %

LIBOR+ 2.85 %

Issuance date July 2, 2007 October 29, 2002 December 19, 2003 December 14, 2006

Distribution dates (2)

Quarterly Quarterly Quarterly Quarterly

(1) The carrying values include unamortized purchase accounting adjustments at December 31, 2020 and 2019.

(2) All cash distributions are cumulative.

2019 Form 10-K

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at the stated maturity date or upon early redemption.

4 unchanged sentences

The trust preferred securities are included in Valley’s total risk-based capital (as Tier 2 capital) for regulatory purposes at December 31, 2020 and 2019.

2020 Form 10-K 120

BENEFIT PLANS (Note 12)

12 unchanged sentences

Interest cost 4,941 6,113

Actuarial loss (gain)

Actuarial loss 18,813 20,001

Benefits paid ( 8,310 ) ( 8,073 )

2 unchanged sentences

Fair value of plan assets at beginning of year $ 236,621 $ 210,508

Actual return (loss) on plan assets

Actual return on plan assets 30,987 32,835

Employer contributions 1,353 1,351

5 unchanged sentences

* Includes accrued interest receivable of $ 623 thousand and $ 641 thousand as of December 31, 2020 and 2019, respectively.

2019 Form 10-K

Amounts recognized as a component of accumulated other comprehensive loss as of year-end that have not been recognized as a component of the net periodic pension expense for Valley’s qualified and non-qualified plans are presented in the following table.

Valley expects to recognize approximately $ 952 thousand of the net actuarial loss reported in the following table as of December 31, 2019 as a component of net periodic pension expense during 2020 .

Valley expects to recognize approximately $ 1.5 million of the net actuarial loss reported in the following table as of December 31, 2020 as a component of net periodic pension expense during 2021.

(in thousands)

2 unchanged sentences

Deferred tax benefit ( 14,132 ) ( 13,168 )

Total $ 36,461 $ 33,437

2020 Form 10-K

The non-qualified plans had a projected benefit obligation, accumulated benefit obligation, and fair value of plan assets as follows:

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In determining discount rate assumptions, management looks to current rates on fixed-income corporate debt securities that receive a rating of AA or higher from either Moody’s or S&P with durations equal to the expected benefit payments streams required of each plan.

The weighted average discount rate used in determining the actuarial present value of benefit obligations for the qualified and non-qualified plans was 3.32 percent and 4.30 percent as of December 31, 2019 and 2018 , respectively.

The net periodic pension income for the qualified and non-qualified plans reported within other non-interest expense (due to the adoption of ASU No.

2017-07) included the following components for the years ended December 31, 2019 , 2018 and 2017 :

The weighted average discount rate used in determining the actuarial present value of benefit obligations for the qualified and non-qualified plans was 2.52 percent a nd 3.32 percent as of December 31, 2020 and 2019, respectively.

The net periodic pension income for the qualified and non-qualified plans reported within other non-interest expense included the following components for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

(in thousands)

5 unchanged sentences

Valley believes this provides a better estimate of interest costs than a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the applicable period.

Other changes in the qualified and non-qualified plan assets and benefit obligations recognized in other comprehensive income/loss for the years ended December 31, 2019 and 2018 were as follows:

Other changes in the qualified and non-qualified plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2020 and 2019 were as follows:

(in thousands)

Net loss $ 5,026 $ 3,619

Amortization of prior service cost ( 136 ) ( 35 )

1 unchanged sentence

Total recognized in other comprehensive income $ 3,887 $ 3,320

Total recognized in net periodic pension income and other comprehensive income/loss (before tax)

2019 Form 10-K

Total recognized in net periodic pension income and other comprehensive income (before tax) $ ( 7,233 ) $ ( 6,721 )

The benefit payments, which reflect expected future service, as appropriate, expected to be paid in future years are presented in the following table:

(in thousands)

Thereafter 49,314

2020 Form 10-K 122

The weighted average discount rate, expected long-term rate of return on assets and rate of compensation increase used in determining Valley’s pension expense for the years ended December 31, 2020, 2019 and 2018 were as follows:

2020 2019 2018

Discount rate - projected benefit obligation 3.29 % 4.30 % 3.69 %

1 unchanged sentence

Expected long-term return on plan assets 7.50 % 7.50 % 7.50 %

Rate of compensation increase

Rate of compensation increase N/A N/A N/A

The expected rate of return on plan assets assumption is based on the concept that it is a long-term assumption independent of the current economic environment and changes would be made in the expected return only when long-term inflation expectations change, asset allocations change materially or when asset class returns are expected to change for the long-term.

1 unchanged sentence

The target asset allocation set for the qualified plan is an approximate equal weighting of 50 percent fixed income securities and 50 percent equity securities.

The absolute investment objective for the equity portion is to earn at least 7 percent cumulative annualized real return, after adjustment by the Consumer Price Index (CPI), over rolling five -year periods, while the relative objective is to earn returns above the S&P 500 Index over rolling three -year periods.

For the fixed income portion, the absolute objective is to earn at least a 3 percent cumulative annual real return, after adjustment by the CPI over rolling five -year periods with a relative objective of earning returns above the Merrill Lynch Intermediate Government/Corporate Index over rolling three -year periods.

Although much depends upon market conditions, the absolute investment objective for the equity portion is to earn at least a mid-to-high single digit return, after adjustment by the Consumer Price Index (CPI), over rolling five-year periods.

Relative performance should be above the median of a suitable grouping of other equity portfolios and a suitable index over rolling three-year periods.

For the fixed income portion, the absolute objective is to earn a positive annual real return, after adjustment by the CPI, over rolling five-year periods.

Relative performance should be better than the median performance of bonds when judged against a suitable index of other fixed income portfolios and above the Merrill Lynch Intermediate Government/Corporate Index over rolling three-year periods.

Cash equivalents will be invested in money market funds or in other high quality instruments approved by the Trustees of the qualified plan.

The exposure of the plan assets of the qualified plan to a concentration of credit risk is limited by the Bank’s Pension Committee’s diversification of the investments into various investment options with multiple asset managers.

The exposure of the plan assets of the qualified plan to risk is limited by the Bank’s Pension Committee’s diversification of the investments into various investment options with multiple asset managers.

The Pension Committee engages an investment management advisory firm that regularly monitors the performance of the asset managers and ensures they are within compliance of the policies adopted by the Trustees.

If the risk profile and overall return of assets managed are not in line with the risk objectives or expected return benchmarks for the qualified plan, the advisory firm may recommend the termination of an asset manager to the Pension Committee.

2019 Form 10-K

In general, the plan assets of the qualified plan are investment securities that are well-diversified in terms of industry, capitalization and asset class.

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Fair Value Measurements at Reporting Date Using:

December 31, 2019

Quoted Prices

Investments December 31, 2020 Quoted Prices

in Active Markets

for Identical

Assets (Level 1)

Assets (Level 1) Significant

Observable Inputs

(Level 2) Significant

($ in thousands)

2 unchanged sentences

Corporate bonds 20 51,410 — 51,410 —

Cash and money market funds

Mutual funds 18 48,041 48,041 — —

government agency securities 3 8,174 — 8,174 —

Cash and money market funds 2 5,420 5,420 — —

Total investments 100 % $ 260,028 $ 200,444 $ 59,584 $ —

2020 Form 10-K

Fair Value Measurements at Reporting Date Using:

December 31, 2018

Quoted Prices

Investments December 31, 2019 Quoted Prices

in Active Markets

for Identical

Assets (Level 1)

Assets (Level 1) Significant

Observable Inputs

(Level 2) Significant

($ in thousands)

2 unchanged sentences

Corporate bonds 21 51,221 — 51,221 —

Cash and money market funds

Mutual funds 18 42,119 42,119 — —

government agency securities 3 6,263 — 6,263 —

Cash and money market funds 4 9,013 9,013 — —

Total investments 100 % $ 235,981 $ 178,497 $ 57,484 $ —

11 unchanged sentences

For tax planning, financial planning, cash flow management or cost reduction purposes, Valley may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.

2019 Form 10-K

Other Qualified Plan

4 unchanged sentences

The Pentegra DB Plan was frozen as of December 31, 2008.

At the acquisition date, Valley determined that it would withdraw from the Pentegra DB Plan and, as a result, recorded an estimated liability of $ 3.0 million .

During 2020, plan participants are expected to receive annuities based on the actuarial estimates of the pension obligation.

During 2020, Valley withdrew from the Pentegra DB Plan and distributed annuities to participants based on the actuarial computation of their pension benefit.

Valley recognized approximately $ 1.1 million of expense included in other non-interest expense related to the final contribution to the Pentegra DB Plan and distribution of the annuities for the year ended December 31, 2020.

Other Non-Qualified Plans

3 unchanged sentences

The $ 1.0 million in accumulated other comprehensive loss will be reclassified to expense on a straight-line basis over the remaining benefit periods of these non-qualified plans.

2020 Form 10-K 124

Valley assumed, in the Oritani acquisition on December 1, 2019, certain obligations under non-qualified retirement plans described below:

Non-qualified benefit equalization plans (BEP) that provided supplemental benefits to certain eligible executives and officers The BEP plans were terminated on November 30, 2019 and the accrued benefits will be fully distributed to the participants on July 1, 2020.

The funded obligation under the BEP plans totaled $ 26.8 million at December 31, 2019 .

An non-qualified benefit equalization pension plan that provided benefits to certain officers who were disallowed certain benefits under former Oritani’s qualified pension plan.

This plan was terminated on November 30, 2019 and the accrued benefits will be distributed to plan participants over 5 years beginning on December 1, 2020.

The funded obligation under this plan totaled $ 1.6 million at December 31, 2019 .

A Supplemental Executive Retirement Income Agreement (the SERP) for the former CEO of Oritani.

• Non-qualified benefit equalization plans (BEP) that provided supplemental benefits to certain eligible executives and officers.

The BEP plans were terminated on November 30, 2019 and the funded obligation under the BEP plans totaled $ 26.8 million on December 31, 2019.

The accrued benefits were fully distributed to the participants on July 1, 2020.

• Non-qualified benefit equalization pension plan that provided benefits to certain officers who were disallowed certain benefits under former Oritani’s qualified pension plan.

This plan was terminated on November 30, 2019 and the accrued benefits are payable to plan participants in five equal installments beginning annually on December 1, 2020 through December 1, 2024.

The funded obligation under this plan totaled $ 1.3 million and $ 1.6 million at December 31, 2020 and 2019, respectively.

• Supplemental Executive Retirement Income Agreement (the SERP) for the former CEO of Oritani.

The SERP is a retirement benefit with a minimum payment period of 20 years upon death, disability, normal retirement, early retirement or separation from service after a change in control.

Distributions from the plan will begin on July 1, 2020.

The funded obligation under the SERP totaled $ 13.0 million at December 31, 2019 .

The above Oritani non-qualified plans are secured by investments in money market mutual funds which are held in a trust and classified as equity securities on the consolidated statements of financial condition at December 31, 2019 .

Distributions from the plan began on July 1, 2020.

The funded obligation under the SERP totaled $ 13.6 million and $ 13.0 million at December 31, 2020 and 2019, respectively.

Valley recorded $ 1.5 million of expenses related to the SERP for the year ended December 31, 2020.

Valley also assumed an Executive Group Life Insurance Replacement (“Split-Dollar”) Plan from Oritani.

1 unchanged sentence

Participants in the Split-Dollar plan are entitled to up to two times their base annual salary, as defined by the plan.

The remaining accrued liability for the Split-Dollar plan totaled $ 961 thousand at December 31, 2019 .

The accrued liability for the Split-Dollar plan totaled $ 1.8 million and $ 961 thousand at December 31, 2020 and 2019, respectively.

Valley recorded $ 812 thousand of expenses related to the Split-Dollar plan f or the year ended December 31, 2020.

Valley National Bank and its subsidiaries may award cash incentive and merit bonuses to its officers and employees based upon a percentage of the covered employees’ compensation as determined by the achievement of certain performance objectives.

1 unchanged sentence

Savings and Investment Plan

Valley National Bank maintains a KSOP, which is defined as a 401(k) plan with an employee stock ownership feature.

This plan covers eligible employees of the Bank and its subsidiaries and allows employees to contribute a percentage of their salary, with the Bank matching a certain percentage of the employee contribution in cash invested in accordance with each participant’s investment elections.

Valley National Bank maintains a 401(k) plan that covers eligible employees of the Bank and its subsidiaries and allows employees to contribute a percentage of their salary, with the Bank matching a certain percentage of the employee contribution in cash invested in accordance with each participant’s investment elections.

The Bank recorded $ 10.1 million, $ 8.6 million and $ 8.5 million in expense for contributions to the plan for the years ended December 31, 2020, 2019 and 2018, respectively.

2019 Form 10-K

Deferred Compensation Plan

Valley has a non-qualified, unfunded deferred compensation plan maintained for the purpose of providing deferred compensation for selected employees participating in the 401(k) plan whose contributions are limited as a result of the limitations under section 401(a)(17) of the IRS Code.

Each participant in the plan is permitted to defer per calendar year, up to five percent of the portion of the participant’s salary and cash bonus above the limit in effect under the Company's 401(k) plan and receive employer matching contributions that become fully vested after two years of participation in the plan.

Plan participants also receive an annual interest crediting on their balances held as of December 31 each year.

Benefits are generally paid to a participant in a single lump sum following the participant’s separation from service with Valley.

Valley recorded plan expenses of $ 372 thousand, $ 273 thousand and $ 262 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, Valley had an unsecured general liability of $ 1.7 million and $ 1.0 million, respectively, included in accrued expenses and other liabilities in connection with this plan.

Stock Based Compensation

Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the “2016 Stock Plan”), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016.

The 2016 Stock Plan is administered by the Compensation and Human Resources Committee (the “Committee”) appointed by Valley’s Board of Directors.

Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the 2016 Plan), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016.

The 2016 Plan is administered by the Compensation and Human Resources Committee (the Committee) appointed by Valley’s Board of Directors.

The Committee can grant awards to officers and key employees of Valley.

The primary purpose of the 2016 Stock Plan is to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.

Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members).

As of December 31, 2019 , 4.3 million shares of common stock were available for issuance under the 2016 Stock Plan.

The primary purposes of the 2016 Plan are to provide additional incentive to officers and key employees of Valley and its subsidiaries, whose substantial contributions are

2020 Form 10-K

essential to the continued growth and success of Valley, and to attract and retain competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.

Under the 2016 Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members).

As of December 31, 2020 , 3.0 million sh ares of common stock were available for issuance under the 2016 Plan.

The essential features of each award are described in the award agreement relating to that award.

1 unchanged sentence

The grant date fair values of performance-based awards that vest based on a market condition are determined by a third party specialist using a Monte Carlo valuation model.

Valley recorded total stock-based compensation expense, primarily for restricted stock awards, totaling $ 15.0 million , $ 19.5 million and $ 12.2 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

The stock-based compensation expense for 2019 , 2018 and 2017 included $ 2.1 million , $ 4.3 million and $ 4.3 million , respectively, related to stock awards granted to retirement eligible employees and was immediately recognized.

On January 26, 2021, the Board of Directors approved the Valley National Bancorp 2021 Incentive Compensation Plan (the 2021 Plan).

The 2021 Plan is subject to approval by Valley shareholders at the Annual Meeting of Shareholders on April 19, 2021.

The 2021 Plan would authorize the Committee to issue up to 9 million shares to Valley's employees and directors.

Awards under the 2021 Plan will be granted in substantially the same manner as the 2016 Plan.

The 2021 Plan is described in more detail in Valley's 2021 definitive proxy statement.

Valley recorded total stock-based compensation expense of $ 16.5 million, $ 15.0 million and $ 19.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The stock-based compensation expense for 2020, 2019 and 2018 included $ 1.5 million, $ 2.1 million and $ 4.3 million, respectively, related to stock awards granted to retirement eligible employees.

In 2020 and 2019, compensation expense for these awards was amortized monthly over a one year period after the grant date.

Prior to 2019, award grantees who were eligible for retirement did not have a service period requirement and the expense was immediately recognized.

The fair values of all other stock awards are expensed over the shorter of the vesting or required service period.

As of December 31, 2020, the unrecognized amortization expense for all stock-based compensation totaled approximately $ 17.8 million and will be recognized over an average remaining vesting period of approximately 1.76 years .

Restricted Stock.

Restricted stock is awarded to key employees providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Stock Plan.

Compensation expense is measured based on the grant-date fair value of the shares.

The following table sets forth the changes in restricted stock awards (RSAs) outstanding for the years ended December 31, 2019 , 2018 and 2017 :

Restricted Stock Awards Outstanding

Outstanding at beginning of year

Outstanding at end of year

Valley did not award shares of restricted stock during 2019.

Included in the RSAs granted (in the table above) during 2018 and 2017 , 60 thousand and 45 thousand shares, respectively, were issued to Valley directors.

In 2018 and 2017 , each non-management director received $ 60 thousand and $ 50 thousand , respectively, of RSAs as part of their annual retainer.

The RSAs were granted on the date of the annual shareholders’ meeting with the number of RSAs determined using the closing market price on the date prior to grant.

The RSAs vest on the earlier of the next annual shareholders’ meeting or the first anniversary of the grant date, with acceleration upon a change in control, death or disability, but not resignation from the Board of Directors.

On December 1, 2019, Valley completed the acquisition of Oritani, at which time each outstanding Oritani RSA became fully vested.

The stock plan under which the Oritani stock awards were issued is no longer active.

Restricted Stock Units (RSUs) .

5 unchanged sentences

Dividend equivalents, per the terms of the agreements, are accumulated and paid to the grantee at the vesting date, or forfeited if the applicable performance or service conditions are not met.

The grant date fair value of the RSUs was $ 10.43 , $ 12.36 and $ 11.05 per share for the years ended December 31, 2019 , 2018 , and 2017 , respectively.

2019 Form 10-K

costs related to RSUs totaled $ 3.6 million , $ 5.5 million and $ 3.8 million , and were included in total stock-based compensation expense for the years ended December 31, 2019 , 2018 and 2017 , respectively.

The grant date fair value of the performance-based RSUs was $ 10.82 , $ 10.43 and $ 12.36 per share for the years ended December 31, 2020, 2019, and 2018, respectively.

The grant date fair value of time-based RSUs was $ 10.29 and $ 10.32 for the years ended December 31, 2020 and 2019, respectively.

Valley did not award time-based restricted stock units during 2018.

The following table sets forth the changes in RSUs outstanding for the years ended December 31, 2020, 2019 and 2018:

Restricted Stock Units Outstanding

2020 2019 2018

Outstanding at beginning of year 2,158,255 1,378,886 1,114,962

Acquired in business combinations — — 336,379

Granted 2,030,026 1,412,941 509,725

Vested ( 879,085 ) ( 500,204 ) ( 503,879 )

Forfeited ( 80,537 ) ( 133,368 ) ( 78,301 )

Outstanding at end of year 3,228,659 2,158,255 1,378,886

Restricted Stock.

Restricted stock is awarded to key employees providing for the immediate award of our common stock subject to certain vesting and restrictions under the 2016 Plan.

Compensation expense is measured based on the grant-date fair value of the shares.

2020 Form 10-K 126

The following table sets forth the changes in restricted stock awards (RSAs) outstanding for the years ended December 31, 2020, 2019 and 2018:

Restricted Stock Awards Outstanding

2020 2019 2018

Outstanding at beginning of year 1,058,681 1,720,968 1,771,702

Granted — — 1,263,144

Vested ( 610,607 ) ( 547,653 ) ( 1,128,521 )

Forfeited ( 34,373 ) ( 114,634 ) ( 185,357 )

Outstanding at end of year 413,701 1,058,681 1,720,968

Valley did not award any shares of restricted stock dur ing 2020 and 20 19.

Included in the RSAs granted (in the table above) during 2018 are 60 thousand shares issued to Valley directors, which are fully vested.

Stock Options .

6 unchanged sentences

The following table summarizes stock options activity as of December 31, 2020, 2019 and 2018 and changes during the years ended on those dates:

Stock Options

2020 2019 2018

Exercise Weighted

Stock Options Shares Price Shares Price Shares Price

Outstanding at beginning of year 3,453,516 $ 8 1,051,787 $ 7 446,980 $ 13

Acquired in business combinations — — 3,130,171 8 1,803,165 5

Exercised ( 249,308 ) 8 ( 716,920 ) 7 ( 975,325 ) 5

Forfeited or expired ( 217,861 ) 11 ( 11,522 ) 8 ( 223,033 ) 14

3 unchanged sentences

Options Outstanding and Exercisable

Range of Exercise Prices

Number of Options

Weighted Average

Range of Exercise Prices Number of Options Weighted Average

Remaining Contractual

Life in Years

Weighted Average

Life in Years Weighted Average

Exercise Price

Director Restricted Stock Plan.

The Director Restricted Stock Plan provides the non-employee members of the Board of Directors with the opportunity to forgo some or their entire annual cash retainer and meeting fees in exchange for shares of Valley restricted stock.

On January 29, 2014, the Director Restricted Stock Plan was amended to provide that no additional fees may be exchanged for Valley’s restricted stock effective April 1, 2014.

The Director Restricted Stock Plan terminated in April 2018 when the remaining restricted stock under the plan vested.

91,500 1.6 $ 3

149,248 4.3 5

2,687,999 0.9 7

32,000 7.3 10

25,600 7.7 10

2,986,347 1.3 7

2020 Form 10-K

The following table sets forth the changes in director’s restricted stock awards outstanding for the years ended December 31, 2018 and 2017 :

Restricted Stock Awards Outstanding

Outstanding at beginning of year

Outstanding at end of year

INCOME TAXES (Note 13)

Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S.

income tax law.

Effective in 2018, the Tax Act reduced the U.S.

statutory corporate tax rate from 35 percent to 21 percent.

In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act.

The guidance provides a one-year measurement period for companies to complete the accounting.

Valley reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete.

To the extent Valley’s accounting for certain income tax effects of the Tax Act is incomplete but it can determine a reasonable estimate, Valley recorded a provisional estimate in the financial statements.

If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, Valley made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017.

The accounting for the tax effects of the Tax Act was completed with the final 2017 tax returns in the fourth quarter 2018, resulting in a $ 2.3 million tax benefit for the year ended December 31, 2018.

Income tax expense for the years ended December 31, 2020, 2019 and 2018 consisted of the following:

2020 2019 2018

(in thousands)

Current expense:

Deferred expense (benefit):

Federal $ 96,057 $ 95,317 $ 51,147

State 48,463 36,457 28,898

144,520 131,774 80,045

Deferred (benefit) expense:

Federal ( 3,109 ) 10,444 ( 17,463 )

State ( 1,951 ) 4,784 5,683

( 5,060 ) 15,228 ( 11,780 )

Total income tax expense $ 139,460 $ 147,002 $ 68,265

2019 Form 10-K

The tax effects of temporary differences that gave rise to the significant portions of the deferred tax assets and liabilities as of December 31, 2020 and 2019 were as follows:

1 unchanged sentence

Deferred tax assets:

Allowance for loan losses

Allowance for credit losses $ 96,508 $ 44,486

Employee benefits 20,888 28,263

Investment securities, including other-than-temporary impairment losses

Net operating loss carryforwards 17,814 19,768

Purchase accounting 10,354 41,857

Other 24,677 19,904

Total deferred tax assets 170,241 154,278

1 unchanged sentence

Pension plans 22,705 19,686

Investment securities, including other-than-temporary impairment losses

Depreciation 3,829 4,527

Investment securities 12,690 2,319

Other investments 9,584 7,731

Core deposit intangibles 12,960 16,620

Other 12,226 13,665

Total deferred tax liabilities 73,994 64,548

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Based upon taxes paid and projections of future taxable income over the periods in which the net deferred tax assets are deductible, management believes that it is more likely than not that Valley will realize the benefits, net of an immaterial valuation allowance, of these deductible differences and loss carryforwards.

Reconciliation between the reported income tax expense and the amount computed by multiplying consolidated income before taxes by the statutory federal income tax rate of 21 percent for the years ended December 31, 2019 and 2018 , and 35 percent for the year ended December 31, 2017 were as follows:

2020 Form 10-K 128

2020 2019 2018

(in thousands)

2 unchanged sentences

State income tax expense, net of federal tax effect

36,744 32,581 23,851

Tax-exempt interest, net of interest incurred to carry tax-exempt securities

( 2,786 ) ( 3,118 ) ( 3,974 )

Bank owned life insurance ( 2,026 ) ( 1,637 ) ( 1,734 )

1 unchanged sentence

FDIC insurance premium 3,283 2,507 3,318

Impact of the Tax Act

Impact of the Tax Cuts and Jobs Act of 2017 — — ( 2,274 )

Addition to reserve for uncertainties — 31,123 —

Other, net 3,002 1,255 641

Income tax expense $ 139,460 $ 147,002 $ 68,265

2019 Form 10-K

The federal energy investment tax credit (FEITC) program encourages the use of renewable energy, including solar energy.

The energy program reduces federal income taxes by offering a 30 percent tax credit to owners of energy property that meets established performance and quality standards.

In addition, there are other returns from tax losses and cash flows generated by the investment.

Typically, an owner and the tax credit investor, such as Valley, establish a limited partnership.

The tax credit investor usually has a substantial, but passive, interest in the partnership and the owner of the solar energy property has a small interest.

The ownership structure permits the tax benefits to pass through to the tax credit investor with an expected exit from ownership after five years.

The amount of the FEITC is calculated based on the total cost of a renewable energy property.

From 2013 to 2015, Valley invested in three FEITC funds (Fund VI, Fund XII and Fund XIX) sponsored by DC Solar to purchase a total of 512 mobile solar generator units.

The valuation of the unit price of the solar units was supported by an appraisal prepared by a well-recognized national appraisal firm.

The total tax credits of $ 22.8 million were used to reduce Valley’s federal income taxes payable in its consolidated financial statements from 2013 to 2015.

The full value of the FEITC is earned immediately when a solar energy property is placed in service.

However, the tax credit is subject to recapture for federal tax purposes for a five-year compliance period, if the property ceases to remain eligible for the tax credit.

A property may become ineligible during the compliance period due to (i) a sale or disposal of the property, (ii) lease of the property to a tax exempt entity or (iii) its removal from service (i.e., no longer available for lease).

During the first year after the property has been placed in service, the recapture rate is 100 percent of the tax credit.

The rate declines by 20 percent each year thereafter until the end of the fifth year.

The compliance period expires at the end of the fifth year after the property has been placed in service.

All three funds leased the mobile solar generator units to DC Solar distributions, which stated its intention to sublease the units to third parties.

An entity shall initially recognize the financial statement effects of a tax position when it is more likely than not (or a likelihood of more than 50 percent), based on the technical merits, that the position will be sustained upon examination.

The level of evidence that is necessary and appropriate to support an entity's assessment of the technical merits of a tax position is a matter of judgment that depends on all available information.

At each of the investment dates, Valley obtained two tax opinions from national law firms that, based upon the facts recited, support the recognition of the tax credits in its tax returns.

Based upon management's review of the tax opinions on the investment’s legal structure, Valley recognized and measured each tax position at 100 percent of the tax credit.

Valley's subsequent measurement of a tax position is based on management’s best judgment given the facts, circumstances, and information available at the latest quarterly reporting date.

A change in judgment that results in subsequent derecognition or change in measurement of a tax position taken in a prior annual period (including any related interest and penalties) is recognized as a discrete item in the period in which the change occurs.

In late February 2019, Valley learned of Federal Bureau of Investigation allegations of fraudulent conduct by DC Solar, including information about asset seizures of DC Solar property and assets of its principals and ongoing federal investigations.

Since learning of the allegations, Valley conducted an ongoing investigation coordinated with other DC Solar fund investors, investors' outside counsel and a third party specialist.

The facts uncovered to date by the investor group impact each investor differently, affecting their likelihood of loss and the ultimate amount of tax benefit likely to be recaptured.

To date, over 97 percent of the 512 solar generator units purchased by Valley's three funds have been positively identified by a third party specialist at several leasee and other locations throughout the United States.

Valley also learned through its investigation that the IRS has challenged the valuation appraisals of similar solar generator units that were used to determine the federal renewable energy tax credits related to another DC Solar fund owned by an unrelated investor.

Given the circumstances that Valley was aware of during the first nine months of 2019, including the aforementioned IRS challenge of the appraisals of similar units used by an unrelated fund investor, and management's best judgments regarding the settlement of the tax positions that it would ultimately accept with the IRS, Valley expected a partial loss and tax benefit recapture.

We invest in certain tax-advantaged investments that support qualified affordable housing projects, community development and, prior to 2019, renewable energy resources.

Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods.

Third parties perform diligence on these investments for us on which we rely both at inception and on an on-going basis.

We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized.

We previously invested in mobile solar generators sold and leased back by DC Solar and its affiliates (DC Solar).

DC Solar had its assets frozen in December 2018 by the U.S.

Department of Justice.

DC Solar and related entities are in Chapter 7 bankruptcy.

A group of investors who purchased mobile solar gener ators from, and leased them back to, DC Solar, including us received tax credits for making these renewable resource investments.

During the fourth quarter 2019, several of the co- conspirators pleaded guilty to fraud in the on-going federal investigation.

Based upon this new information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold (discussed above) in Valley's tax reserve assessment at December 31, 2019.

As result of this assessment and a partial reserve recognized by Valley in the first quarter 2019, Valley's net income for the year ended December 31, 2019 includes an increase to Valley's provision for income taxes of $ 31.1 million reflecting the reserve for uncertain tax liability positions established in 2019 (shown in the table below).

As of December 31, 2019, Valley believes it is fully reserved for the renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest.

However, Valley can provide no assurance that it will not recognize additional tax provisions related to this uncertain tax liability in the future.

2019 Form 10-K

A reconciliation of Valley’s gross unrecognized tax benefits for 2019 , 2018 and 2017 are presented in the table below:

Based upon this information, Valley deemed that its tax positions related to the DC Solar funds did not meet the more likely than not recognition threshold in Valley's tax reserve assessment at December 31, 2019.

The principals pled guilty to fraud in early 2020.

As of December 31, 2020 and 2019, Valley believes that it was fully reserved for the renewable energy tax credits and other tax benefits previously recognized from the investments in the DC Solar funds plus interest.

Valley will continue to evaluate all its existing tax positions, however, cannot provide assurance that it will not recognize additional tax provisions related to this uncertain tax liability in the future.

A reconciliation of Valley’s gross unrecognized tax benefits for 2020, 2019 and 2018 is presented in the table below:

2020 2019 2018

(in thousands)

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The entire balance of unrecognized tax benefits, if recognized, would favorably affect Valley's effective income tax rate.

It is reasonably possible that the liability for unrecognized tax benefits could increase or decrease in the next twelve months due to completion of tax authorities’ exams or the expiration of statutes of limitations.

Management estimates that the liability for unrecognized tax benefits could decrease by $ 3.5 million within the next twelve months.

Valley’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Valley accrued approximately $ 6.1 million and $ 1.8 million of interest expense associated with Valley’s uncertain tax positions at December 31, 2019 and 2017, respectively.

Valley accrued approximately $ 7.6 million and

2020 Form 10-K

$ 6.1 million of interest expense associated with Valley’s uncertain tax positions at December 31, 2020 and 2019, respectively.

There was no interest expense accrued for uncertain tax positions during the year ended December 31, 2018.

4 unchanged sentences

federal and state income tax examinations by tax authorities for years before 2017.

Valley is under routine examination by various state jurisdictions, and we expect the examinations to be completed within the next 12 months.

Valley is under examination by the IRS and also under routine examination by various state jurisdictions, and we expect the examinations to be completed within the next 12 months.

Valley has considered, for all open audits, any potential adjustments in establishing our reserve for unrecognized tax benefits as of December 31, 2020.

6 unchanged sentences

Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition.

Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense of the consolidated statements of income using the equity method of accounting.

Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense in the consolidated statements of income using the equity method of accounting.

After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and other-than-temporary impairments, if applicable.

See the "Other-Than-Temporary Impairment Analysis" section below.

See the "Impairment Analysis" section below.

The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at December 31, 2020 and 2019:

4 unchanged sentences

Total tax credit investments, net

$ 67,375 $ 84,130

Other Liabilities:

4 unchanged sentences

The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

(in thousands)

3 unchanged sentences

Total reduction in income tax expense

$ 13,479 $ 16,962 $ 28,064

Amortization of Tax Credit Investments:

4 unchanged sentences

Total amortization of tax credit investments recorded in non-interest expense

Other-Than-Temporary Impairment Analysis

$ 13,335 $ 20,392 $ 24,200

Impairment A nalysis

An impairment loss is recognized when the fair value of the tax credit investment is less than its carrying value.

13 unchanged sentences

If management determines that a decline in value is other than temporary per its quarterly and annual reviews, including current probable cash flow projections, the applicable tax credit investment is written down to its estimated fair value through an impairment charge to earnings, which establishes the new cost basis of the investment.

The aggregate unamortized investment related to three federal renewable energy tax credit funds sponsored by DC Solar represented approximately $ 2.4 million (or approximately $ 800 thousand for each fund) of the $ 59.1 million of net other tax credit investments reported as of December 31, 2019 .

These funds are disclosed in detail in Note 14.

During the first quarter 2019, Valley determined that future cash flows related to the remaining investments in all three funds were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019.

As a result, Valley recognized an other-than-temporary impairment charge for the entire aggregate unamortized investment of $ 2.4 million during the first quarter 2019, which is included within amortization of tax credit investments for the year ended December 31, 2019 .

As a result of the Tax Act, Valley incurred additional impairment of $ 2.2 million and $ 2.1 million related to certain affordable housing tax credit investments and other tax credit investments, respectively, during the fourth quarter 2017.

2019 Form 10-K

During the first quarter 2019, Valley determined that future cash flows related to the remaining investments in three federal renewable energy tax credit funds sponsored by DC Solar (previously reported in other tax credit investments, net) were not probable based upon new information available, including the sponsor’s bankruptcy proceedings which were reclassified to Chapter 7 from Chapter 11 in late March 2019.

As a result, Valley recognized impairment charge for the entire aggregate unamortized investment of $ 2.4 million for the first quarter 2019, which is included within amortization of tax credit investments for the year ended December 31, 2019.

COMMITMENTS AND CONTINGENCIES (Note 15)

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In the ordinary course of business in meeting the financial needs of its customers, Valley, through its subsidiary Valley National Bank, is a party to various financial instruments, which are not reflected in the consolidated financial statements.

These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit.

These financial instruments include standby and commercial letters of credit, unused portions of lines of credit and

2020 Form 10-K

commitments to extend various types of credit.

These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

10 unchanged sentences

Commercial letters of credit 1,663 2,887

Total $ 7,845,683 $ 7,575,781

Obligations to advance funds under commitments to extend credit, including commitments under unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

15 unchanged sentences

Valley’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.

To accomplish this objective, Valley uses interest rate swaps and caps as part of its interest rate risk management strategy.

To accomplish this objective, Valley uses interest rate swaps as part of its interest rate risk management strategy.

Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty.

Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

2019 Form 10-K

At December 31, 2019 , Valley had the following cash flow hedge derivatives:

One forward starting interest rate swap, with a notional amount of $ 75 million , to hedge the changes in cash flows associated with certain brokered money market deposits.

Starting in November 2015 , the interest rate swap required Valley to pay fixed-rate amounts of approximately 2.97 percent , in exchange for the receipt of variable-rate payments at the three-month LIBOR rate.

The swap has an expiration date of November 2020 .

Two forward starting interest rate swaps with a total notional amount of $ 50 million and $ 55 million , respectively, to hedge the changes in cash flows associated with borrowed funds.

Starting in March 2016, the interest rate swaps required Valley to pay fixed-rate amounts of 2.87 percent and 2.88 percent , respectively, in exchange for the receipt of variable-rate payments at the three-month LIBOR rate.

The two swaps have expiration dates in March 2020 and September 2020, respectively.

At December 31, 2020, Valley had 10 interest rate swap agreements, with a total notional amount of $ 1.1 billion, to hedge the changes in cash flows associated with certain short-term FHLB advances and brokered deposits.

Valley is required to pay fixed-rates of interest ranging from 0.05 percent to 0.67 percent and receives variable rates of interest that reset quarterly based on three-month LIBOR.

Expiration dates for the swaps range from April 2021 to August 2022.

Fair Value Hedges of Fixed Rate Assets and Liabilities.

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From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value.

Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount.

Interest rate swaps designated as fair value hedges

2020 Form 10-K 132

involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.

Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.

At December 31, 2019 , Valley had one interest rate swap with a notional amount of approximately $ 7.3 million used to hedge the change in the fair value of a commercial loan.

Valley's one interest rate swap used to hedge the change in the fair value of a commercial loan matured in November 2020.

Valley did not have any fair value hedges at December 31, 2020.

Non-designated Hedges.

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Derivatives not designated as hedges are not entered into for speculative purposes.

Under a program, Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies.

Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies.

These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions.

As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

As these interest rate swaps do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans.

4 unchanged sentences

At December 31, 2020, Valley had 26 credit swaps with an aggregate notional amount of $ 221.1 million related to risk participation agreements.

At December 31, 2019 , Valley had one "steepener" swap with a total current notional amount of $ 10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits.

At December 31, 2020, Valley h ad two "steepener" swaps with a total current notional amount of $ 10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits.

The rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve.

3 unchanged sentences

Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on Valley’s commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.

2019 Form 10-K

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows:

December 31, 2019

December 31, 2018

Other Liabilities

Notional Amount

Other Liabilities

Notional Amount

December 31, 2020 December 31, 2019

Fair Value Fair Value

Other Assets Other Liabilities Notional Amount Other Assets Other Liabilities Notional Amount

(in thousands)

Derivatives designated as hedging instruments:

Cash flow hedge interest rate caps and swaps

Cash flow hedge interest swaps $ — $ 179 $ 1,100,000 $ — $ 1,484 $ 180,000

Fair value hedge interest rate swaps — — — — 229 7,281

Total derivatives designated as hedging instruments

$ — $ 179 $ 1,100,000 $ — $ 1,713 $ 187,281

Derivatives not designated as hedging instruments:

Interest rate swaps, and embedded and credit derivatives

Interest rate swaps and other contracts (1)

$ 387,008 $ 154,025 $ 8,889,557 $ 158,382 $ 42,020 $ 4,113,106

Mortgage banking derivatives 444 2,077 321,486 150 193 142,760

Total derivatives not designated as hedging instruments

The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments.

As a result, the fair value of the designated cash flow interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties and reported in the table above on a net basis at December 31, 2019 .and 2018 .

$ 387,452 $ 156,102 $ 9,211,043 $ 158,532 $ 42,213 $ 4,255,866

2020 Form 10-K

(1) Other contracts include risk participation agreements.

The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the cash flow hedges and over-the-counter (OTC) non-designated derivative instruments.

As a result, the fair value of the designated cash flow interest rate swaps assets and designated and non-designated interest rate swaps liabilities were reduced by variation margin treated as settlement of the related derivatives fair values for legal and accounting purposes as required by central clearing houses and reported in the table above on a net basis at December 31, 2020 and 2019.

Gains (losses) included in the consolidated statements of income and in other comprehensive income (loss), on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows:

2020 2019 2018

(in thousands)

Amount of loss reclassified from accumulated other comprehensive loss to interest expense

$ ( 2,912 ) $ ( 1,808 ) $ ( 3,493 )

Amount of (loss) gain recognized in other comprehensive income ( 3,169 ) ( 1,380 ) 2,651

4 unchanged sentences

Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:

2020 2019 2018

(in thousands)

3 unchanged sentences

Interest income $ ( 229 ) $ ( 133 ) $ ( 290 )

Fee income related to derivative interest rate swaps executed with commercial loan customers totaled $ 33.4 million , $ 16.4 million and $ 8.3 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

2019 Form 10-K

The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at December 31, 2020 and 2019:

Line Item in the Statement of Financial Position in Which the Hedged Item is Included

Carrying Amount of the Hedged Asset

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset

Line Item in the Statement of Financial Position in Which the Hedged Item is Included Carrying Amount of the Hedged Asset Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset

2020 2019 2020 2019

(in thousands)

Loans $ — $ 7,510 $ — $ 229

Net losses included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows:

2020 2019 2018

(in thousands)

1 unchanged sentence

Other non-interest expense $ 1,067 $ 898 $ 792

Fee income related to derivative interest rate swaps executed with commercial loan customers totaled $ 59.0 million , $ 33.4 million and $ 16.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

2020 Form 10-K 134

Collateral Requirements and Credit Risk Related Contingency Features.

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Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.

2019 Form 10-K

BALANCE SHEET OFFSETTING (Note 16)

Certain financial instruments, including derivatives (consisting of interest rate swaps and caps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements.

Certain financial instruments, including certain OTC derivatives (mostly interest rate swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated statements of financial condition and/or subject to master netting arrangements or similar agreements.

OTC derivatives include interest rate swaps executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house (presented in the table below).

The credit risk associated with bilateral OTC derivatives is managed through obtaining collateral and enforceable master netting agreements.

Valley is party to master netting arrangements with its financial institution counterparties;

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In such cases, the collateral would be used to settle the fair value of the repurchase agreement should Valley be in default.

Total amount of collateral held or pledged can not exceed the net derivative fair values with the counterparty.

2020 Form 10-K

The table below presents information about Valley’s financial instruments that are eligible for offset in the consolidated statements of financial condition as of December 31, 2020 and 2019.

1 unchanged sentence

Gross Amounts

Recognized Gross Amounts

Offset Net Amounts

Presented Financial

Instruments Cash

Collateral (1)

(in thousands)

3 unchanged sentences

Repurchase agreements 300,000 — 300,000 ( 300,000 ) (2)

Total liabilities $ 450,487 $ — $ 450,487 $ ( 300,000 ) $ ( 150,487 ) $ —

December 31, 2019

Interest rate swaps and caps

Interest rate swaps $ 17,218 $ — $ 17,218 $ — $ — $ 17,218

Interest rate swaps $ 17,218 $ — $ 17,218 $ — $ ( 16,881 ) $ 337

Repurchase agreements 350,000 — 350,000 ( 350,000 ) (2)

Total liabilities $ 367,218 $ — $ 367,218 $ ( 350,000 ) $ ( 16,881 ) $ 337

(1) Cash collateral pledged to our counterparties in relation to market value exposures of OTC derivative contracts in a liability position.

(2) Represents the fair value of non-cash pledged investment securities.

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Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

Valley is required to maintain a common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent , Tier 1 capital to risk-weighted assets 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.

On January 1, 2019, the capital conversation buffer was fully phased-in.

Valley is required to maintain a common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets 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 December 31, 2020 and 2019, Valley and Valley National Bank exceeded all capital adequacy requirements (see table 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 for 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 reserve build (i.e., provision for credit losses less net charge-offs) for the year ended December 31, 2020 will be phased in over the same time frame.

2020 Form 10-K 136

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

Minimum Capital

Actual Minimum Capital

Requirements To Be Well

Capitalized Under

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Action Provision

Amount Ratio Amount Ratio Amount Ratio

($ in thousands)

1 unchanged sentence

Total Risk-based Capital

Valley $ 3,802,223 12.64 % $ 3,159,019 10.50 % N/A N/A

Valley National Bank 3,839,922 12.76 3,158,842 10.50 $ 3,008,421 10.00 %

Common Equity Tier 1 Capital

Valley 2,991,085 9.94 2,106,013 7.00 N/A N/A

Valley National Bank 3,607,625 11.99 2,105,894 7.00 1,955,473 6.50

Tier 1 Risk-based Capital

Valley 3,205,926 10.66 2,557,301 8.50 N/A N/A

Valley National Bank 3,607,625 11.99 2,557,158 8.50 2,406,736 8.00

Tier 1 Leverage Capital

Valley 3,205,926 8.06 1,591,852 4.00 N/A N/A

Valley National Bank 3,607,625 9.07 1,591,457 4.00 1,989,321 5.00

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Total Risk-based Capital

Valley $ 3,427,134 11.72 % $ 3,070,687 10.50 % N/A N/A

Valley National Bank 3,416,674 11.69 3,069,894 10.50 $ 2,923,709 10.00 %

Common Equity Tier 1 Capital

Valley 2,754,524 9.42 2,047,125 7.00 N/A N/A

Valley National Bank 3,152,070 10.78 2,046,596 7.00 1,900,411 6.50

Tier 1 Risk-based Capital

Valley 2,968,530 10.15 2,485,795 8.50 N/A N/A

Valley National Bank 3,152,070 10.78 2,485,153 8.50 2,338,967 8.00

Tier 1 Leverage Capital

Valley 2,968,530 8.76 1,355,378 4.00 N/A N/A

Valley National Bank 3,152,070 9.31 1,354,693 4.00 1,693,366 5.00

2020 Form 10-K

COMMON AND PREFERRED STOCK (Note 18)

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The ability to issue authorized and previously unissued common stock or reissue treasury stock as part of Valley's DRIP was terminated effective February 12, 2018.

During 2018 and 2017 , 87 thousand and 713 thousand common shares, respectively, were reissued from treasury stock or issued from authorized common shares under the DRIP for net proceeds totaling $ 1.0 million and $ 8.2 million , respectively.

During 2018, 87 thousand common shares were reissued from treasury stock or issued from authorized common shares under the DRIP for net proceeds totaling $ 1.0 million.

Repurchase Plan.

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During the years ended December 31, 2020, 2019 and 2018, Valley purchased approximately 510 thousand, 175 thousand and 441 thousand shares, respectively, of its outstanding common stock at an average price of $ 10.61 , $ 10.45 and $ 11.83 , respectively, for such purpose.

2019 Form 10-K

Preferred Stock

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Preferred stock is included in Valley's (additional) Tier 1 capital and total risk-based capital at December 31, 2020 and 2019.

2020 Form 10-K 138

OTHER COMPREHENSIVE INCOME (Note 19)

The following table presents the tax effects allocated to each component of other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018.

Components of other comprehensive income (loss) include changes in net unrealized gains and losses on debt securities available for sale (including the non-credit portion of other-than-temporary impairment charges relating to certain securities during the period);

Components of other comprehensive income (loss) include changes in net unrealized gains and losses on debt securities available for sale;

unrealized gains and losses on derivatives used in cash flow hedging relationships;

and the pension benefit adjustment for the unfunded portion of various employee, officer and director pension plans.

2020 2019 2018

(in thousands)

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Net gains (losses) arising during the period

Less reclassification adjustment for net losses (gains) included in net income (1)

$ 38,477 $ ( 10,632 ) $ 27,845 $ 54,723 $ ( 15,461 ) $ 39,262 $ ( 32,123 ) $ 9,191 $ ( 22,932 )

Less reclassification adjustment for net (gains) losses included in net income (1)

( 524 ) 147 ( 377 ) 150 ( 31 ) 119 2,873 ( 636 ) 2,237

37,953 ( 10,485 ) 27,468 54,873 ( 15,492 ) 39,381 ( 29,250 ) 8,555 ( 20,695 )

Unrealized gains and losses on derivatives (cash flow hedges)

Net (losses) gains arising during the period

Less reclassification adjustment for net losses included in net income (2)

( 3,169 ) 918 ( 2,251 ) ( 1,380 ) 391 ( 989 ) 2,651 ( 777 ) 1,874

Less reclassification adjustment for net losses (gains) included in net income (2)

2,912 ( 838 ) 2,074 1,808 ( 517 ) 1,291 3,493 ( 999 ) 2,494

( 257 ) 80 ( 177 ) 428 ( 126 ) 302 6,144 ( 1,776 ) 4,368

Defined benefit pension plan

Net (losses) gains arising during the period

( 5,719 ) 2,301 ( 3,418 ) ( 2,385 ) ( 176 ) ( 2,561 ) ( 9,916 ) 2,765 ( 7,151 )

Amortization of prior service (cost) credit (3)

( 136 ) 38 ( 98 ) ( 135 ) 42 ( 93 ) 212 ( 66 ) 146

Amortization of net loss (3)

1,003 ( 282 ) 721 264 ( 76 ) 188 625 ( 178 ) 447

( 4,852 ) 2,057 ( 2,795 ) ( 2,256 ) ( 210 ) ( 2,466 ) ( 9,079 ) 2,521 ( 6,558 )

Total other comprehensive income (loss)

Included in losses on securities transactions, net.

$ 32,844 $ ( 8,348 ) $ 24,496 $ 53,045 $ ( 15,828 ) $ 37,217 $ ( 32,185 ) $ 9,300 $ ( 22,885 )

(1) Included in gains (losses) on securities transactions, net.

(2) Included in interest expense.

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The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the years ended December 31, 2020, 2019 and 2018:

Components of Accumulated Other Comprehensive Loss

Components of Accumulated Other Comprehensive Loss Total

Comprehensive

Unrealized Gains

and Losses on AFS Securities

Unrealized Gains

and Losses on AFS Securities Unrealized Gains

and Losses on

Derivatives Defined

(in thousands)

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Reclassification due to the adoption of ASU No.

( 480 ) — — ( 480 )

Reclassification due to the adoption of ASU No.

— ( 61 ) — ( 61 )

Balance-January 1, 2018 ( 12,864 ) ( 8,399 ) ( 25,283 ) ( 46,546 )

Other comprehensive income (loss) before reclassifications

Other comprehensive (loss) income before reclassifications ( 22,932 ) 1,874 ( 7,151 ) ( 28,209 )

Amounts reclassified from other comprehensive income (loss)

2,237 2,494 593 5,324

Other comprehensive income (loss), net ( 20,695 ) 4,368 ( 6,558 ) ( 22,885 )

Balance-December 31, 2018 ( 33,559 ) ( 4,031 ) ( 31,841 ) ( 69,431 )

Reclassification due to the adoption of ASU No.

Balance-January 1, 2018

Other comprehensive income (loss) before reclassifications

39,262 ( 989 ) ( 2,561 ) 35,712

Amounts reclassified from other comprehensive income (loss)

119 1,291 95 1,505

Other comprehensive income (loss), net 39,381 302 ( 2,466 ) 37,217

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Other comprehensive income (loss) before reclassifications

27,845 ( 2,251 ) ( 3,418 ) 22,176

Amounts reclassified from other comprehensive income (loss)

( 377 ) 2,074 623 2,320

Other comprehensive income (loss), net 27,468 ( 177 ) ( 2,795 ) 24,496

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2020 Form 10-K 140

QUARTERLY FINANCIAL DATA (UNAUDITED) (Note 21)

Quarters Ended 2019

(in thousands, except for share data)

Interest income

Interest expense

Net interest income

Provision for credit losses

Non-interest income:

Net impairment losses on securities recognized in earnings

Gains on sales of loans, net

Gains (losses) on sales of assets, net

Other non-interest income

Non-interest expense:

Loss on extinguishment of debt

Amortization of tax credit investments

Other non-interest expense

Income before income taxes

Income tax expense

Dividend on preferred stock

Net income available to common shareholders

Earnings per common share:

Cash dividends declared per common share

Weighted average number of common shares outstanding:

Quarters Ended 2018

(in thousands, except for share data)

Interest income

Interest expense

Net interest income

Provision for credit losses

Non-interest income:

Gains on sales of loans, net

Losses on sales of assets

Other non-interest income

Non-interest expense:

Amortization of tax credit investments

Other non-interest expense

Income before income taxes

Income tax expense

Dividend on preferred stock

Net income available to common shareholders

Earnings per common share:

Cash dividends declared per common share

Weighted average number of common shares outstanding:

2019 Form 10-K

PARENT COMPANY INFORMATION (Note 20)

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(in thousands)

Cash $ 130,163 $ 119,213

Equity securities 2,999 —

Investments in and receivables due from subsidiaries 4,998,795 4,671,578

Other assets 11,133 12,953

Total Assets $ 5,143,090 $ 4,803,744

Liabilities and Shareholders’ Equity

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Years Ended December 31,

2020 2019 2018

(in thousands)

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Other interest and income 21 51 39

Total Income 190,457 164,601 159,445

Total Expenses 23,484 27,998 32,269

Income before income tax and equity in undistributed earnings of subsidiary

Income tax expense (benefit)

166,973 136,603 127,176

Income tax (benefit) expense ( 3,946 ) 24,524 ( 20,547 )

Income before equity in undistributed earnings of subsidiary 170,919 112,079 147,723

Equity in undistributed earnings of subsidiary 219,687 197,714 113,705

Net Income 390,606 309,793 261,428

Dividends on preferred stock 12,688 12,688 12,688

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Years Ended December 31,

2020 2019 2018

(in thousands)

Cash flows from operating activities:

Net Income $ 390,606 $ 309,793 $ 261,428

Adjustments to reconcile net income to net cash provided by operating activities:

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Net change in:

Other assets 121 19,768 9,928

Accrued expenses and other liabilities 17,905 8,803 ( 10,657 )

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Cash flows from investing activities:

Purchases of equity securities ( 2,500 ) — —

Sales of investment securities available for sale — — 257

Cash and cash equivalents acquired in acquisitions — 11,947 7,915

Repayment of subordinated debt by subsidiary 100,000 — —

Capital contributions to subsidiary ( 210,000 ) — —

Net cash provided by (used in) investing activities

Other, net ( 1,200 ) — —

Net cash (used in) provided by investing activities ( 113,700 ) 11,947 8,172

Cash flows from financing activities:

Proceeds from issuance of preferred stock, net

Proceeds from issuance of long-term borrowings, net 113,146 — —

Dividends paid to preferred shareholders ( 12,688 ) ( 12,688 ) ( 15,859 )

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Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount).

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 segments’ average earning assets outstanding for the period.

Expenses related to the branch network, all other components of retail banking, along with the back office departments of the 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 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 Valley’s operations, which may not necessarily be comparable to any other financial institution.

The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting, and may result in income and expense measurements that differ from amounts under U.S.

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

The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial

2020 Form 10-K 142

reporting and may result in income and expense measurements that differ from amounts under U.S.

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

The consumer lending segment is mainly comprised of residential mortgages and automobile loans, and to a lesser extent, secured personal lines of credit, home equity loans and other consumer loans.

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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 Division, comprised of trust, asset management and insurance services.

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

The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans.

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The investment management segment generates a large portion of Valley’s income through investments in various types of securities and interest-bearing deposits with other banks.

These investments are mainly comprised of fixed rate securities and depending on Valley's liquid cash position, interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York), as part of its asset/liability management strategies.

These investments are mainly comprised of fixed rate securities and depending on Valley's liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York), as part of its asset/liability management strategies.

The fixed rate investments are among Valley’s assets that are least sensitive to changes in market interest rates.

However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of Valley’s balance sheet.

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

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 the loss on extinguishment of debt and merger expenses.

The following tables represent the financial data for Valley’s four business segments for the years ended December 31, 2020, 2019 and 2018:

Year Ended December 31, 2020

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

Average interest earning assets (unaudited)

$ 7,160,793 $ 24,625,066 $ 5,225,074 $ — $ 37,010,933

Interest income $ 257,196 $ 1,027,796 $ 102,883 $ ( 4,156 ) $ 1,383,719

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Net interest income (loss) after provision for credit losses

197,982 750,136 67,434 ( 22,370 ) 993,182

Non-interest income 81,499 64,783 10,083 26,667 183,032

Non-interest expense 77,582 98,710 1,136 468,720 646,148

Internal expense transfer

Internal transfer expense (income) 77,835 267,588 56,788 ( 402,211 ) —

Income (loss) before income taxes $ 124,064 $ 448,621 $ 19,593 $ ( 62,212 ) $ 530,066

Return on average interest earning assets (pre-tax) (unaudited)

1.73 % 1.82 % 0.37 % N/A 1.43 %

2020 Form 10-K

Year Ended December 31, 2019

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

Average interest earning assets (unaudited)

$ 6,891,462 $ 19,343,791 $ 4,340,277 $ — $ 30,575,530

Interest income $ 272,773 $ 926,328 $ 126,723 $ ( 4,824 ) $ 1,321,000

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Net interest income (loss) after provision for credit losses

174,287 651,128 68,908 ( 20,493 ) 873,830

Non-interest income 57,981 41,157 8,818 106,564 214,520

Non-interest expense 76,046 101,924 1,034 452,551 631,555

Internal expense transfer

Internal transfer expense (income) 78,743 221,113 49,670 ( 349,526 ) —

Income (loss) before income taxes $ 77,479 $ 369,248 $ 27,022 $ ( 16,954 ) $ 456,795

Return on average interest earning assets (pre-tax) (unaudited)

1.12 % 1.91 % 0.62 % N/A 1.49 %

Year Ended December 31, 2018

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

Average interest earning assets (unaudited)

$ 6,197,161 $ 17,143,169 $ 4,362,581 $ — $ 27,702,911

Interest income $ 235,264 $ 798,974 $ 130,971 $ ( 5,961 ) $ 1,159,248

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Net interest income (loss) after provision for credit losses

165,631 594,750 85,859 ( 21,538 ) 824,702

Non-interest income 61,280 22,275 8,691 41,806 134,052

Non-interest expense 92,462 95,171 1,251 440,177 629,061

Internal expense transfer

Internal transfer expense (income) 77,164 213,399 54,353 ( 344,916 ) —

Income (loss) before income taxes $ 57,285 $ 308,455 $ 38,946 $ ( 74,993 ) $ 329,693

Return on average interest earning assets (pre-tax) (unaudited)

0.92 % 1.80 % 0.89 % N/A 1.19 %

2020 Form 10-K 144

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.

Basis for Opinion

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Assessment of the allowance for loan losses related to non-PCI loans collectively evaluated for impairment

As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses related to loans collectively evaluated for impairment (general reserve) was $123.2 million of a total allowance for loan losses of $161.8 million as of December 31, 2019.

The Company estimates the general reserve by developing loss factors based on historical losses adjusted for qualitative factors, to better estimate incurred losses in the current portfolio.

We identified the assessment of the general reserve as a critical audit matter.

The estimation of the general reserve involved significant measurement uncertainty and, as a result, our assessment of the general reserve required complex auditor judgments, and knowledge and experience in the industry in order to evaluate the methodologies, inputs, and assumptions used to estimate the reserve.

Inputs and assumptions included (1) the loss factors developed from historical loss experience, and their key factors and assumptions, which included the pooling of loans with similar risk characteristics, the historical look-back period, the loss emergence periods, and credit risk ratings for commercial loans, and (2) the qualitative factor adjustments.

In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

Allowance for loan losses evaluated on a collective basis

As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU No.

2016-13, Financial Instruments – Credit Losses (ASC Topic 326), as of January 1, 2020.

As discussed in Note 5 to the consolidated financial statements, the Company’s total allowance for loan losses as of December 31, 2020 was $340.2 million, of which $264.4 million related to the loans collectively evaluated for credit losses (the collective ALL).

The collective ALL includes the measure of expected credit losses on a collective basis for those loans that share similar risk characteristics.

In estimating the collective ALL, the Company uses a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by using probability of default and loss given default metrics.

2020 Form 10-K

The primary procedures we performed to address the critical audit matter included the following.

We tested certain internal controls over the (1) development and approval of the general reserve methodology, (2) determination of key factors and assumptions used to estimate the historical loss factors, and (3) qualitative framework and related factors.

We tested the relevance of sources of data and key assumptions related to the look-back period by evaluating (1) the loss data in the look-back period compared to the credit characteristics of the current portfolio and (2) the sufficiency of loss data within the look-back period.

We assessed the loss emergence period assumptions by considering the Company’s credit risk policies and testing loss data.

We involved credit risk professionals with industry knowledge and experience who assisted in:

evaluating the Company’s methodology to estimate the general reserve for compliance with U.S.

generally accepted accounting principles,

evaluating the methodology to calculate the loss factors, including key inputs and assumptions,

evaluating the framework used to develop the resulting qualitative factors and the effect of those factors on the general reserve compared with relevant credit risk factors and credit trends, and

testing individual loan risk ratings by evaluating the financial performance of the borrower, underlying collateral, and guarantor support.

We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s general reserve.

Assessment of the remaining expected cash flows for purchase credit impaired loans

As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s purchased credit impaired (PCI) loan portfolio had a carrying value of $6.6 billion at December 31, 2019, and consists primarily of loans acquired in business combinations subsequent to 2011.

The PCI loans are aggregated into pools based on common risk characteristics, initially recorded at fair value based on the present value of expected future cash flows, and subsequently accounted for as pools of loans.

The undiscounted cash flows expected to be collected (expected cash flows) are estimated by incorporating several key assumptions, including probability of default (PD), loss given default (LGD), and the actual prepayments after the acquisition date.

The difference between the expected cash flows at acquisition and the initial carrying value or fair value of the PCI loans, or accretable yield, is recognized as interest income utilizing the level-yield method over the life of each pool.

The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectable contractual interest expected to be incurred over the life of the loans.

We identified the assessment of the remaining expected cash flows and the impact to the accretable yield and the non-accretable difference related to PCI loans as a critical audit matter.

The estimation of the expected cash flows involved significant measurement uncertainty, and as a result, our assessment required complex auditor judgment and knowledge and experience in the industry in order to evaluate the methodologies, inputs, and assumptions used to estimate the remaining expected cash flows.

Inputs and assumptions included (1) the PD and LGD, which include the credit risk ratings for commercial loans, and (2) the prepayment assumptions which are used to estimate future prepayments which impact the overall timing of cash flows.

The assessment also included an evaluation of the mathematical accuracy of the estimation of future cash flows and calculation of the accretable yield and non-accretable difference.

The primary procedures we performed to address the critical audit matter included the following.

We tested certain internal controls over the (1) development of the methodology to estimate expected cash flows over the remaining life of the PCI loans, and (2) the determination of key factors and assumptions used to estimate the PD, LGD, and prepayment assumptions.

We involved credit risk professionals with specialized industry knowledge and experience who assisted in testing individual credit risk ratings of a selection of commercial loan relationships.

We involved valuation professionals with industry knowledge and experience who assisted in:

evaluating the Company’s methodology for compliance with U.S.

The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses incurred.

The expected credit losses are the product of multiplying the model’s expected life of loan loss percentages by the exposure at default at period end.

The model’s expected losses are adjusted for qualitative factors which includes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience on a straight-line basis for the remaining life of the loan.

The forecasts consist of a multi-scenario economic forecast model which is assigned relative probability weightings.

These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses.

We identified the assessment of the collective ALL as a critical audit matter.

A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ALL.

Specifically, the assessment encompassed the evaluation of the collective ALL methodology, including the model and methods used to estimate the (1) life of loan loss percentages and the related significant assumptions, including probability of default, loss given default and credit risk ratings for commercial loans, and (2) the qualitative factors, including the reasonable and supportable economic forecasts and related weightings, and reversion.

The assessment also included an evaluation of the conceptual soundness and performance of the methodology utilized to derive the quantitative life of loan loss percentages and qualitative factors and the Company’s procedures to validate the model utilized to produce the lifetime loss estimate.

In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ALL estimate, including controls over the:

• development of the collective ALL methodology

• development of the transition matrix model

• identification and determination of the significant assumptions used in the model

• development and ongoing monitoring of the appropriateness of the reasonable and supportable forecast period

• development of the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors

• procedures performed by the Company to validate the model is fit for use and appropriate to estimate lifetime losses

• periodic testing of loan risk ratings for loan portfolios

• analysis of the collective ALL results, trends and ratios.

We evaluated the Company’s process to develop the collective ALL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors and assumptions.

In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:

• evaluating the Company’s collective ALL methodology for compliance with U.S.

generally accepted accounting principles

evaluating the key assumptions used by the Company in developing the estimate by comparing them to those used by similar market participants,

recalculating the estimation of expected cash flows based on key inputs and assumptions used by the Company, and

evaluating the Company’s ability to estimate future losses and prepayments by comparing prior period estimates to actual results.

• evaluating the judgments made by the Company relative to the development and performance monitoring of the transition matrix model used to calculate the life of loan loss percentage by comparing them to Company-specific metrics and trends and the applicable industry and regulatory practices

• testing the conceptual soundness and performance of the transition matrix model by inspecting the model documentation and model validation documentation to determine whether the model is suitable for the intended use

• evaluating the economic forecast scenarios and related weightings by comparing them to the Company’s business environment and relevant industry practices

• testing the reasonable and supportable forecast period and reversion period to evaluate the length of each period by comparison to specific portfolio risk characteristics and trends

• determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices

2020 Form 10-K 146

Assessment of the fair value measurement of the acquired loans in the Oritani Financial Corp.

business combination

As discussed in Note 2 to the consolidated financial statements, on December 1, 2019 the Company completed its acquisition of Oritani Financial Corp.

The transaction was accounted for as a business combination using the acquisition method of accounting.

Accordingly, assets acquired, liabilities assumed, and consideration paid for Oritani were recorded at their fair values at the acquisition date, including the fair value of acquired loans of $3.4 billion.

The fair value of acquired loans was based on a discounted cash flow methodology that used a forecast of principal and interest payments based on certain key valuation assumptions including risk ratings on commercial loan relationships, probability of default, loss given default, discount rate, and prepayment rate.

The difference between the fair value and the expected cash flows from the acquired loans will be accreted into income over the remaining terms of the loans.

We identified the assessment of the fair value measurement of the acquired loans in the Oritani business combination as a critical audit matter.

The fair value estimate involved significant measurement uncertainty and required industry knowledge and experience to evaluate.

Specifically, the assessment of the fair value measurement encompassed the evaluation of the fair value methodology and the development of key valuation assumptions.

The assessment also included an evaluation of mathematical accuracy of the calculations.

Additionally, there was auditor judgment involved in designing and performing audit procedures in order to test the key assumptions utilized to determine the estimate.

The primary procedures we performed to address the critical audit matter included the following.

We tested certain internal controls over the Company’s fair value measurement process, including controls related to (1) the development of the methodology to calculate the fair value of the acquired loans, (2) the determination of key inputs and valuation assumptions used by considering their relevance and reliability in the acquired loan fair value estimate, and (3) the calculation of the fair value estimate.

We involved credit risk professionals with industry knowledge and experience who assisted in testing individual loan risk ratings for a selection of commercial loan relationships.

We involved valuation professionals with industry knowledge and experience who assisted in:

evaluating the valuation methodology for compliance with U.S.

generally accepted accounting principles, and

developing an independent estimate of the fair value of the acquired loan portfolio using key assumptions used by other market participants and comparing the results to the Company’s fair value estimate.

Assessment of the carrying value of goodwill in the Investment Management reporting unit

As discussed in Notes 1 and 9 to the consolidated financial statements, the carrying value of the Company’s goodwill balance related to the Investment Management reporting unit is $220.1 million of a total goodwill balance of $1.4 billion as of December 31, 2019.

The Company’s goodwill is not amortized but is subject to annual tests for impairment, or more often, if events or circumstances indicate it may be impaired.

The impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill.

Fair value is determined using market multiples and discounted cash flow analyses.

If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not impaired;

however, if the carrying amount of the reporting unit exceeds its fair value, an additional step must be performed.

The additional step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill.

An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value and the loss establishes a new basis in the goodwill.

We identified the goodwill impairment assessment of the Investment Management reporting unit as a critical audit matter.

The principal considerations for this determination was the degree of auditor judgment in performing procedures over the key assumptions, which include the discount rate and long term growth rate used in the discounted cash flow analyses.

In addition, auditor judgment was required to evaluate the overall fair value of the Investment Management reporting unit which incorporated discounted cash flow analyses and a market multiples approach.

The primary procedures we performed to address the critical audit matter included the following.

We tested certain internal controls over the Company’s goodwill impairment process, including controls related to the key assumptions used in the discounted cash flow analyses and the application of the market multiples approach.

• testing individual credit risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment and any relevant guarantees or underlying collateral

• evaluating the methodology used to develop the qualitative factor framework and the effect of those factors on the collective ALL by comparing the qualitative factors to the specific portfolio risk characteristics, trends and relevant industry practices and identified limitations of the underlying quantitative models.

We also assessed the sufficiency of the audit evidence obtained related to the collective ALL by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices and potential bias in the accounting estimate.

Goodwill impairment assessment of the Company’s reporting units

As discussed in Notes 1 and 8 to the consolidated financial statements, the carrying value of the Company’s goodwill balance is $1.4 billion as of December 31, 2020.

The Company’s goodwill is not amortized but is subject to annual tests for impairment in the second quarter, or more often, if events or circumstances indicate it may be impaired.

The Company elected to perform a quantitative impairment test for its annual assessment in the second quarter which compared the fair value of each of the reporting units with their carrying amounts, including goodwill.

If the fair value of each of the reporting units exceeded its carrying amounts, the goodwill of the reporting unit was not impaired.

An impairment loss is recognized if the carrying value of the net assets assigned to the reporting units exceeds the fair value, with the impairment charge not to exceed the amount of goodwill recorded.

Fair value is determined using market multiples and certain discounted cash flow analyses.

Factors that may materially affect the fair value estimate include, among others, changes in discount rates, terminal values and specific industry or market sector conditions.

We identified the measurement of the fair value of each of the reporting units in the Company’s annual goodwill impairment assessment as a critical audit matter.

A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgement was involved in performing procedures over the individual reporting unit estimated cash flows and related key assumptions, which included the discount rate and the terminal value growth rate used in the discounted cash flow analyses.

The key assumptions were challenging to test as they represented subjective determinations of future market and economic conditions that were also more sensitive to variation.

Minor changes in these assumptions could have had a significant effect on the Company’s measurement of the fair value of the reporting units and the impairment assessment of the carrying value of the goodwill.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s determination of the estimated fair value of the reporting units in the annual goodwill impairment assessment, including controls over the selection and development of key assumptions used in the discounted cash flow analyses.

We involved valuation professionals with specialized skill and knowledge, who assisted in:

evaluating the Company’s fair value methodology for the Investment Management reporting unit,

evaluating the Company’s long term growth rate and discount rate by comparing the inputs to the development of the assumptions to publicly available data,

assessing the Company’s market multiples by comparing them to market multiples of comparable companies in the banking industry,

reconciling the Company’s estimated fair value to its market capitalization as of the measurement date, and

2019 Form 10-K

assessing the results of the impairment analysis considering the discounted cash flow analyses and the market multiples approach.

• evaluating the Company’s fair value methodology for the reporting units for compliance with U.S.

generally accepted accounting principles

• evaluating the Company’s discount rate by comparing it against a discount rate range that was independently developed using publicly available data for comparable entities

• evaluating the Company’s terminal value growth rate by comparing it against an average growth rate range that was independently developed using publicly available economic and industry data for comparable entities

• developing an independent estimate of the reporting units’ fair value using the reporting units’ cash flow forecast and an independently developed discount rate and compared our estimate of fair value to the Company’s fair value estimate

• reconciling the Company’s estimated fair value to its market capitalization as of the measurement date and evaluating the implied control premium for alignment with industry standards.

We have served as the Company’s auditor since 2008.

Short Hills, New Jersey

March 10, 2020

February 26, 2021

2020 Form 10-K

1 unchanged sentence

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-K

Item 8. Financial Statements and Supplementary Data