VALLEY NATIONAL BANCORP 10-Q

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part 1, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A. The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “would,” “could,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, include, but are not limited to: • the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients; • the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets; • potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic or as a result of our actions in response to, or failure to implement or effectively implement, federal, state and local laws, rules or executive orders requiring that we grant forbearances or not act to collect our loans; • the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral; • the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; • damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters; • a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas; • higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; 41 • the inability to grow customer deposits to keep pace with loan growth; • a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios; • the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; • greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; • the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy; • cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems; • results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; • our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; • unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; • unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and • the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships. A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020. Critical Accounting Policies and Estimates Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. At March 31, 2021, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2020. New Authoritative Accounting Guidance See Note 4 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. Executive Summary Company Overview. At March 31, 2021, Valley had consolidated total assets of approximately $41.2 billion, total net loans of $32.3 billion, total deposits of $32.6 billion and total shareholders’ equity of $4.7 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City 42 Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama . Of our current 226 branch network, 58 percent, 17 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Flor ida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions. Impact of COVID-19. During the first quarter 2021, the COVID-19 pandemic continued to cause uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. However, the overall level of economic activity and our outlook improved during the first quarter 2021 largely due to government stimulus programs, central bank policies, strong vaccine rollout efforts and consumers and businesses eager to return to a state of normalcy after almost a year of lockdowns. The American Rescue Plan Act of 2021, signed into law on March 11, 2021, is a $1.9 trillion economic stimulus package intended to continue to facilitate the recovery from the economic and health effects of the COVID-19 pandemic. This new law combined with the Consolidated Appropriations Act, 2021 signed into law on December 27, 2020, provides, amongst other stimulus, additional funding under the SBA's Paycheck Protection Program (PPP). Valley's PPP loan portfolio increased $212.5 million to $2.4 billion at March 31, 2021 from December 31, 2020 , which was net of over $630 million of PPP loans forgiven by the SBA during the first quarter 2021 . During the second quarter 2021, Valley originated approximately $108 million of additional PPP loans through May 4, 2021, which was the last day the SBA's PPP loan application window was open for most lenders. In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days. Any extensions beyond this period were made in accordance with applicable regulatory guidance. As of March 31, 2021 , Vall ey had $284 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.9 percent of our total loan portfolio at March 31, 2021 as compared to $361 million, or 1.1 percent of total loans at December 31, 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, Enhancement Act and other government stimulus or Federal Reserve actions. However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the second quarter 2021 and beyond is highly uncertain. See the "Operating Environment" section of MD&A for more details. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant, which may necessitate certain branch or other office closures and reduced lobby services. Our business continuity plan continues to remain in effect with many of our non-customer facing employees continuing to work remotely. Quarterly Results. Net income for the first quarter 2021 was $115.7 million, or $0.28 per diluted common share, compared to $87.3 million, or $0.21 per diluted common share, for the first quarter 2020. The $28.4 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: • a $27.3 million increase in net interest income mainly due to (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) continued run-off of higher cost time deposits, (iii) interest and fee income from PPP loans, and (iv) the prepayment of $534 million of long-term FHLB advances with a combined weighted average interest rate of 2.48 percent in December 2020; and • a $26.0 million decrease in our provision for credit losses mainly due to the improved economic forecast component of the reserve as compared to March 31, 2020, 43 partially offset by: • a $10.1 million decrease in non-interest income mainly caused by lower commercial loan customer swap fees and a decrease in gains on the sales of residential mortgage loans; • a $4.6 million increase in non-interest expense due to higher salary and employee benefits expense and increases in data processing costs and telecommunication expense; and • a $10.2 million increase in income tax expense. See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our first quarter 2021 results. Operating Environment. During the first quarter 2021, real gross domestic product expanded 6.4 percent compared to 4.3 percent growth in the fourth quarter 2020. The acceleration in growth was broad-based as a result of increased investments and households consumption for a range of goods and services. Economic activity is likely to remain strong as COVID-19 cases are expected to decline and vaccination rates in the country increase. In addition, the recent passage of the American Rescue Plan Act of 2021 should further support this outlook. The Federal Reserve continued to assist economic activity and the return to sustained expansion. At their meeting in March, the Federal Open Market Committee maintained the target range for the federal funds rate between 0.00 and 0.25 percent. The 10-year U.S. Treasury note yield ended the first quarter at 1.74 percent, 81 basis points higher compared with December 31, 2020. The spread between the 2- and 10-year U.S. Treasury note yields ended the first quarter 2021 at 1.58 percent, a 78 basis point widening as compared to the end of the fourth quarter 2020. For all commercial banks in the U.S., loans and leases declined approximately 3.2 percent on an annual basis in the first quarter 2021 compared to the previous linked quarter. For the industry, banks reported that demand for commercial and industrial lending remains weak. For commercial real estate loans, conditions were mixed. While demand picked up considerably for loans secured by multifamily residential structures, the environment remains challenged for loans secured by nonfarm nonresidential structures. In the first quarter 2021, Valley's originations increased across most products, particularly from residential mortgage and consumer lending. Valley also benefited from a stronger origination pipeline for non-PPP commercial and industrial and commercial real estate loans across its geographies, particularly in Florida, partly driven by expansion of its lending teams. However, should loan demand weaken or the expected recovery from the pandemic in Valley's primary markets be prolonged, our business operations and results could be adversely impacted, as highlighted elsewhere in this MD&A. Loans. Loans increased $469.3 million to approximately $32.7 billion at March 31, 2021 from December 31, 2020. The increase was largely due to new loan volumes within the commercial and industrial, commercial real estate and automobile loan portfolios in the first quarter 2021. Within commercial and industrial loans, PPP loans increased $212.5 million to approximately $2.4 billion at March 31, 2021 from December 31, 2020. Our first quarter new and refinanced loan originations included approximately $288 million of residential mortgage loans originated for sale rather than investment. Net gains on sales of residential loans were $3.5 million and $16.0 million in the first quarter 2021 and fourth quarter 2020, respectively. See further details on our loan activities under the “Loan Portfolio” section below. Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and a non-accrual debt security increased $16.0 million to $210.5 million at March 31, 2021 as compared to December 31, 2020. Non-accrual loans increased $18.7 million to $204.0 million at March 31, 2021 as compared to December 31, 2020 mainly due to one commercial real estate loan and an increase in non-accrual residential mortgage loans partially caused by the migration of loans previously reported in the 60-89 44 days past due category at December 31, 2020. Non-accrual loans represented 0.62 percent of total loans at March 31, 2021, as compared to 0.58 percent at December 31, 2020. Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $46.2 million to $52.8 million, or 0.16 percent of total loans, at March 31, 2021 as compared to $99.0 million, or 0.31 percent of total loans, at December 31, 2020 mainly due to declines in early stage delinquencies for most loan categories. See further details in the "Non-performing Assets" section below. Deposits and Other Borrowings . Av erage non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 30 percent, 52 percent and 18 percent of total deposits as of March 31, 2021, respectively. Overall, average deposits increased by $79.4 million to $31.8 billion for the first quarter 2021 as compared to the fourth quarter 2020. Our mix of the deposit categories within total average deposits for the first quarter 2021 as compared to the fourth quarter 2020 experienced a continued shift of maturing time deposits and consumer preference to non-maturity deposit account due to the low level of interest rates. Actual ending balances for deposits increased $649.6 million to approximately $32.6 billion at March 31, 2021 from December 31, 2020 largely due to increases of $847.8 million and $1.1 billion in the non-interest bearing and non-maturity interest bearing deposit categories, respectively, partially offset by a $1.3 billion decrease in time deposits. The decrease in time deposits was driven by normal run-off of maturing retail and brokered CDs with some continued migration of retail balances to more liquid deposit product categories. Total brokered deposits (consisting of both time and money market deposit accounts) decreased approximately $800 million to $2.3 billion at March 31, 2021 as compared to $3.1 billion at December 31, 2020. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 31 percent, 52 percent and 17 percent of total deposits as of March 31, 2021, respectively. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at March 31, 2021. Average short-term borrowings decreased $148.1 million to $1.2 billion for the first quarter 2021 as compared to the fourth quarter 2020 due to reductions in our excess liquidity levels. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased by $456.4 million to $2.3 billion for the first quarter 2021 as compared to the fourth quarter 2020 mainly due to the prepayment of $534 million of long-term FHLB borrowings in December 2020. Actual ending balances for short-term borrowings decreased by $63.3 million to $1.1 billion at March 31, 2021 from the fourth quarter 2020 due to the decline in overnight borrowings. Long-term borrowings decreased by $52.7 million to $2.2 billion at March 31, 2021 as compared to December 31, 2020 mainly attributable to the normal maturities of FHLB advances. Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated: Three Months Ended March 31, 2021 2020 Return on average assets 1.14 % 0.92 % Return on average assets, as adjusted 1.14 0.93 Return on average shareholders’ equity 9.96 7.92 Return on average shareholders’ equity, as adjusted 9.97 8.01 Return on average tangible shareholders’ equity (ROATE) 14.49 11.84 ROATE, as adjusted 14.50 11.97 45 Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are presented below. Adjusted net income is computed as follows: Three Months Ended March 31, 2021 2020 (in thousands) Net income, as reported $ 115,710 $ 87,268 Add: Losses on securities transactions (net of tax) 85 29 Add: Merger related expenses (net of tax) (*) — 936 Net income, as adjusted $ 115,795 $ 88,233 (*) Merger related expenses are primarily within professional and legal fees, and other non-interest expense. In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details. Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended March 31, 2021 2020 ($ in thousands) Net income, as adjusted $ 115,795 $ 88,233 Average assets $ 40,770,731 $ 38,116,850 Annualized return on average assets, as adjusted 1.14 % 0.93 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended March 31, 2021 2020 ($ in thousands) Net income, as adjusted $ 115,795 $ 88,233 Average shareholders' equity $ 4,645,400 $ 4,408,585 Annualized return on average shareholders' equity, as adjusted 9.97 % 8.01 % 46 ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows: Three Months Ended March 31, 2021 2020 ($ in thousands) Net income $ 115,710 $ 87,268 Net income, as adjusted 115,795 88,233 Average shareholders’ equity $ 4,645,400 $ 4,408,585 Less: Average goodwill and other intangible assets 1,451,750 1,460,988 Average tangible shareholders’ equity $ 3,193,650 $ 2,947,597 Annualized ROATE 14.49 % 11.84 % Annualized ROATE, as adjusted 14.50 % 11.97 % Net Interest Income Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley. Net interest income on a tax equivalent basis totaling $293.6 million for the first quarter 2021 increased $4.8 million and $27.2 million as compared to the fourth quarter 2020 and first quarter 2020, respectively. The increase as compared to the fourth quarter 2020 was mainly due to (i) increased interest and fee income from PPP loans, (ii) continued run-off of higher cost time deposits, (iii) the prepayment of $534 million of long-term FHLB advances with a combined weighted average interest rate of 2.48 percent in December 2020, and (iv) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities. Interest expense of $39.1 million for the first quarter 2021 decreased $7.0 million as compared to the fourth quarter 2020. Interest income on a tax equivalent basis in the first quarter 2021 decreased by $2.3 million to $332.7 million as compared to the fourth quarter 2020 mainly due to lower overall yields on average taxable investment securities and loans and a decline in average balances within the investment portfolio due to normal repayment activity, partially offset by a $8.7 million increase in interest and fees on PPP loans caused by recognition of fee income on loans forgiven by the SBA during the first quarter 2021. Average interest earning assets increased $2.7 billion to $37.4 billion for the first quarter 2021 as compared to the first quarter 2020 primarily due to organic loan growth over the 12-month period, including $2.3 billion of PPP loans. As compared to the fourth quarter 2020, average interest earning assets decreased by $420.3 million from $37.8 billion partly driven by lower level of excess liquidity held in overnight interest bearing deposits with banks. The decrease in average overnight interest bearing deposits with banks was largely caused by funds used in the prepayment of long-term FHLB borrowings totaling $534 million in December 2020. Average interest bearing liabilities decreased $280.9 million to $26.0 billion for the first quarter 2021 as compared to the first quarter 2020 primarily due to the repayments of long-term FHLB advances and a decline in overnight borrowings, partially offset by higher average deposit levels caused by general increases in customer balances. As compared to the fourth quarter 2020, average interest bearing li abilities decreased by $754.0 million in the first quarter 2021 mainly due to decreases in long- and short-term borrowings largely attributable to the December 2020 prepayment and normal maturities of FHLB advances, respectively, as we reduced our reliance on wholesale funding sources. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Our net interest margin on a tax equivalent basis of 3.14 percent for the first quarter 2021 increased by 8 basis points and 7 basis points from 3.06 percent and 3.07 percent for the first quarter 2020 and fourth quarter 2020, respectively. The yield on average interest earning assets increased by 2 basis points on a linked quarter basis, 47 mostly due to the higher yield on the PPP loan portfolio and reduced excess liquidity held in overnight investments. The yield on average loans decreased by 1 basis point to 3.85 percent for the first quarter 2021 as compared to the fourth quarter 2020. This decrease was mainly due to new and refinanced loan originations at lower market interest rates and two less days during the first quarter 2021, which were mostly offset by the increased yield on our PPP loan portfolio. The overall cost of average interest bearing liabilities decreased 9 basis points to 0.60 percent for the first quarter 2021 as compared to the linked fourth quarter 2020, largely due to the lower rates offered on deposit products, maturing time deposits and a 4 basis point decrease in the average cost of short-term borrowings. Our cost of total average deposits was 0.28 percent for the first quarter 2021 as compared to 0.33 percent for the fourth quarter 2020. Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the second quarter 2021 and beyond due to the low level of market rates and the potential negative impact on the overall yield on new and refinanced loan originations. However, we are also encouraged by the continued potential opportunity to repay or reprice stated maturity deposits and borrowings maturing at low costs during the remainder of 2021. On April 1, 2021, we elected to call and prepay $60 million of subordinated notes that were bearing interest of 6.25 percent per annum and had an original contractual maturity date of April 1, 2026. 48 The following table reflects the components of net interest income for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020: Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and Net Interest Income on a Tax Equivalent Basis Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 32,582,479 $ 313,206 3.85 % $ 32,570,902 $ 313,993 3.86 % $ 29,999,428 $ 333,068 4.44 % Taxable investments (3) 3,111,116 15,037 1.93 3,204,974 16,491 2.06 3,557,913 25,334 2.85 Tax-exempt investments (1)(3) 513,809 4,248 3.31 506,748 4,227 3.34 585,987 4,970 3.39 Interest bearing deposits with banks 1,178,815 224 0.08 1,523,876 260 0.07 530,747 1,465 1.10 Total interest earning assets 37,386,219 332,715 3.56 37,806,500 334,971 3.54 34,674,075 364,837 4.21 Allowance for loan losses (347,262) (329,748) (256,675) Cash and due from banks 312,882 283,239 312,762 Other assets 3,373,506 3,503,259 3,378,372 Unrealized gains on securities available for sale, net 45,386 45,693 8,316 Total assets $ 40,770,731 $ 41,308,943 $ 38,116,850 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 16,617,762 $ 11,125 0.27 % $ 15,606,081 $ 11,706 0.30 % $ 13,239,382 $ 34,513 1.04 % Time deposits 5,844,524 11,093 0.76 7,005,804 14,368 0.82 8,897,934 42,814 1.92 Total interest bearing deposits 22,462,286 22,218 0.40 22,611,885 26,074 0.46 22,137,316 77,327 1.40 Short-term borrowings 1,168,617 1,758 0.60 1,316,706 2,097 0.64 1,322,699 4,707 1.42 Long-term borrowings (4) 2,323,279 15,155 2.61 2,779,632 17,967 2.59 2,775,049 16,420 2.37 Total interest bearing liabilities 25,954,182 39,131 0.60 26,708,223 46,138 0.69 26,235,064 98,454 1.50 Non-interest bearing deposits 9,373,000 9,143,953 6,694,102 Other liabilities 798,149 874,438 779,099 Shareholders’ equity 4,645,400 4,582,329 4,408,585 Total liabilities and shareholders’ equity $ 40,770,731 $ 41,308,943 $ 38,116,850 Net interest income/interest rate spread (5) $ 293,584 2.96 % $ 288,833 2.85 % $ 266,383 2.71 % Tax equivalent adjustment (917) (913) (1,044) Net interest income, as reported $ 292,667 $ 287,920 $ 265,339 Net interest margin (6) 3.13 % 3.05 % 3.06 % Tax equivalent effect 0.01 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 3.14 % 3.06 % 3.07 % _____________ (1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition. 49 (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis. (6) Net interest income as a percentage of total average interest earning assets. The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Change in Net Interest Income on a Tax Equivalent Basis Three Months Ended March 31, 2021 Compared to March 31, 2020 Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 27,174 $ (47,036) $ (19,862) Taxable investments (2,894) (7,403) (10,297) Tax-exempt investments* (599) (123) (722) Interest bearing deposits with banks 844 (2,085) (1,241) Total increase (decrease) in interest income 24,525 (56,647) (32,122) Interest Expense: Savings, NOW and money market deposits 7,134 (30,522) (23,388) Time deposits (11,474) (20,247) (31,721) Short-term borrowings (495) (2,454) (2,949) Long-term borrowings and junior subordinated debentures (2,841) 1,576 (1,265) Total decrease in interest expense (7,676) (51,647) (59,323) Total increase (decrease) in net interest income $ 32,201 $ (5,000) $ 27,201 * Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate. 50 Non-Interest Income Non-interest income decreased $10.2 million for the three months ended March 31, 2021 as compared to the same period of 2020. The following table presents the components of non-interest income for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) Trust and investment services $ 3,329 $ 3,413 Insurance commissions 1,558 1,951 Service charges on deposit accounts 5,103 5,680 Losses on securities transactions, net (118) (40) Fees from loan servicing 2,899 2,748 Gains on sales of loans, net 3,513 4,550 (Losses) gains on sales of assets, net (196) 121 Bank owned life insurance 2,331 3,142 Other 12,814 19,832 Total non-interest income $ 31,233 $ 41,397 Net gains on sales of loans decreased $1.0 million for the three months ended March 31, 2021 as compared to the same period in 2020. Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. The net decrease from the change in the fair value of loans held for sale totaled $9.5 million for the three months ended March 31, 2021 as compared to a $867 thousand increase for the three months ended March 31, 2020. During the first quarter 2021, we sold approximately $347.6 million of residential mortgage loans as compared to $301.2 million (including $30.0 million of pre-existing residential mortgage loans sold from our loan portfolio) during the first quarter 2020. See further discussion of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below. Bank owned life insurance income decreased $811 thousand for the first quarter 2021 as compared to the first quarter 2020 partly due to lower yields on the underlying fixed income investments held by insurance policies. Other non-interest income decreased $7.0 million for the first quarter 2021 as compared to the same quarter in 2020 primarily due to an $8.0 million decrease in fee income related to derivative interest rate swaps executed with commercial lending customers. Swap fee income totaled $6.2 million and $14.2 million for the three months ended March 31, 2021 and 2020, respectively. 51 Non-Interest Expense Non-interest expense increased $4.6 million for the three months ended March 31, 2021 as compared to the same period of 2020. The following table presents the components of non-interest expense for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) Salary and employee benefits expense $ 88,103 $ 85,728 Net occupancy and equipment expense 32,259 32,441 FDIC insurance assessment 3,276 3,876 Amortization of other intangible assets 6,006 5,470 Professional and legal fees 6,272 6,087 Amortization of tax credit investments 2,744 3,228 Telecommunications expense 3,160 2,287 Other 18,393 16,539 Total non-interest expense $ 160,213 $ 155,656 Salary and employee benefits expense increased $2.4 million for the three months ended March 31, 2021 as compared to the same period of 2020. The increase was partly due to increases in health insurance and stock-based incentive compensation expenses totaling $1.7 million and $1.5 million, respectively. The three months ended March 31, 2020 included an expense of $1.8 million related to a special bonus paid to hourly employees impacted by COVID-19. Other non-interest expense increased $1.9 million for the three months ended March 31, 2021 as compared to the same period of 2020 largely due to higher data processing costs, including approximately $605 thousand of costs related to our PPP loan program. See Notes 8 and 12 to the consolidated financial statements for information regarding the amortization of other intangible assets and tax credit investments, respectively. Efficiency Ratio The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted primarily by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, including, but not limited to, merger expenses. 52 The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 ($ in thousands) Total non-interest expense $ 160,213 $ 155,656 Less: Amortization of tax credit investments (pre-tax) 2,744 3,228 Less: Merger related expenses (pre-tax) — 1,302 Total non-interest expense, adjusted $ 157,469 $ 151,126 Net interest income $ 292,667 $ 265,339 Total non-interest income 31,233 41,397 Add: Losses on securities transactions, net (pre-tax) 118 40 Total net interest income and non-interest income $ 324,018 $ 306,776 Efficiency ratio 49.46 % 50.75 % Efficiency ratio, adjusted 48.60 % 49.26 % Income Taxes Income tax expense totaled $39.3 million for the first quarter 2021 as compared to $38.0 million and $29.1 million for the fourth quarter 2020 and first quarter 2020, respectively. Our effective tax rate was 25.4 percent, 26.5 percent and 25.0 percent for the first quarter 2021, fourth quarter 2020 and first quarter 2020, respectively. The decrease in the effective tax rate as compared to the fourth quarter 2020 was mainly due to an increase in the excess stock compensation benefit for the first quarter 2021. U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies. Business Segments We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. 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 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 our 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. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. 53 The following tables present the financial data for each business segment for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,049,252 $ 25,533,227 $ 4,803,740 $ — $ 37,386,219 Income (loss) before income taxes 31,399 129,052 2,800 (8,220) 155,031 Annualized return on average interest earning assets (before tax) 1.78 % 2.02 % 0.23 % N/A 1.66 % Three Months Ended March 31, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,217,144 $ 22,782,284 $ 4,674,647 $ — $ 34,674,075 Income (loss) before income taxes 16,241 102,795 7,830 (10,469) 116,397 Annualized return on average interest earning assets (before tax) 0.90 % 1.80 % 0.67 % N/A 1.34 % See Note 13 to the consolidated financial statements for additional information. Consumer Lending This consumer lending segment represented 20.9 percent of our loan portfolio at March 31, 2021, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 12.4 percent of our loan portfolio at March 31, 2021) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 4.4 percent of total loans at March 31, 2021) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services. Average interest earning assets in this segment decreased $167.9 million to $7.0 billion for the three months ended March 31, 2021 as compared to the first quarter 2020. The decrease was largely due to continued residential mortgage loan refinance activity and a higher percentage of mortgage loans originated for sale rather than held for investment over the last 12 month period. Automobile loan demand was also tempered during the onset of the pandemic before steadily strengthening in the fourth quarter 2020 and first quarter 2021. Income before income taxes generated by the consumer lending segment increased $15.2 million to $31.4 million for the first quarter 2021 as compared to the first quarter 2020 largely due to a $9.4 million decrease in the provision for loan losses coupled with a $5.9 million increase in net interest income. The decrease in the provision for loan losses was mainly due to the improvement in the economic forecast component of the allowance for loan losses at March 31, 2021 as compared to March 31, 2020. See further details in the "Allowance for Credit Losses" section of this MD&A. The increase in net interest income was largely driven by lower funding costs, partially offset by lower yields on consumer loans and the decline in average loan balances. 54 The net interest margin on the consumer lending portfolio increased 40 basis points to 3.09 percent for the first quarter 2021 as compared to the first quarter 2020 mainly due to a 73 basis point decrease in the costs associated with our funding sources, partially offset by a 33 basis point decrease in the yield on average loans. The decrease in our funding costs was largely due to the lower rates offered on deposit products, maturing time deposits and an 82 basis point decrease in the average cost of short-term borrowings. The 33 basis point decrease in loan yield was due to lower yielding new and refinanced loan volumes. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources. Commercial Lending The commercial lending segment is 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. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $7.1 billion and represented 21.9 percent of the total loan portfolio at March 31, 2021. Commercial real estate loans and construction loans totaled $18.7 billion and represented 57.2 percent of the total loan portfolio at March 31, 2021. Average interest earning assets in this segment increased approximately $2.8 billion to $25.5 billion for the three months ended March 31, 2021 as compared to the first quarter 2020. The increase was mostly due to the origination of PPP loans totaling $2.4 billion within the commercial and industrial portfolio at March 31, 2021, as well as organic commercial real estate loan growth over most of the last 12 month period. For the three months ended March 31, 2021, income before income taxes for the commercial lending segment increased $26.3 million to $129.1 million as compared to the first quarter 2020 mainly driven by an increase in net interest income combined with a decline in the provision for credit losses. Net interest income for this segment increased $26.4 million to $229.1 million for the first quarter 2021 as compared to the same period in 2020 primarily due to lower funding costs and interest and fee income largely resulting from PPP loans. The provision for credit losses decreased by $15.5 million mainly due to the improvement in the economic forecast component of the allowance for loan losses as compared to March 31, 2020. The positive impact of the aforementioned items was partially offset by a decrease in non-interest income and higher internal transfer expense. Non-interest income decreased $7.9 million to $7.7 million for the three months ended March 31, 2021 as compared to the first quarter 2020 mainly due to an $8.0 million decrease in swap fee income related to derivative interest rate swaps executed with commercial loan customers. Internal transfer expense increased $6.4 million for the first quarter 2021 as compared to the first quarter 2020 partly due to general increases related to organic growth in our business. The net interest margin for this segment increased 3 basis points to 3.59 percent for the first quarter 2021 as compared to the first quarter 2020 due to a 73 basis point decrease in the cost of our funding sources, which was mostly offset by a 70 basis point decrease in the yield on average loans. I nvestment Management The investment management segment generates a large portion of our 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 our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed rate investments are one of Valley’s least sensitive assets 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 our balance sheet. See the “Asset/Liability Management” section below for further analysis. Average interest earning assets in this segment increased $129.1 million during the first quarter 2021 as compared to the first quarter 2020 primarily due to a $648.1 million increase in average interest bearing deposits with banks, partially offset by a $519.0 million decrease in average investment securities. The increase in average overnight interest bearing deposits with banks was due, in part, to a lower rate of reinvestment of normal repayments within our investment securities portfolio. 55 For the first quarter 2021, income before income taxes for the investment management segment decreased $5.0 million to $2.8 million as compared to the first quarter 2020 mostly due to a $3.9 million decrease in net interest income, partially offset by a lower provision for credit losses. The decrease in net interest income was primarily due to normal repayments of higher yielding securities and the low yields on the increased overnight investment balances. The provision for credit losses decreased $1.1 million for the three months ended March 31, 2021 as compared to the first quarter 2020. The net interest margin for this segment decreased 37 basis points to 1.26 percent for the first quarter 2021 as compared to the same quarter in 2020 largely due to a 110 basis point decrease in the yield on average investments, partially offset by a 73 basis point decrease in our cost of funding. The decrease in the yield on average investments as compared to the first quarter 2020 was largely driven by principal repayments on higher yielding residential mortgage-backed securities, acceleration of premium amortization expense related to the increased prepayment of mortgage-backed securities and purchases of lower yielding investment securities over the last 12 months. Corporate and other adjustments The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses not reported in the investment management segment above, interest expense related to subordinated notes, amortization and impairment of tax credit investments, as well as non-core items, including merger expenses. The corporate segment recognized pre-tax losses of $8.2 million and $10.5 million for the three months ended March 31, 2021 and 2020, respectively. The decline in the pre-tax loss for the first quarter 2021 was largely due to a $5.6 million increase in internal transfer income, partially offset by a $1.8 million increase in non-interest expense. The increase in non-interest expense was largely driven by increases in salaries and employee benefits expenses, higher data processing and telecommunication expenses, partially offset by a decrease in amortization of tax credit investments. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities. We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of March 31, 2021. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the 56 balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of March 31, 2021. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model. Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of March 31, 2021. Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 2021 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the first quarter 2021. The model also utilizes an immediate parallel shift in market interest rates at March 31, 2021. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet. Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income. The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below. Estimated Change in Future Net Interest Income Changes in Interest Rates Dollar Change Percentage Change (in basis points) ($ in thousands) +200 $ 58,608 5.01 % +100 28,837 2.46 –100 (43,263) (3.70) –200 (70,355) (6.01) As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 month period by 2.46 percent. Management believes the interest rate sensitivity remains within an acceptable tolerance range at March 31, 2021. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows. 57 Liquidity and Cash Requirements Bank Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements. The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at March 31, 2021. Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payment related to leases, capital expenditures and other purchase commitments. In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments. Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below. On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximate ly $3.1 billion, representing 8.2 percent of earning assets at March 31, 2021 and $3.1 billion, representing 8.3 percent of earning assets at December 31, 2020. Of the $3.1 billion of liquid assets at March 31, 2021, approximately $691.4 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approx imately $697 million in principal payments from securities in the total investment portfolio over the next 12 month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities. Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at March 31, 2021) are projected in accordance with their scheduled contractual terms to be approximately $9.8 billion over the next 12 month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtail ment of lending activities. On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $28.4 billion and $25.8 billion for the three months ended March 31, 2021 and for the year ended December 31, 2020, respectively, representing 75.9 percent and 69.8 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities. Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous banks. While these lending lines are uncommitted, management believes that the Bank could borrow approximately $1.5 billion from these banks on a collective basis. 58 The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances 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. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Letters of Credit (MULOC) to collateralize certain municipal deposits held by Valley. At March 31, 2021, Valley had $700 million of MULOCs outstanding for this purpose. Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At March 31, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans) under the Federal Reserve Bank's discount window was $1.6 billion. We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $63.3 million to $1.1 billion at March 31, 2021 as compared to December 31, 2020 primarily driven by normal maturities. Corporation Liquidity Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions. Investment Securities Portfolio As of March 31, 2021, we had $33.0 million, $1.1 billion and $2.4 billion in equities, available for sale debt securities and held to maturity debt securities, respectively. Our equity securities portfolio is mainly comprised of a money market mutual fund and investments in public and private Community Reinvestment Act funds. Our held to maturity and available for sale debt securities portfolios were comprised of U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, that may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. Certain securities with limited marketability and/or restrictions, such as Federal Home Loan Bank and Federal Reserve Bank stocks, are carried at cost and are included in other assets. Allowance for Credit Losses and Impairment Analysis Available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. 59 If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. We have evaluated all available for sale debt securities that are in an unrealized loss position as of March 31, 2021 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three months ended March 31, 2021 and, as a result, there was no allowance for credit losses for available for sale debt securities at March 31, 2021. Held to maturity debt securities. Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds, which are excluded from the model. 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. Held to maturity debt securities were carried net of allowance for credit losses totaling $1.1 million and $1.4 million at March 31, 2021 and December 31, 2020, respectively. Valley recorded a credit (negative) provision for credit losses of $358 thousand during the first quarter 2021 and a provision for credit losses of $759 thousand for the first quarter 2020, respectively. There were no net charge-offs of debt securities in the respective periods. Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. 60 The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at March 31, 2021: March 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Available for sale investment grades: * AAA Rated $ 949,878 $ 30,036 $ (1,329) $ 978,585 AA Rated 25,149 616 — 25,765 A Rated 6,161 155 — 6,316 BBB Rated 29,330 612 (8) 29,934 Non-investment grade 11,847 — (12) 11,835 Not rated 62,217 1,636 (67) 63,786 Total $ 1,084,582 $ 33,055 $ (1,416) $ 1,116,221 Held to maturity investment grades: * AAA Rated $ 2,051,782 $ 41,064 $ (18,749) $ 2,074,097 AA Rated 175,740 5,485 (2) 181,223 A Rated 13,274 360 — 13,634 BBB Rated 8,000 450 (72) 8,378 Non-investment grade 5,632 — (111) 5,521 Not rated 136,598 588 (6,678) 130,508 Total $ 2,391,026 $ 47,947 $ (25,612) $ 2,413,361 * Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. The unrealized losses in the AAA rated category of the held to maturity debt securities (in the above table) are mainly related to residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. The investment securities held to maturity portfolio included $136.6 million of investments not rated by the rating agencies with aggregate unrealized losses of $6.7 million at March 31, 2021 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million. See Note 6 to the consolidated financial statements for additional information regarding our investments securities portfolio. 61 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 ($ in thousands) Loans Commercial and industrial: Commercial and industrial $ 4,784,017 $ 4,709,569 $ 4,625,880 $ 4,670,362 $ 4,998,731 Commercial and industrial PPP loans 2,364,627 2,152,139 2,277,465 2,214,327 — Total commercial and industrial * 7,148,644 6,861,708 6,903,345 6,884,689 4,998,731 Commercial real estate: Commercial real estate 16,923,627 16,724,998 16,815,587 16,571,877 16,390,236 Construction 1,786,331 1,745,825 1,720,775 1,721,352 1,727,046 Total commercial real estate 18,709,958 18,470,823 18,536,362 18,293,229 18,117,282 Residential mortgage 4,060,492 4,183,743 4,284,595 4,405,147 4,478,982 Consumer: Home equity 409,576 431,553 457,083 471,115 481,751 Automobile 1,444,883 1,355,955 1,341,659 1,369,489 1,436,734 Other consumer 912,863 913,330 892,542 890,942 914,587 Total consumer loans 2,767,322 2,700,838 2,691,284 2,731,546 2,833,072 Total loans * $ 32,686,416 $ 32,217,112 $ 32,415,586 $ 32,314,611 $ 30,428,067 As a percent of total loans: Commercial and industrial 21.9 % 21.3 % 21.3 % 21.3 % 16.5 % Commercial real estate 57.2 57.3 57.2 56.6 59.5 Residential mortgage 12.4 13.0 13.2 13.6 14.6 Consumer loans 8.5 8.4 8.3 8.5 9.4 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % * Includes net unearned discount and deferred loan fees of $108.6 million, $95.8 million, $116.2 million, $131.3 million, and $76.4 million at March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020, respectively. Net unearned discounts and deferred loan fees included $57.2 million, $43.2 million, $54.4 million and $62.1 million of net unearned fees related to PPP loans at March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively. Commercial and industrial loans increased $286.9 million, or 16.7 percent on an annualized basis, to $7.1 billion at March 31, 2021 as compared to December 31, 2020 mostly due to the $212.5 million increase in PPP loans, which was net of over $630 million of PPP loans forgiven by the SBA during the first quarter 2021. Valley expects the majority of these borrowers to qualify for loan forgiveness under the guidelines of the SBA program, which impact our ability to grow the commercial and industrial loan portfolio. Non-PPP commercial and industrial loans increased $74.4 million, or 6.3 percent, at March 31, 2021 as compared to December 31, 2020 mostly due to expansion of our lending teams during the first quarter 2021, as well as stronger demand in certain customer segments, including healthcare lending. Commercial real estate loans (excluding construction loans) increased $198.6 million, or 4.8 percent on an annualized basis, to $16.9 billion at March 31, 2021 from December 31, 2020 reflecting the recovery of our loan commitment pipeline near the end of 2020. Construction loans increased $40.5 million to $1.8 billion at March 31, 2021 from December 31, 2020. Construction demand in our Florida markets, which have mostly reopened during the current COVID-19 pandemic, remains robust as compared to the Northeast and we intend to be strategically competitive for the strongest borrowers and projects in that market. 62 Residential mortgage loans declined $123.3 million, or 11.8 percent on an annualized basis during the first quarter 2021 mainly due to continued refinance activity and a higher percentage of loans originated for sale rather than held for investment. New and refinanced residential mortgage loan originations totaled approximately $550.6 million for the first quarter 2021 as compared to $542.3 million and $358.9 million for the fourth quarter 2020 and first quarter 2020, respectively. Of the total originations in the first quarter 2021, approximately $288 million of residential mortgage loans were originated for sale rather than held for investment. During the first quarter 2021, we sold approximately $348 million (including $301 million of residential mortgage loans held for sale at December 31, 2020). We may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the second quarter 2021 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet. Home equity loans moderately increased $22.0 million to $409.6 million at March 31, 2021 from December 31, 2020 . New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest, despite the favorable low interest rate environment. Automobile loans increased by $88.9 million, or 26.2 percent on an annualized basis, to $1.4 billion at March 31, 2021 as compared to December 31, 2020 due to strong consumer demand seen across the auto industry during the first quarter 2021 . Our Florida dealership network contributed $43.8 million in auto loan originations, representing approximately 18 percent of new loans, during the first quarter 2021 as compared to $27.7 million, or 17 percent of new loans, during the fourth quarter 2020. Other consumer loans decreased $467 thousand to $912.9 million at March 31, 2021 as compared to $913.3 million at December 31, 2020 mainly due to tempered usage and demand within our collateralized personal lines of credit portfolio. Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector. For the remainder of 2021, we remain cautiously optimistic about overall loan growth, exclusive of PPP loans. In the early stages of the second quarter 2021, our loan origination pipelines remain robust and organic growth opportunities, especially in Florida, appear to be closer to pre-pandemic levels. During the first quarter 2021, approximately 50 percent of our commercial loan growth come out of Florida. However, there can be no assurance that those positive trends will continue, or balances will not decline from March 31, 2021 given the potential for unforeseen changes in consumer confidence, the economy, and other market conditions. We believe that many of our SBA PPP loans will be eligible for forgiveness in 2021 in accordance with the rules of this program and is highly likely to result in a large reduction in these loan balances. Non-performing Assets Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), other repossessed assets (which primarily consists of automobiles and taxi medallions) and non-accrual debt securities at March 31, 2021. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell. Our NPAs increased $16.0 million to $210.5 million at March 31, 2021 as compared to December 31, 2020 mainly due to a $18.7 million increase in non-accrual loans in the first quarter 2021. NPAs as a percentage of total loans and NPAs totaled 0.64 percent and 0.60 percent at March 31, 2021 and December 31, 2020, respectively (as shown in the table below). We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past 12 months, despite the uptick in non-accrual borrowers mainly caused by COVID-19 pandemic. The level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 7 to the consolidated financial statements. 63 Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the uncertain path of the recovery from the COVID -19 pandemic and a number of our borrowers that are still performing under forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at March 31, 2021. 64 The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 ($ in thousands) Accruing past due loans: 30 to 59 days past due: Commercial and industrial $ 3,763 $ 6,393 $ 6,587 $ 6,206 $ 9,780 Commercial real estate 11,655 35,030 26,038 13,912 41,664 Construction — 315 142 — 7,119 Residential mortgage 16,004 17,717 22,528 35,263 38,965 Total Consumer 5,480 10,257 8,979 12,962 19,508 Total 30 to 59 days past due 36,902 69,712 64,274 68,343 117,036 60 to 89 days past due: Commercial and industrial 1,768 2,252 3,954 4,178 7,624 Commercial real estate 5,455 1,326 610 1,543 15,963 Construction — — — — 49 Residential mortgage 2,233 10,351 3,760 4,169 9,307 Total Consumer 1,021 1,823 1,352 3,786 2,309 Total 60 to 89 days past due 10,477 15,752 9,676 13,676 35,252 90 or more days past due: Commercial and industrial 2,515 9,107 6,759 5,220 4,049 Commercial real estate — 993 1,538 — 161 Residential mortgage 2,472 3,170 891 3,812 1,798 Total Consumer 417 271 753 2,082 1,092 Total 90 or more days past due 5,404 13,541 9,941 11,114 7,100 Total accruing past due loans $ 52,783 $ 99,005 $ 83,891 $ 93,133 $ 159,388 Non-accrual loans: Commercial and industrial $ 108,988 $ 106,693 $ 115,667 $ 130,876 $ 132,622 Commercial real estate 54,004 46,879 41,627 43,678 41,616 Construction 71 84 2,497 3,308 2,972 Residential mortgage 33,655 25,817 23,877 25,776 24,625 Total Consumer 7,292 5,809 7,441 6,947 4,095 Total non-accrual loans 204,010 185,282 191,109 210,585 205,930 Other real estate owned (OREO) 4,521 5,118 7,746 8,283 10,198 Other repossessed assets 1,857 3,342 3,988 3,920 3,842 Non-accrual debt securities 129 815 783 1,365 531 Total non-performing assets (NPAs) $ 210,517 $ 194,557 $ 203,626 $ 224,153 $ 220,501 Performing troubled debt restructured loans $ 67,102 $ 57,367 $ 58,090 $ 53,936 $ 48,024 Total non-accrual loans as a % of loans 0.62 % 0.58 % 0.59 % 0.65 % 0.68 % Total NPAs as a % of loans and NPAs 0.64 0.60 0.62 0.69 0.72 Total accruing past due and non-accrual loans as a % of loans 0.79 0.88 0.85 0.94 1.20 Allowance for loan losses as a % of non-accrual loans 168.07 183.64 170.08 147.03 137.59 Loans past due 30 to 59 days decreased $32.8 million to $36.9 million at March 31, 2021 as compared to December 31, 2020. Commercial real estate loans past due 30 to 59 days decreased $23.4 million to $11.7 million at March 31, 2021 as compared December 31, 2020 largely due to a $12.3 million matured loan (in the process of restructuring its terms) reported in this delinquency category at December 31, 2020 and the migration of one $8.4 65 million commercial real estate loan to non-accrual status at March 31, 2021. Consumer loan delinquencies decreased by $4.8 million to $5.5 million at March 31, 2021 as compared December 31, 2020 partly due to improved customer performance and results of our collection efforts during the first quarter 2021. Loans past due 60 to 89 days decreased $5.3 million to $10.5 million at March 31, 2021 as compared to December 31, 2020 mainly due to a decline in the residential loans category, partially offset by higher commercial real estate loan delinquencies. Residential loans past due 60 to 89 days decreased by $8.1 million as compared to December 31, 2020 partly due to loans that migrated to non-accrual status at March 31, 2021. Commercial real estate loan delinquencies increased $4.1 million at March 31, 2021 as compared to December 31, 2020 largely due to one $4.6 million potential problem loan reported in this delinquency category at March 31, 2021. Loans past due 90 days or more and still accruing interest decreased $8.1 million to $5.4 million at March 31, 2021 as compared to $13.5 million at December 31, 2020 largely due to a $6.6 million decrease in the commercial and industrial loan category, as well as lower commercial real estate and residential mortgage loan delinquencies. The decrease in commercial and industrial loans past due 90 or more days was primarily due to premium finance loans (related to two insurance carriers) totaling $6.1 million reclassified to non-accrual status during the first quarter 2021. All of the loans past due 90 days or more and still accruing reported at March 31, 2021, including $2.5 million of premium finance loans (collateralized by insurance policies) within commercial and industrial loans, are considered to be well secured and in the process of collection. Non-accrual loans increased $18.7 million to $204.0 million at March 31, 2021 as compared to $185.3 million at December 31, 2020 mostly driven by one $8.4 million commercial real estate loan and a $7.8 million increase in non-accrual residential mortgage loans which was partially caused by the migration of loans previously reported in the 60-89 days past due category at December 31, 2020. We continue to closely monitor our non-performing New York City and Chicago taxi medallion loans totaling $87.2 million and $6.6 million, respectively, within the commercial and industrial loan portfolio at March 31, 2021. Due to continued negative trends in estimated fair valuations of the underlying taxi medallion collateral, a weak operating environment for ride services and uncertain borrower performance, all of the taxi medallion loans are on non-accrual status. The low level of the market valuation of taxi medallions adversely affected the estimated fair valuation of these loans and the allowance for loan losses related to such loans at March 31, 2021and December 31, 2020 . At March 31, 2021, non-accrual taxi medallion loans totaling $93.8 million and had related reserves of $63.2 million, or 67.2 percent of such loans, within the allowance for loan losses as compared to $97.5 million with related reserves of $66.4 million, or 68.1 percent of such loans, at December 31, 2020. Potential further declines in the market valuation of taxi medallions and the stressed operating environment within both New York City and Chicago due to the COVID-19 pandemic could also negatively impact the future performance of this portfolio. For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated rese rves of $6.9 million w ithin the allowance for loan losses based upon taxi medallion loan balances at March 31, 2021. See the "Allowance for Credit Losses" section below for further details on our reserves. OREO properties decreased $597 thousand to $4.5 million at March 31, 2021 from $5.1 million at December 31, 2020. Net gains and losses from the sales of OREO properties were immaterial for the three months ended March 31, 2021 and 2020. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million and $1.9 million at March 31, 2021 and December 31, 2020, respectively. TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $9.7 million to $67.1 million at March 31, 2021 as compared to $57.4 million at December 31, 2020. Performing TDRs consisted of 86 loans at March 31, 2021. On an aggregate basis, the $67.1 66 million in performing TDRs at March 31, 2021 had a modified weighted average interest rate of approximately 4.60 percent as compared to a pre-modification weighted average interest rate of 4.70 percent. Loan Forbearance. In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days. Any extensions beyond this period were done in accordance with applicable regulatory guidance. The following table presents the outstanding loan b alances and number of loans in an active payment deferral period under short-term modifications as of March 31, 2021: March 31, 2021 Amount Number of loans ($ in thousands) Commercial and industrial $ 10,287 61 Commercial real estate 227,194 45 Residential mortgage 43,857 104 Consumer 2,971 140 Total $ 284,309 350 During the first quarter 2021, active loan forbearances decreased from approximately 610 loans with total outstanding balances of $361 million remaining as of December 31, 2020. Higher Risk COVID-19 Credit Exposures . V alley has identified certain borrower industries that may pose a higher risk of credit losses to us due to the negative impact of the COVID-19 pandemic. The following table presents non-PPP loans and active deferrals in the COVID-19 e xposure industries at March 31, 2021 : March 31, 2021 Non-PPP loan balance % of non-PPP loans Active deferrals % of total industry loans ($ in thousands) Retail trade $ 585,346 1.9 % $ 15,976 2.7 % Hotels and hospitality 504,853 1.7 — — Doctors and surgery 494,391 1.6 12,974 2.6 Restaurants and food service 323,197 1.1 19,068 5.9 Entertainment and recreation 224,650 0.7 — — Total $ 2,132,437 7.0 % $ 48,018 2.3 % As of March 31, 2021, Valley had outstanding loans of approximately $2.1 billion, or 7.0 percent of total loans (excluding PPP loans), that were made to borrowers in these industries. Active deferrals in this category totaled $48.0 million, or 2.3 percent of total loans in COVID-19 exposed industries at March 31, 2021, as compared to $50.1 million, or 2.3 percent of total loans at December 31, 2020. As of March 31, 2021, approximately 88 percent of loans within the higher risk industries were pass-rated under Valley’s internal risk rating system. Allowance for Credit Losses for Loans The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (1) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (2) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. 67 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 allowance on a collective basis we use 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, relative 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 and 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. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. For the first quarter 2021, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios. At March 31, 2021, Valley assigned a higher weighting to Moody’s Baseline scenario as compared to December 31, 2020 with less emphasis on Moody’s S-3 and S-4 downside scenarios. This change reflects positive economic developments including federal stimulus and increasing vaccination levels that are expected to lead to improved economic conditions during the remainder of 2021. This increased optimism could still be tempered by continued COVID-19 hot spots in various locales, relatively weak labor market conditions and other factors. The Moody's Baseline forecast carried the highest weighting in our three-scenario forecast and including the following assumptions at March 31, 2021: • GDP expansion by over 6.2 percent in the second quarter 2021; • Unemployment of 6 percent in the second quarter 2021 and improving to 4.1 percent by the first quarter 2023; and • A U.S. economy poised for robust growth due to approximately $2 trillion in fiscal support entering the economy via the American Rescue Plan Act of 2021 and the COVID-19 relief legislation passed at the end of 2020; including substantial stimulus checks, unemployment insurance, rental, childcare and food assistance, aid to small businesses, airlines, schools and state and local governments. See more details regarding our allowance for credit losses for loans in Note 7 to the consolidated financial statements. 68 The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated. Three Months Ended March 31, 2021 December 31, 2020 March 31, 2020 ($ in thousands) Average loans outstanding $ 32,582,479 $ 32,570,902 $ 29,999,428 Beginning balance - Allowance for credit losses for loans 351,354 335,328 164,604 Impact of ASU No. 2016-13 adoption on January 1, 2020 * — — 37,989 Allowance for purchased credit deteriorated (PCD) loans * — — 61,643 Beginning balance, adjusted 351,354 335,328 264,236 Loans charged-off: Commercial and industrial (7,142) (3,281) (3,360) Commercial real estate (382) (1) (44) Residential mortgage (138) (250) (336) Total consumer (1,138) (1,670) (2,565) Total charge-offs (8,800) (5,202) (6,305) Charged-off loans recovered: Commercial and industrial 1,589 160 569 Commercial real estate 65 890 73 Construction 4 372 20 Residential mortgage 157 44 50 Total consumer 930 734 794 Total recoveries 2,745 2,200 1,506 Net charge-offs (6,055) (3,002) (4,799) Provision charged for credit losses 9,014 19,028 33,924 Ending balance - Allowance for credit losses for loans $ 354,313 $ 351,354 $ 293,361 Components of allowance for credit losses for loans: Allowance for loan losses $ 342,880 $ 340,243 $ 283,342 Allowance for unfunded credit commitments 11,433 11,111 10,019 Allowance for credit losses for loans $ 354,313 $ 351,354 $ 293,361 Components of provision for credit losses for loans: Provision for credit losses for loans $ 8,692 $ 18,213 $ 33,851 Provision for unfunded credit commitments 322 815 73 Total provision for credit losses for loans $ 9,014 $ 19,028 $ 33,924 Annualized ratio of net charge-offs to average loans outstanding 0.07 % 0.04 % 0.06 % * The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU No. 2016-13 effective January 1, 2020. Net loan charge-offs totaled $6.1 million for the first quarter 2021 as compared to $3.0 million and $4.8 million for the fourth quarter 2020 and first quarter 2020, respectively. The increase in net loan charge-offs for the first quarter 2021 was mainly due to partial charge-offs of certain taxi medallion loans and a full charge-off of a $1.9 million unsecured, non-performing commercial and industrial loan relationship. The partial charge-offs of taxi medallion loans totaled $3.3 million for the first quarter 2021 as compared to $2.3 million and $1.3 million for the fourth quarter 2020 and the first quarter 2020, respectively. The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio. 69 The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: March 31, 2021 December 31, 2020 March 31, 2020 Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and Industrial loans $ 126,408 1.77 % $ 131,070 1.91 % $ 127,437 2.55 % Commercial real estate loans: Commercial real estate 153,680 0.91 146,009 0.87 97,876 0.60 Construction 20,556 1.15 18,104 1.04 13,709 0.79 Total commercial real estate loans 174,236 0.93 164,113 0.89 111,585 0.62 Residential mortgage loans 27,172 0.67 28,873 0.69 29,456 0.66 Consumer loans: Home equity 4,199 1.03 4,675 1.08 4,463 0.93 Auto and other consumer 10,865 0.46 11,512 0.51 10,401 0.44 Total consumer loans 15,064 0.54 16,187 0.60 14,864 0.52 Total allowance for loan losses 342,880 1.05 340,243 1.06 283,342 0.93 Allowance for unfunded credit commitments 11,433 11,111 10,019 Total allowance for credit losses for loans $ 354,313 $ 351,354 $ 293,361 Allowance for credit losses for loans as a % loans 1.08 % 1.09 % 0.96 % The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including letters of credit), as a percentage of total loans was 1.08 percent, 1.09 percent and 0.96 percent at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. During the first quarter 2021, we recorded a $9.0 million provision for credit losses as compared to $19.0 million and $33.9 million for the fourth quarter 2020 and the first quarter 2020, respectively. The provision in the first quarter 2021 reflects, among other factors, additional reserves related to non-PPP loan growth and certain segments of our commercial real estate portfolio, partially offset by the lower qualitative reserves for customers impacted by the pandemic and the improvement in our economic forecast component of the reserve as compared to December 31, 2020. At March 31, 2021, the allowance allocations for credit losses as a percentage of total loans increased in the commercial real estate and construction loan categories while decreasing slightly for most other loan categories as compared to December 31, 2020. The allocated reserves as a percentage of commercial and industrial loans declined by 14 basis points partially due to the loan charge-offs in the first quarter 2021 within this loan category, as well as the increase in PPP loans guaranteed by the SBA with no related allowance at March 31, 2021. The allowance for credit losses for loans as a percentage of non-PPP loans was 1.17 percent at both March 31, 2021 and December 31, 2020. 70 Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At March 31, 2021 and December 31, 2020, shareholders’ equity totaled approximately $4.7 billion and $4.6 billion, respectively, which represented 11.3 percent of total assets. During the three months ended March 31, 2021, total shareholders’ equity increased by $67.6 million primarily due to net income of $115.7 million and a $9.7 million increase attributable to the effect of our stock incentive plan. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $48.5 million and an increase in other comprehensive loss of $9.3 million. Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. 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. We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of March 31, 2021 and December 31, 2020, 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 $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build since adoption (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame. 71 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at March 31, 2021 and December 31, 2020: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of March 31, 2021 Total Risk-based Capital Valley $ 3,887,829 12.76 % $ 3,199,331 10.50 % N/A N/A Valley National Bank 3,937,010 12.93 3,197,660 10.50 $ 3,045,390 10.00 % Common Equity Tier 1 Capital Valley 3,071,590 10.08 2,132,888 7.00 N/A N/A Valley National Bank 3,699,612 12.15 2,131,773 7.00 1,979,504 6.50 Tier 1 Risk-based Capital Valley 3,286,431 10.79 2,589,935 8.50 N/A N/A Valley National Bank 3,699,612 12.15 2,588,582 8.50 2,436,312 8.00 Tier 1 Leverage Capital Valley 3,286,431 8.37 1,570,427 4.00 N/A N/A Valley National Bank 3,699,612 9.42 1,570,198 4.00 1,962,747 5.00 As of December 31, 2020 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 Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: March 31, 2021 December 31, 2020 ($ in thousands, except for share data) Common shares outstanding 405,797,538 403,858,998 Shareholders’ equity $ 4,659,670 $ 4,592,120 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 1,450,414 1,452,891 Tangible common shareholders’ equity $ 2,999,565 $ 2,929,538 Tangible book value per common share $ 7.39 $ 7.25 Book value per common share $ 10.97 $ 10.85 Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and 72 facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies. Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 60.7 percent for the three months ended March 31, 2021 as compared to 52.7 percent for the year ended December 31, 2020. Cash dividends declared amounted to $0.11 per common share for each of the three months ended March 31, 2021 and 2020. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2020 in the MD&A section - “Liquidity and Cash Requirements” and Notes 10 and 11 to the consolidated financial statements included in this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See pa ge 55 for a discussion of interest rate sensitivity.