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 46 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,” "may," "estimate," 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: • failure to obtain shareholder or regulatory approval for the acquisition of Bank Leumi USA (Bank Leumi) on the anticipated terms and within the anticipated timeframe; • the inability to realize expected cost savings and synergies from the Westchester and Bank Leumi acquisitions in amounts or in the timeframe anticipated; • costs or difficulties relating to Westchester and Bank Leumi integration matters might be greater than expected; • the inability to retain customers and qualified employees of the Westchester and Bank Leumi; • changes in estimates of non-recurring charges related to Westchester and Bank Leumi acquisitions; • 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; • 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; • 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; 47 • 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, ransomware 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; and • 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. 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 and Part II, Item 1A of this Quarterly Report. 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 September 30, 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 5 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 September 30, 2021, Valley had consolidated total assets of approximately $41.3 billion, total net loans of $32.3 billion, total deposits of $33.6 billion and total shareholders’ equity of $4.8 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama . Of our current 226 branch network, 58 percent, 17 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, w e have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions. The Westchester Bank Holding Corporation. On June 29, 2021, Valley announced that it will acquire The Westchester Bank Holding Corporation (“Westchester”) and its principal subsidiary, The Westchester Bank which is headquartered in White Plains, New York. As of June 30, 2021 , Westchester had total assets of $1.3 billion, total loans of $908 million, and total deposits of $1.1 billion. Westchester maintains a seven branch network in Westchester County, New York. The common shareholders of Westchester will receive 229.645 shares of Valley 48 common stock for each Westchester share they own. Based on Valley’s closing stock price on June 28, 2021, Westchester’s stockholders will receive approximately $210 million in Valley common stock. Existing Westchester options will be cashed out for approximately $10 million in cash. The acquisition is anticipated to close on December 1, 2021, pending the satisfaction of customary closing conditions . Bank Leumi Le-Israel Corporation Merger. On September 23, 2021, Valley announced a merger with Bank Leumi Le-Israel Corporation (Leumi) whereby Valley will acquire Leumi, the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA (Bank Leumi). The merger will enable Valley to greatly expand its commercial banking and venture capital banking businesses, as well as help Valley increase its revenue diversity and expand into new geographies. Bank Leumi has its headquarters in New York City and also operates commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Fl. As of June 30, 2021, Bank Leumi had total assets of $8.4 billion, total deposits of $7.1 billion, and gross loans of $5.4 billion. The acquisition is expected to close in the first half of 2022, subject to standard regulatory approvals, approval of Valley shareholders, as well as other customary closing conditions. Dudley Venture s Acquisition . On October 8, 2021, Valley acquired Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits. The transaction includes the acquisition of DV's community development entity, DV Community Investment, as well as DV Fund Advisors and DV Advisory Services. The transaction price included $11.3 million of cash at the closing date, fixed future stock consideration totaling $3.8 million, and contingent cash earn-out payments based upon revenue growth of the acquired entities over a five-year period. The acquisition of Dudley Ventures is expected to support our efforts to build differentiated sources of non-interest income. Impact of COVID-19. Economic activity and businesses continued to rebound in the third quarter 2021. However, the U.S. is experiencing significant global supply chain disruptions and labor shortages which have also increased inflation. W e continue to monitor the impact of COVID-19 closely, including its impact on our employees, customers, communities and results of operations and other government stimulus or Federal Reserve actions. The extent to which the COVID-19 pandemic will impact our operations and financial results during the fourth quarter 2021 and beyond is highly uncertain. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant and will follow proper protocols designed to ensure safety of our employees and customers. See the "Operating Environment" section of MD&A for more details. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. Valley extended a total of $3.2 billion PPP loans under the program, of which $2.3 billion of these loans have received forgiveness from the SBA, including $476.7 million during the third quarter 2021 . As of September 30, 2021 , we had $874.0 million of PPP loans still outstanding. In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the 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. As of September 30, 2021 , Vall ey had $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.3 percent of our total loan portfolio at September 30, 2021 as compared to $361 million, or 1.1 percent of total loans at December 31, 2020. Quarterly Results. Net income for the third quarter 2021 was $122.6 million, or $0.29 per diluted common share, compared to $102.4 million, or $0.25 per diluted common share, for the third quarter 2020. The $20.2 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: • a $17.9 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) run-off of higher cost time deposits, (iii) lower average other borrowings and related costs driven by normal maturities of FHLB 49 advances and long-term repos, as well as our prepayments of $534 million and $248 million of long-term FHLB borrowings in December 2020 and June 2021, respectively; and • a $27.4 million decrease in our provision for credit losses mainly due to the improved economic forecast component of the reserve as compared to September 30, 2020, partially offset by: • a $6.8 million decrease in non-interest income mainly due to the combination of lower gains on sales of residential mortgage loans and lower fee income related to derivative interest rate swaps executed with commercial lending customers, partially offset by moderate increases in other fee categories; • a $14.7 million increase in non-interest expense primarily due to higher salary and employee benefits expenses, and increased professional and legal fees, including an accrual of $2.1 million for general litigation reserves, partially offset by a $2.4 million decrease in the loss on the early extinguishment as compared to the third quarter 2020; and • a $3.5 million increase in income tax expense mainly due to higher income before income taxes. 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 third quarter 2021 results. Operating Environment. During the third quarter 2021, real gross domestic product expanded 0.5 percent, compared to 6.7 percent growth in the second quarter 2021. The deceleration in growth was driven by personal consumption and business fixed investment as inflation remained elevated, partly offset by inventory restocking and government spending. The Federal Reserve continued to maintain an accommodative stance on monetary policy to keep interest rates low and promote liquidity. At their meeting in September 2021, the Federal Open Market Committee (the "Committee") maintained the target range for the federal funds rate between 0.00 and 0.25 percent. Additionally, the Committee decided to maintain several programs, including purchasing U.S. Treasury and mortgage backed securities to support the flow of credit to households and businesses in order to promote its maximum employment and price stability goals. Notwithstanding this, the Committee indicated that a moderation in the pace of asset purchases may soon be warranted. The 10-year U.S. Treasury note yield ended the third quarter at 1.52 percent, 7 basis points higher, as compared with June 30, 2021. The spread between the 2- and 10-year U.S. Treasury note yields ended the third quarter 2021 at 1.24 percent, 4 basis points higher, as compared to the end of the second quarter 2021 and 68 basis points higher, as compared to June 30, 2020. For all commercial banks in the U.S., loans and leases increased approximately 0.9 percent in the third quarter 2021, as compared to the previous quarter. For the industry, banks reported more relaxed credit standards for most loan types. Additionally, banks reported that demand had firmed or increased during the third quarter which finally translated into stronger loan growth. In the third quarter 2021, Valley continued to see strong organic growth demand for commercial real estate loans and several other loan types across its geographic footprint. Inflation has been elevated, which could adversely impact companies if they cannot pass along higher input costs to their customers. Should inflation pressures persist, this dynamic, among other external factors, could challenge our business operations as highlighted throughout the remaining MD&A discussion below. Loans. Total loans increased $149.4 million to $32.6 billion at September 30, 2021 from June 30, 2021 in spite of a $476.7 million decrease in PPP loans within the commercial and industrial loan category. Our non-PPP loan portfolio increased $626.0 million, or 8.0 percent on an annualized basis, to $31.7 billion at September 30, 2021 from $31.1 billion at June 30, 2021. The increase in non-PPP loans was largely driven by increases of $399.9 million, $51.7 million and $105.4 million in the commercial real estate, construction and residential mortgage categories, respectively. Additionally, our third quarter 2021 new and refinanced loan originations included 50 approximately $233 million of residential mortgage loans originated for sale. Net gains on sales of residential loans were $6.4 million and $10.1 million in the third quarter 2021 and second quarter 2021, 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), and other repossessed assets increased $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021. Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to June 30, 2021 mainly due to the $33.1 million increase in non-accrual commercial real estate loans from three loan relationships which have $3.7 million of related allowance reserves as of September 30, 2021. Non-accrual loans represented 0.77 percent of total loans at September 30, 2021, as compared to 0.68 percent at June 30, 2021. Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $25.0 million to $55.2 million, or 0.17 percent of total loans, at September 30, 2021 as compared to $80.2 million, or 0.25 percent of total loans, at June 30, 2021. The decrease was driven by the transition of the aforementioned three commercial real estate loan delinquencies from accruing past due loans to non-accrual loan status. See further details in the "Non-performing Assets" section below. Deposits and Other Borrowings . Overall, average deposits increased by $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021 due to continued growth in both commercial and retail customer balances. Av erage non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 2021, respectively. Our mix of average deposits for the third quarter 2021 also continued to shift away from time deposits into the non-maturity deposit categories as compared to the second quarter 2021, as some funding from maturing retail CDs migrate to the more liquid deposit products and normal growth in such categories. Actual ending balances for deposits increased $437.8 million to approximately $33.6 billion at September 30, 2021 from June 30, 2021 largely due to increases of $524.8 million and $260.3 million in the non-maturity interest bearing deposit and non-interest bearing deposit categories, respectively, partially offset by a $347.3 million decrease in time deposits. The decrease of $347.3 million in time deposits was driven by normal run-off of maturing retail CDs with the aforementioned migration of some retail balances to more liquid, lower cost deposit product categories. Total brokered deposits (within money market deposit accounts) decreased approximately $315 million to $1.7 billion at September 30, 2021 as compared to $2.0 billion at June 30, 2021, as our funding profile has benefited from the surge in commercial and retail deposit balances. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 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 September 30, 2021. Average short-term borrowings decreased $13.5 million to $860.5 million for the third quarter 2021 as compared to the second quarter 2021 due to normal debt maturities funded with excess cash liquidity. 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 $605.0 million to $1.6 billion for the third quarter 2021 as compared to the second quarter 2021 largely due to combination of (i) the $248 million of FHLB advances which were prepaid in late June 2021, (ii) repayments upon maturities of FHLB advances and (iii) $300 million of long-term repurchase agreements which matured during the third quarter 2021, with these decreases partially offset by (iv) the $300 million subordinated notes issued in late May 2021 which were outstanding for the full quarter in third quarter 2021. Actual ending balances for short-term borrowings decreased by $71.0 million to $783.3 million at September 30, 2021 as compared to June 30, 2021 largely due to repayments of FHLB advances. Long-term borrowings decreased by $458.2 million to $1.4 billion at September 30, 2021 as compared to June 30, 2021 mainly due to the maturity of $300 million of long-term repurchase agreements and $158 million of FHLB advances which were repaid with excess liquidity during the third quarter 2021. See Note 10 to the consolidated financial statements for additional information. 51 Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Return on average assets 1.18 % 0.99 % 1.16 % 0.94 % Return on average assets, as adjusted 1.20 1.01 1.19 0.95 Return on average shareholders’ equity 10.23 9.04 10.14 8.50 Return on average shareholders’ equity, as adjusted 10.41 9.20 10.37 8.59 Return on average tangible shareholders’ equity (ROATE) 14.64 13.30 14.63 12.61 ROATE, as adjusted 14.90 13.53 14.97 12.75 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Net income, as reported $ 122,580 $ 102,374 $ 358,802 $ 285,243 Add: Loss on extinguishment of debt (net of tax) — 1,691 6,024 1,691 Add: (Gains) losses on available for sale and held to maturity securities transactions (net of tax) (a) (565) 33 (399) 91 Add: Merger related expenses (net of tax) (b) 1,207 76 1,207 1,275 Add: Litigation reserves (net of tax) (b) 1,505 — 1,505 — Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300 (a) Included in gains on securities transactions, net. (b) Included in professional and legal fees. 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. 52 Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 ($ in thousands) Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300 Average assets $ 41,543,930 $ 41,356,737 $ 41,144,375 $ 40,304,956 Annualized return on average assets, as adjusted 1.20 % 1.01 % 1.19 % 0.95 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 ($ in thousands) Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300 Average shareholders' equity $ 4,794,843 $ 4,530,671 $ 4,718,960 $ 4,472,447 Annualized return on average shareholders' equity, as adjusted 10.41 % 9.20 % 10.37 % 8.59 % 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 ($ in thousands) Net income $ 122,580 $ 102,374 $ 358,802 $ 285,243 Net income, as adjusted 124,727 104,174 $ 367,139 $ 288,300 Average shareholders’ equity $ 4,794,843 $ 4,530,671 $ 4,718,960 $ 4,472,447 Less: Average goodwill and other intangible assets 1,446,760 1,451,889 1,449,285 1,456,536 Average tangible shareholders’ equity $ 3,348,083 $ 3,078,782 $ 3,269,675 $ 3,015,911 Annualized ROATE 14.64 % 13.30 % 14.63 % 12.61 % Annualized ROATE, as adjusted 14.90 % 13.53 % 14.97 % 12.75 % 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 $301.7 million for the third quarter 2021 decreased $43 thousand as compared to the second quarter 2021 and increased $17.6 million from the third quarter 2020. Interest expense of $27.8 million for the third quarter 2021 decreased $5.0 million as compared to the second quarter 2021 as we continue to reduce our cost of funding from both deposits and our repayment of other borrowings, primarily FHLB advances. Interest income on a tax equivalent basis in the third quarter 2021 decreased by $5.0 million to $329.5 million as compared to the second quarter 2021 largely due to a $9.4 million decline in PPP loan related interest and fees caused by lower levels of loan forgiveness (prepayments) in the third quarter 2021 and lower yields on non-PPP new and renewed loans. 53 Average interest earning assets increased $565.2 million to $38.3 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to higher levels of excess liquidity held in overnight investments with banks caused by the surge in customer deposit balances and fluctuations in the timing of loan and investment funding. As compared to the second quarter 2021, average interest earning assets increased by $425.5 million from $37.9 billion, mostly driven by higher levels of excess overnight liquidity and purchases of new taxable investments, partially offset by principal repayments in both the taxable and non-taxable investment portfolios. Average interest bearing liabilities decreased $1.7 billion to $25.4 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to the repayment of borrowings with excess cash liquidity over the last 12-month period. As compared to the second quarter 2021, average interest bearing liabilities decreased by $115.4 million in the third quarter 2021 mainly due to repayments of short-term and long-term borrowings, which were largely offset by the surge in both commercial and retail customer deposits. Total average deposits increased $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Our net interest margin on a tax equivalent basis of 3.15 percent for the third quarter 2021 decreased by 3 basis points and increased by 14 basis points from 3.18 percent and 3.01 percent for the second quarter 2021 and third quarter 2020, respectively. The yield on average interest earning assets decreased by 9 basis points on a linked quarter basis mostly due to the lower yield on new and renewed loans, partially offset by one additional day in the third quarter 2021 as compared to the second quarter 2021. The yield on average loans decreased by 8 basis points to 3.79 percent for the third quarter 2021 as compared to the second quarter 2021. The overall cost of average interest bearing liabilities decreased 7 basis points to 0.44 percent for the third quarter 2021 as compared to the second quarter 2021. The decrease was mainly due to: (i) the continued run-off of maturing higher cost time deposits, (ii) repayment of maturing FHLB advances and other borrowings during the third quarter 2021, (iii) the prepayment of $248 million of long-term FHLB advances in June 2021 and (iv) the overall lower cost of deposits. Our cost of total average deposits was 0.18 percent for the third quarter 2021 as compared to 0.21 percent for the second quarter 2021. Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the fourth 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 selectively redeploy low yielding excess cash liquidity into new loans and investments during the fourth quarter 2021, as well as repay or reprice (at low costs) stated maturity deposits totaling approximately $3.3 billion with an average cost of 31 basis points scheduled to mature over the next 12-month period. 54 The following table reflects the components of net interest income for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020: Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2021 June 30, 2021 September 30, 2020 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 32,698,382 $ 309,778 3.79 % $ 32,635,298 $ 315,339 3.87 % $ 32,515,264 $ 315,863 3.89 % Taxable investments (3) 3,302,803 15,797 1.91 3,159,842 14,883 1.88 3,354,373 17,529 2.09 Tax-exempt investments (1)(3) 429,941 3,302 3.07 498,971 4,071 3.26 542,450 4,564 3.37 Interest bearing deposits with banks 1,901,748 642 0.14 1,613,303 235 0.06 1,355,623 420 0.12 Total interest earning assets 38,332,874 329,519 3.44 37,907,414 334,528 3.53 37,767,710 338,376 3.58 Allowance for credit losses (346,437) (350,388) (309,382) Cash and due from banks 213,452 335,083 291,803 Other assets 3,314,308 3,237,689 3,558,927 Unrealized gains on securities available for sale, net 29,733 31,661 47,679 Total assets $ 41,543,930 $ 41,161,459 $ 41,356,737 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 18,771,619 $ 10,605 0.23 % $ 17,784,985 $ 11,166 0.25 % $ 14,542,470 $ 13,323 0.37 % Time deposits 4,126,253 4,394 0.43 4,609,778 6,279 0.54 8,027,346 19,028 0.95 Total interest bearing deposits 22,897,872 14,999 0.26 22,394,763 17,445 0.31 22,569,816 32,351 0.57 Short-term borrowings 860,474 1,464 0.68 873,927 1,168 0.53 1,533,246 2,588 0.68 Long-term borrowings (4) 1,595,814 11,312 2.84 2,200,836 14,128 2.57 2,959,728 19,318 2.61 Total interest bearing liabilities 25,354,160 27,775 0.44 25,469,526 32,741 0.51 27,062,790 54,257 0.80 Non-interest bearing deposits 10,701,948 10,328,412 8,820,877 Other liabilities 692,979 654,724 942,399 Shareholders’ equity 4,794,843 4,708,797 4,530,671 Total liabilities and shareholders’ equity $ 41,543,930 $ 41,161,459 $ 41,356,737 Net interest income/interest rate spread (5) $ 301,744 3.00 % $ 301,787 3.02 % $ 284,119 2.78 % Tax equivalent adjustment (718) (880) (1,033) Net interest income, as reported $ 301,026 $ 300,907 $ 283,086 Net interest margin (6) 3.14 % 3.18 % 3.00 % Tax equivalent effect 0.01 — 0.01 Net interest margin on a fully tax equivalent basis (6) 3.15 % 3.18 % 3.01 % 55 The following table reflects the components of net interest income for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 September 30, 2020 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 32,641,362 $ 938,323 3.83 % $ 31,522,268 $ 970,814 4.11 % Taxable investments (3) 3,191,930 45,717 1.91 3,527,823 65,402 2.47 Tax-exempt investments (1)(3) 480,599 11,621 3.22 563,459 14,207 3.36 Interest bearing deposits with banks 1,588,656 1,101 0.09 1,130,257 2,296 0.27 Total interest earning assets 37,902,547 996,762 3.51 36,743,807 1,052,719 3.82 Allowance for credit losses (348,011) (283,508) Cash and due from banks 263,910 318,370 Other assets 3,290,439 3,492,846 Unrealized gains on securities available for sale, net 35,490 33,441 Total assets $ 41,144,375 $ 40,304,956 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 17,730,438 $ 32,896 0.25 % $ 13,834,930 $ 64,463 0.62 % Time deposits 4,853,891 21,766 0.60 8,501,949 91,699 1.44 Total interest bearing deposits 22,584,329 54,662 0.32 22,336,879 156,162 0.93 Short-term borrowings 966,544 4,390 0.61 1,723,947 9,275 0.72 Long-term borrowings (4) 2,037,312 40,595 2.66 2,873,912 53,240 2.47 Total interest bearing liabilities 25,588,185 99,647 0.52 26,934,738 218,677 1.08 Non-interest bearing deposits 10,147,130 7,995,759 Other liabilities 690,100 902,012 Shareholders’ equity 4,718,960 4,472,447 Total liabilities and shareholders’ equity $ 41,144,375 $ 40,304,956 Net interest income/interest rate spread (5) $ 897,115 2.99 % $ 834,042 2.74 % Tax equivalent adjustment (2,515) (3,058) Net interest income, as reported $ 894,600 $ 830,984 Net interest margin (6) 3.15 % 3.02 % Tax equivalent effect 0.01 % 0.01 % Net interest margin on a fully tax equivalent basis (6) 3.16 % 3.03 % _____________ (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. (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. 56 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 September 30, 2021 Compared to September 30, 2020 Nine Months Ended September 30, 2021 Compared to September 30, 2020 Change Due to Volume Change Due to Rate Total Change Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 1,771 $ (7,856) $ (6,085) $ 33,667 $ (66,158) $ (32,491) Taxable investments (266) (1,466) (1,732) (5,809) (13,876) (19,685) Tax-exempt investments* (889) (373) (1,262) (2,022) (564) (2,586) Interest bearing deposits with banks 182 40 222 697 (1,892) (1,195) Total increase (decrease) in interest income 798 (9,655) (8,857) 26,533 (82,490) (55,957) Interest Expense: Savings, NOW and money market deposits 3,234 (5,952) (2,718) 14,669 (46,236) (31,567) Time deposits (6,860) (7,774) (14,634) (29,613) (40,320) (69,933) Short-term borrowings (1,144) 20 (1,124) (3,606) (1,279) (4,885) Long-term borrowings and junior subordinated debentures (9,548) 1,542 (8,006) (16,428) 3,783 (12,645) Total decrease in interest expense (14,318) (12,164) (26,482) (34,978) (84,052) (119,030) Total increase in net interest income $ 15,116 $ 2,509 $ 17,625 $ 61,511 $ 1,562 $ 63,073 * Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate. Non-Interest Income Non-interest income decreased $6.8 million and $18.7 million for the three and nine months ended September 30, 2021 as compared to the same periods of 2020. The following table presents the components of non-interest income for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Trust and investment services $ 3,550 $ 3,068 $ 10,411 $ 9,307 Insurance commissions 1,610 1,816 5,805 5,426 Service charges on deposit accounts 5,428 3,952 15,614 13,189 Gains (losses) on securities transactions, net 787 (46) 1,263 (127) Fees from loan servicing 2,894 2,551 8,980 7,526 Gains on sales of loans, net 6,442 13,366 20,016 26,253 Gains on sales of assets, net 344 894 380 716 Bank owned life insurance 2,018 (1,304) 6,824 7,661 Other 19,358 24,975 47,497 65,548 Total non-interest income $ 42,431 $ 49,272 $ 116,790 $ 135,499 57 Service charges on deposits accounts increased by $1.5 million and $2.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, mostly due to a decline in waived fees largely related to COVID-19 customer relief efforts during the second and third quarters of 2020. Net gains on sales of loans decreased $6.9 million and $6.2 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. 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 losses from the change in the fair value of loans held for sale totaled $403 thousand and $10.4 million for the three and nine months ended September 30, 2021, respectively, as compared to net gains of $4.3 million and $8.3 million for the three and nine months ended September 30, 2020, respectively. During the third quarter 2021, we sold approximately $234.6 million of residential mortgage loans as compared to $301.2 million during the third 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 increased $3.3 million for the three months ended September 30, 2021 as compared to the same period in 2020. The increase was attributable to a mortality contingency reserve adjustment recorded in third quarter 2020. Other non-interest income decreased $5.6 million and $18.1 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020 primarily due to lower fee income related to derivative interest rate swaps executed with commercial lending customers caused by lower transaction volumes. Swap fee income totaled $8.8 million and $19.2 million for the three months ended September 30, 2021 and 2020, respectively, and $22.6 million and $48.1 million for the nine months ended September 30, 2021 and 2020, respectively. Non-Interest Expense Non-interest expense increased $14.7 million and $34.0 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. The following table presents the components of non-interest expense for the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Salary and employee benefits expense $ 93,992 $ 83,626 $ 273,190 $ 247,886 Net occupancy and equipment expense 32,402 31,116 97,112 96,774 FDIC insurance assessment 3,644 4,847 10,294 14,858 Amortization of other intangible assets 5,298 6,377 16,753 18,528 Professional and legal fees 13,492 8,762 27,250 22,646 Loss on extinguishment of debt — 2,353 8,406 2,353 Amortization of tax credit investments 3,079 2,759 8,795 9,403 Telecommunications expense 2,615 2,094 8,507 7,247 Other 20,400 18,251 56,721 53,312 Total non-interest expense $ 174,922 $ 160,185 $ 507,028 $ 473,007 Salary and employee benefits expense increased $10.4 million and $25.3 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020 primarily due to strategic increases in our headcount to enhance lending and operations and increases in our branch compensation to preserve staffing and service levels, and to keep pace with the increases in wage demand across the industry. In addition, 58 higher cash and stock-based incentive compensation accruals and health insurance costs also contributed to the increases in both periods. FDIC insurance assessment expense decreased $1.2 million and $4.6 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020 mostly due to the Bank's improved capital position and overall risk profile. Professional and legal fees increased $4.7 million and $4.6 million f or the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. The increases were largely attributable to a $2.1 million accrual for general litigation reserves, $1.3 million of merger related fees, as well as increased consulting expenses duri ng the three and nine months ended September 30, 2021. Higher consulting expenses mostly related to our technology transformation efforts and new product initiati ves. Loss on extinguishment of debt totaled $8.4 million for the nine months ended September 30, 2021 reflecting the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021. The loss on extinguishment of debt totaling $2.4 million during the three and nine months ended September 30, 2020 was related to the prepayment of $50 million of long-term institutional repo borrowings. All the prepayments were funded by excess cash liquidity at the Bank. See Note 10 to the consolidated financial statements for additional information regarding our borrowed funds. Other non-interest expense increased $2.1 million and $3.4 million f or the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. These increases were largely due to higher data processing costs, OREO related expenses as well as incrementally higher operating expenses in several categories due to the expansion of our operations. See Notes 9 and 14 to the consolidated financial statements for information regarding the amortization of other intangible assets and tax credit investments, respectively. Efficiency Ratio The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted primarily by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, including, but not limited to loss on extinguishment of debt, litigation reserves and merger related expenses. 59 The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and nine months ended September 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 ($ in thousands) Total non-interest expense $ 174,922 $ 160,185 $ 507,028 $ 473,007 Less: Loss on extinguishment of debt (pre-tax) — 2,353 8,406 2,353 Less: Amortization of tax credit investments (pre-tax) 3,079 2,759 8,795 9,403 Less: Litigation reserve (a) 2,100 — 2,100 — Less: Merger related expenses (pre-tax) (a) 1,287 106 1,287 1,774 Total non-interest expense, adjusted $ 168,456 $ 154,967 $ 486,440 $ 459,477 Net interest income $ 301,026 $ 283,086 $ 894,600 $ 830,984 Total non-interest income 42,431 49,272 116,790 135,499 Add: (Gains) losses on available for sale and held to maturity securities transactions, net (pre-tax) (b) (788) 46 (557) 127 Total net interest income and non-interest income $ 342,669 $ 332,404 $ 1,010,833 $ 966,610 Efficiency ratio 50.93 % 48.20 % 50.13 % 48.94 % Efficiency ratio, adjusted 49.16 % 46.62 % 48.12 % 47.53 % (a) Included in professional and legal fees. (b) Included in gains on securities transactions, net. Income Taxes Income tax expense totaled $42.4 million for the third quarter 2021 as compared to $42.9 million and $38.9 million for the second quarter 2021 and third quarter 2020, respectively, and $124.6 million and $101.5 million for the nine months ended September 30, 2021 and 2020, respectively. Our effective tax rate was 25.7 percent, 26.2 percent and 27.5 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively. The decrease in the effective tax rate in the third quarter 2021 as compared to the second quarter 2021 and the third quarter 2020 was mainly due to the increase in excess stock compensation benefit. 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 . For the remainder of 2021, we currently estimate that our effective tax rate will range from 25 percent to 27 percent. 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 60 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. The following tables present the financial data for each business segment for the three months ended September 30, 2021 and 2020: Three Months Ended September 30, 2021 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,373,897 $ 25,324,485 $ 5,634,492 $ — $ 38,332,874 Income (loss) before income taxes 37,132 141,927 2,846 (16,901) 165,004 Annualized return on average interest earning assets (before tax) 2.01 % 2.24 % 0.20 % N/A 1.72 % Three Months Ended September 30, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,126,157 $ 25,389,107 $ 5,252,446 $ — $ 37,767,710 Income (loss) before income taxes 34,565 121,351 1,066 (15,717) 141,265 Annualized return on average interest earning assets (before tax) 1.94 % 1.91 % 0.08 % N/A 1.50 % See Note 15 to the consolidated financial statements for additional information. Consumer Lending This consumer lending segment represented 22.3 percent of our loan portfolio at September 30, 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 13.3 percent of our loan portfolio at September 30, 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 4.8 percent of total loans at September 30, 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 increased $247.7 million to $7.4 billion for the three months ended September 30, 2021 as compared to the third quarter 2020. The increase was largely due to loan growth from origination of new residential mortgage loans and automobile loans over most of the last 12-month period. Income before income taxes generated by the consumer lending segmen t increased $2.6 million to $37.1 million for the third quarter 2021 as compared to the third quarter 2020 largely due to a $10.0 million decrease in the provision for loan losses and lower non-interest expense, partially offset by a $11.7 million decrease in non-interest income 61 coupled with a $2.0 million increase in the internal transfer expense. The decrease of $11.7 million in non-interest income was partly due to a $6.9 million decrease in net gains on sales of loans for the three months ended September 30, 2021. 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 September 30, 2021 as compared to September 30, 2020. See further details in the "Allowance for Credit Losses" section of this MD&A. The net interest margin on the consumer lending portfolio decreased 11 basis points to 2.97 percent for the third quarter 2021 as compared to the third quarter 2020 mainly due to a 40 basis point decrease in the yield on average loans, partially offset by a 29 basis point decrease in the costs associated with our funding sources. The 40 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments. The decrease in our funding costs was mainly due to continued runoff of higher cost time deposits, some customer migration to lower cost deposits without stated maturities and lower rates offered on deposit products. 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 $5.6 billion and represented 17.3 percent of the total loan portfolio at September 30, 2021. Commercial real estate loans and construction loans totaled $19.7 billion and represented 60.4 percent of the total loan portfolio at September 30, 2021. Average interest earning assets in this segment decreased approximately $64.6 million to $25.3 billion for the three months ended September 30, 2021 as compared to the third quarter 2020 mostly due to commercial and industrial PPP loans which were paid off (forgiven), largely offset by strong new loan originations concentrated in the commercial real estate loan portfolio. For the three months ended September 30, 2021, income before income taxes for the commercial lending segment increased $20.6 million to $141.9 million as compared to the third quarter 2020 mainly driven by a $18.5 million increase in net interest income and a $17.5 million decrease in the provision for loan losses, partially offset by lower non-interest income and higher internal expense. Net interest income for this segment increased to $237.1 million for the third quarter 2021 as compared to the same period in 2020 primarily due to lower funding costs. The provision for loan losses decreased by $17.5 million mainly due to the improvement in the economic forecast component of the allowance for loan losses as compared to September 30, 2020. Non-interest income decreased $8.8 million to $11.6 million for the three months ended September 30, 2021 as compared to the third quarter 2020 mainly due to a $10.4 million decrease in swap fee income related to derivative interest rate swaps executed with commercial loan customers. Internal transfer expense increased $4.8 million for the third quarter 2021 as compared to the third quarter 2020 partly due to general increases related to organic growth in our business. The net interest margin for this segment increased 28 basis points to 3.74 percent for the third quarter 2021 as compared to the third quarter 2020 due to a 29 basis point decrease in the cost of our funding sources, which was marginally offset by a 1 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. 62 Average interest earning assets in this segment increased $382.0 million during the third quarter 2021 as compared to the third quarter 2020 due to a $546.1 million increase in average interest bearing deposits with banks, partially offset by a $164.1 million decrease in average investment securities. The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the third quarter 2021 as we continued to experience a surge in customer deposits. The decrease in average investment securities was mainly driven by principal repayments on securities with a slower rate of reinvestment activity due to the low interest rate environment and our preference to fund loan growth. However, average investments did increase $73.9 million as compared to the linked second quarter 2021 as we modestly increased our investment purchases in the third quarter 2021. During the second quarter 2021, income before income taxes for the investment management segment increased $1.8 million to $2.8 million as compared to $1.1 million for the third quarter 2020 mostly due to an increase in both net interest income and non-interest income, partially offset by higher internal transfer expense. The increase in net interest income totaled $753 thousand and was mainly due to the decreased cost of funding, partially offset by lower yields on our investments securities and lower average investment balances. Non-interest income increased $3.3 million in the third quarter 2021 as compared to the third quarter 2020 mainly due to higher bank owned life insurance income. See the "Non-Interest Income" section for more details. The net interest margin for this segment decreased 2 basis points to 1.18 percent for the third quarter 2021 as compared to the same quarter in 2020 largely due to a 31 basis point decrease in the yield on average investments, partially offset by a 29 basis point decrease in our cost of funding. The decrease in the yield on average investments as compared to the third quarter 2020 was largely driven by the lower yielding investment securities and the higher average holdings in low yielding overnight cash investments. 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 $16.9 million an d $15.7 million for the three months ended September 30, 2021 and 2020, respectively. The $1.2 million increase in the pre-tax loss for the third quarter 2021 was mainly driven by the $19.2 million increase in non-interest expense largely caused by higher salaries and employee benefits expense, and professional and legal fees for the three months ended September 30, 2021. These items were partially offset by increases of $10.3 million and $8.9 million in non-interest income and internal transfer income, respectively. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. 63 The following tables present the financial data for each business segment for the nine months ended September 30, 2021 and 2020: Nine Months Ended September 30, 2021 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,176,086 $ 25,465,276 $ 5,261,185 $ — $ 37,902,547 Income (loss) before income taxes 104,308 411,712 9,149 (41,741) 483,428 Annualized return on average interest earning assets (before tax) 1.94 % 2.16 % 0.23 % N/A 1.70 % Nine Months Ended September 30, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,187,839 $ 24,334,429 $ 5,221,538 $ — $ 36,743,806 Income (loss) before income taxes 80,367 326,713 16,426 (36,777) 386,729 Annualized return on average interest earning assets (before tax) 1.49 % 1.79 % 0.42 % N/A 1.40 % Consumer Lending Average interest earning assets in this segment decreased $11.8 million to $7.2 billion for the nine months ended September 30, 2021 as compared to the same period in 2020. The decrease was largely due to runoff from principal repayments with a higher percentage of new and refinanced mortgage loans originated for sale rather than held for investment over the last 12 month period. However, automobile loan demand, which was tempered during much of 2020 due to the onset of the COVID-19 pandemic, was strong during the nine months ended September 30, 2021 due to built up demand for auto purchases by consumers. Income before income taxes generated by the consumer lending segment increased $23.9 million to $104.3 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to a lower provision for loan losses and non-interest expense, and an increase in net interest income. The provision for loan losses decreased $21.8 million to a credit (negative) provision of $6.5 million for the nine months ended September 30, 2021 from a $15.3 million provision for the same period of 2020. The lower provision was mainly due to the improved economic forecast component of the allowance for loan losses as compared to September 30, 2020, as well as better actual loan performance within these loan categories. See further details in the "Allowance for Credit Losses" section of this MD&A. Net interest income increased $4.7 million primarily due to the lower funding costs, which were partially offset by lower loan yields, as well as the modest decline in average interest earning assets. The higher net interest income was partially offset by a $7.9 million decrease in non-interest income, which was largely attributable to lower net gains on sales of loans for the nine months ended September 30, 2021 as compared to the same period in 2020. The net interest margin on the consumer lending portfolio increased 10 basis points to 3.04 percent for the nine months ended September 30, 2021 as compared to the same period one year ago mainly due to a 46 basis point decrease in the costs associated with our funding sources, partially offset by a 36 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates and the repayment of maturing higher cost borrowings. The 36 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments. 64 Commercial Lending Average interest earning assets in this segment increased $1.1 billion to $25.5 billion for the nine months ended September 30, 2021 as compared to the same period in 2020. This increase was mainly due to PPP loan originations during the last 12 months, as well as organic commercial real estate loan growth during the nine months ended September 30, 2021. For the nine months ended September 30, 2021, income before income taxes for the commercial lending segment increased $85.0 million to $411.7 million as compared to the same period in 2020 mainly driven by an increase in net interest income and a lower provision for loan losses. Net interest income increased $67.8 million to $703.6 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to lower funding costs and the higher average commercial loan balances during the current period. The provision for credit losses decreased $63.0 million to $27.8 million during the nine months ended September 30, 2021 as compared to $90.8 million for the same period in 2020. The decrease in the provision for loan losses was mainly due to an improvement in the economic forecast component of the allowance for loan losses and other qualitative factors related to the COVID-19 pandemic as compared to September 30, 2020. See the "Allowance for Credit Losses" section below for further details. The positive impa ct of the aforementioned items w as partially offset by a decrease in non-interest inc ome, as well as higher non-interest expense and internal transfer expense. Non-interest income decreased $23.0 million for the nine months ended September 30, 2021 as compared to the same period in 2020 primarily due to a $25.5 million decrease in fee income related to derivative interest rate swaps executed with commercial loan customers. Internal transfer expense increased $15.5 million to $212.9 million for the nine months ended September 30, 2021 as compared to the same period in 2020. The net interest margin for this segment increased 20 basis points to 3.68 percent for the nine months ended September 30, 2021 as compared to the same period in 2020 due to a 46 basis point decrease in the cost of our funding sources, partially offset by a 26 basis point decrease in yield on average loans. I nvestment Management Average interest earning assets in this segment increased $39.6 million during the nine months ended September 30, 2021 as compared to the same period in 2020. Within the category, a $458.4 million increase in average interest bearing deposits with banks was largely offset by $418.8 million decrease in average investment securities. The increase in our excess liquidity held in overnight interest bearing deposits with banks was mainly caused by strong deposits growth over the 12-month period and management's lower rate of reinvestment in investment securities for most of the same period. For the nine months ended September 30, 2021, income before income taxes for the investment management segment decreased $7.3 million to $9.1 million as compared to the same period in 2020 mainly due to decreases in the net interest income and non-interest income and a higher internal expense transfer. The negative impact of these items was partially offset by a decline in the provision for credit losses for held to maturity debt securities from a $688 thousand provision for the nine months ended September 30, 2020 to a credit of $353 thousand for the nine months ended September 30, 2021. The net interest margin for this segment decreased 15 basis points to 1.19 percent for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to a 61 basis point decrease in the yield on average investments, partially offset by a 46 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments as compared to the same period of 2020 was mainly due to lower yielding investment securities and excess liquidity held in low yielding overnight investments. Corporate and other adjustments The pre-tax net loss for the corporate segment totaled $41.7 million for the nine months ended September 30, 2021 as compared to $36.8 million for the same period in 2020. The negative change of $5.0 million was mainly due to an increase in non-interest expense, partially offset by higher internal transfer income and greater non-interest 65 income. Non-interest expense increased $33.3 million to $372.2 million for the nine months ended September 30, 2021 as compared to the same period in 2020 partially due to increases in salaries and employee benefits expenses, professional and legal fees and the l oss on extinguishment of debt during the current period as compared to prior. Internal transfer income increased $18.5 million to $316.7 million for the nine months ended September 30, 2021 as compared to the same period in 2020. 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 September 30, 2021. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of September 30, 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 September 30, 2021. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 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 third quarter 2021. The model also utilizes an immediate parallel shift in market interest rates at September 30, 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. 66 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 $ 104,613 8.88 % +100 52,462 4.45 –100 (54,113) (4.59) –200 (78,513) (6.66) 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 4.45 percent. Management believes the interest rate sensitivity remains within an acceptable tolerance range at September 30, 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. 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 ex cess 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 September 30, 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 67 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 classified as trading and 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 $3.0 billion, representing 7.9 percent of earning assets at September 30, 2021 and $3.1 billion, representing 8.3 percent of earning assets at December 31, 2020. Of the $3.0 billion of liquid assets at September 30, 2021, approximately $547.5 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approx imately $747 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 September 30, 2021) are projected in accordance with their scheduled contractual terms to be approximately $10.4 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 $29.2 billion and $25.8 billion for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively, representing 77.6 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. 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 September 30, 2021, Valley had $1.0 billion 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 September 30, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans) under the Federal Reserve Bank's discount window was $1.8 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 $364.6 million to $783.3 million at September 30, 2021 as compared to December 31, 2020 due to normal FHLB advance repayments. 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 and subordinated notes. Valley's 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 68 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. During the second quarter 2021, Valley redeemed $60 million of callable subordinated notes and issued $300 million of 3.00 percent subordinated notes. See Note 10 to the consolidated financial statements for additional information. Investment Securities Portfolio As of September 30, 2021, we had $36.1 million, $4.8 million, $1.2 billion and $2.6 billion in equity, trading debt, available for sale and held to maturity debt securities, respectively. Our trading securities portfolio wholly consists of investment grade municipal bonds. The equity securities consisted of one publicly traded mutual fund, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in a partnership that invests in such companies. Our CRA and other equity investments are a mixture of both publicly traded entities and privately held entities. Held to maturity and available for sale debt securities portfolios include 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. 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 September 30, 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 and nine months ended September 30, 2021 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2021. There was no allowance for credit losses for available for sale debt securities at December 31, 2020. 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 69 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 September 30, 2021 and December 31, 2020, respectively. There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2021 and 2020. 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. The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at September 30, 2021: September 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Available for sale investment grades: * AAA Rated $ 1,016,325 $ 23,138 $ (2,483) $ 1,036,980 AA Rated 63,001 339 (722) 62,618 A Rated 6,173 89 — 6,262 BBB Rated 29,313 891 — 30,204 Non-investment grade 4,996 42 — 5,038 Not rated 64,982 2,244 (51) 67,175 Total $ 1,184,790 $ 26,743 $ (3,256) $ 1,208,277 Held to maturity investment grades: * AAA Rated $ 2,260,843 $ 30,971 $ (18,015) $ 2,273,799 AA Rated 159,468 3,862 (129) 163,201 A Rated 12,512 389 — 12,901 BBB Rated 6,000 418 — 6,418 Non-investment grade 5,595 — (75) 5,520 Not rated 139,985 224 (5,737) 134,472 Total $ 2,584,403 $ 35,864 $ (23,956) $ 2,596,311 * 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 $140.0 million of investments not rated by the rating agencies with aggregate unrealized losses of $5.7 million at September 30, 2021 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million. See Note 7 to the consolidated financial statements for additional information regarding our investments securities portfolio. 70 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 ($ in thousands) Loans Commercial and industrial: Commercial and industrial $ 4,761,227 $ 4,733,771 $ 4,784,017 $ 4,709,569 $ 4,625,880 Commercial and industrial PPP loans 874,033 1,350,684 2,364,627 2,152,139 2,277,465 Total commercial and industrial * 5,635,260 6,084,455 7,148,644 6,861,708 6,903,345 Commercial real estate: Commercial real estate 17,912,070 17,512,142 16,923,627 16,724,998 16,815,587 Construction 1,804,580 1,752,838 1,786,331 1,745,825 1,720,775 Total commercial real estate 19,716,650 19,264,980 18,709,958 18,470,823 18,536,362 Residential mortgage 4,332,422 4,226,975 4,060,492 4,183,743 4,284,595 Consumer: Home equity 402,658 410,856 409,576 431,553 457,083 Automobile 1,563,698 1,531,262 1,444,883 1,355,955 1,341,659 Other consumer 956,126 938,926 912,863 913,330 892,542 Total consumer loans 2,922,482 2,881,044 2,767,322 2,700,838 2,691,284 Total loans * $ 32,606,814 $ 32,457,454 $ 32,686,416 $ 32,217,112 $ 32,415,586 As a percent of total loans: Commercial and industrial 17.3 % 18.7 % 21.9 % 21.3 % 21.3 % Commercial real estate 60.4 59.4 57.2 57.3 57.2 Residential mortgage 13.3 13.0 12.4 13.0 13.2 Consumer loans 9.0 8.9 8.5 8.4 8.3 Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % * Includes net unearned discount and deferred loan fees of $73.0 million, $86.1 million, $108.6 million, $95.8 million, and $116.2 million at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively. Net unearned discounts and deferred loan fees included $27.6 million, $40.9 million, $57.2 million, $43.2 million and $54.4 million of net unearned fees related to PPP loans at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively. Commercial and industrial loans decreased $449.2 million, or 29.5 percent on an annualized basis, to $5.6 billion at September 30, 2021 as compared to June 30, 2021 mostly due to $476.7 million of PPP loans that were forgiven (i.e., repaid) during the third quarter 2021. As of September 30, 2021 , nearly 100 percent of the PPP loan balances from the first two rounds of our funding under the SBA program have been forgiven. Valley expects the majority of the remaining $874 million of PPP loans on September 30, 2021 to qualify for forgiveness under the guidelines of the SBA program, which is expected to negatively impact our ability to grow the commercial and industrial loan portfolio. Non-PPP commercial and industrial loans modestly increased by $27.5 million at September 30, 2021 as compared to June 30, 2021. Commercial real estate loans (excluding construction loans) increased $399.9 million, or 9.1 percent on an annualized basis, to $17.9 billion at September 30, 2021 from June 30, 2021 reflecting solid organic growth mainly due to strong demand for non-owner occupied loans across our geographic footprint driven by low interest rates. Construction loans increased $51.7 million to $1.8 billion at September 30, 2021 from June 30, 2021 partially due to higher demand for commercial and residential construction projects. Residential mortgage loans increased $105.4 million, or 10.0 percent on an annualized basis during the third quarter 2021 due to continued strong origination of new and refinanced residential mortgage loans totaling $622.1 million for the third quarter 2021 as compared to $753.2 million and $540.2 million for the second quarter 2021 and third 71 quarter 2020, respectively. Florida originations totaled approximately $163 million and represented 26 percent of total originations. Of the total originations in the third quarter 2021, approximately $232.8 million of residential mortgage loans were originated for sale rather than held for investment as compared to $253.9 million during the second quarter 2021. During the third quarter 2021 we retained over 60 percent of the total residential mortgages originations in our held for investment loan portfolio. We sold approximately $235 million of residential mortgage loans held for sale during the third quarter 2021 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the fourth 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 decreased by $8.2 million to $402.7 million at September 30, 2021 from June 30, 2021. 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 $32.4 million, or 8.5 percent on an annualized basis, to $1.6 billion at September 30, 2021 as compared to June 30, 2021. Consumer demand seen across the auto industry was solid during the first half of 2021 but started to slow in the third quarter 2021. We originated $201 million in auto loans through our dealership network during the third quarter 2021 as compared to $251 million in the second quarter 2021. Of the total originations our Florida dealership network contributed $30.4 million in auto loan originations, representing approximately 15 percent of new loans, during the third quarter 2021. Strong auto loan originations experienced in the first half of 2021 slowed during the third quarter 2021 due to inventory and auto part shortages caused by supply chain disruptions affecting auto industry. In the early stages of the fourth quarter 2021, vehicle inventories are near record lows, driving prices higher. This trend may negatively impact our auto loan growth in fourth quarter 2021 and beyond. Other consumer loans increased $17.2 million to $956.1 million at September 30, 2021 as compared to $938.9 million at June 30, 2021 mainly due to higher new loan originations and consumer usage of collateralized personal lines of credit. Most of our lendin g is in northern and central New Jersey, New York City, Long Island, Florida and Alabama, 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 continue to believe that our non-PPP loan growth will remain strong. In the early stages of the fourth quarter 2021, we are encouraged that our loan origination pipelines remain robust. During the third quarter 2021, approximately 57 percent of our commercial real estate loan growth came from the New York and New Jersey market area. However, there can be no assurance that those positive trends will continue, or balances will not decline from September 30, 2021 given the effects of the COVID-19 pandemic and the potential for unforeseen changes in consumer confidence and the economy, and other market conditions and supply chain issues. We believe that many of our SBA PPP loans will continue to be forgiven in the fourth quarter 2021 in accordance with the rules of this program resulting in further reduction in these loan balances. Non-performing Assets Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at September 30, 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 $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021 mainly due to a $37.0 million increase in non-accrual commercial real estate loans (see table below). NPAs as a percentage of total loans and NPAs totaled 0.78 percent and 0.69 percent at September 30, 2021 and June 30, 2021, respectively (as shown in the table below). We believe our total NPAs has remained relatively low as a percentage 72 of the total loan portfolio over the past 12 months, despite the uptick in non-accrual borrowers mainly caused by COVID-19 pandemic. The level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the uncertain path of the recovery from the COVID -19 pandemic and some of our borrowers that are still performing under forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at September 30, 2021. 73 The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 ($ in thousands) Accruing past due loans: 30 to 59 days past due: Commercial and industrial $ 2,677 $ 3,867 $ 3,763 $ 6,393 $ 6,587 Commercial real estate 22,956 40,524 11,655 35,030 26,038 Construction — — — 315 142 Residential mortgage 9,293 8,479 16,004 17,717 22,528 Total Consumer 5,463 6,242 5,480 10,257 8,979 Total 30 to 59 days past due 40,389 59,112 36,902 69,712 64,274 60 to 89 days past due: Commercial and industrial 985 1,361 1,768 2,252 3,954 Commercial real estate 5,897 11,451 5,455 1,326 610 Residential mortgage 974 1,608 2,233 10,351 3,760 Total Consumer 1,617 985 1,021 1,823 1,352 Total 60 to 89 days past due 9,473 15,405 10,477 15,752 9,676 90 or more days past due: Commercial and industrial 2,083 2,351 2,515 9,107 6,759 Commercial real estate 1,942 1,948 — 993 1,538 Residential mortgage 1,002 956 2,472 3,170 891 Total Consumer 325 463 417 271 753 Total 90 or more days past due 5,352 5,718 5,404 13,541 9,941 Total accruing past due loans $ 55,214 $ 80,235 $ 52,783 $ 99,005 $ 83,891 Non-accrual loans: Commercial and industrial $ 100,614 $ 102,594 $ 108,988 $ 106,693 $ 115,667 Commercial real estate 95,843 58,893 54,004 46,879 41,627 Construction 17,653 17,660 71 84 2,497 Residential mortgage 33,648 35,941 33,655 25,817 23,877 Total Consumer 4,073 4,924 7,292 5,809 7,441 Total non-accrual loans 251,831 220,012 204,010 185,282 191,109 Other real estate owned (OREO) 3,967 4,523 4,521 5,118 7,746 Other repossessed assets 1,896 2,060 1,857 3,342 3,988 Non-accrual debt securities — — 129 815 783 Total non-performing assets (NPAs) $ 257,694 $ 226,595 $ 210,517 $ 194,557 $ 203,626 Performing troubled debt restructured loans $ 64,832 $ 64,080 $ 67,102 $ 57,367 $ 58,090 Total non-accrual loans as a % of loans 0.77 % 0.68 % 0.62 % 0.58 % 0.59 % Total NPAs as a % of loans and NPAs 0.78 0.69 0.64 0.60 0.62 Total accruing past due and non-accrual loans as a % of loans 0.94 0.93 0.79 0.88 0.85 Allowance for loan losses as a % of non-accrual loans 136.01 154.23 168.07 183.64 170.08 Loans past due 30 to 59 days decreased $18.7 million to $40.4 million at September 30, 2021 as compared to June 30, 2021. Commercial real estate loans past due 30 to 59 days decreased $17.6 million to $23.0 million at September 30, 2021 as compared to June 30, 2021 largely due to two loan relationships totaling $22.2 million that migrated to non-accrual loan status at September 30, 2021. 74 Loans past due 60 to 89 days decreased $5.9 million to $9.5 million at September 30, 2021 as compared to June 30, 2021. Commercial real estate loans in this delinquency category decreased $5.6 million to $5.9 million at September 30, 2021 mainly as a result of one $10.9 million loan negatively impacted by the COVID-19 pandemic that migrated to non-accrual status at September 30, 2021, partially offset by the addition of a $5.5 million matured commercial real estate loan in the process of renewal in this delinquency category at September 30, 2021. Loans past due 90 days or more and still accruing interest totaled $5.4 million at September 30, 2021 as compared to $5.7 million at June 30, 2021. A ll of the loans past due 90 days or more and still accruing reported at September 30, 2021 are considered to be well secured and in the process of collection. Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to $220.0 million at June 30, 2021 mostly driven by a $37.0 million increase in the commercial real estate loans. This increase was caused by two loans totaling $22.2 million and one loan totaling $10.9 million that migrated to non-accrual status from the 30-59 days and 60 to 89 days past due categories reported at June 30, 2021, respectively. These non-accrual loans totaling $33.1 million have allocated reserves of $3.7 million within our allowance for loan losses at September 30, 2021. We continue to closely monitor our non-performing New York City and Chicago taxi medallion loans totaling $86.3 million and $577 thousand, respectively, within the commercial and industrial loan category at September 30, 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. At September 30, 2021, the taxi medallion loans totaling $86.9 million had related reserves of $58.6 million, or 67.4 percent of such loans. The related reserves were relatively unchanged as compared to June 30, 2021. Potential declines in the market valuation of taxi medallions and the stressed operating environment mainly within New York City due to the COVID-19 pandemic could 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 reserves of $5.9 million within the allowance for loan losses based upon the taxi medallion loan balances at September 30, 2021. See the "Allowance for Credit Losses" section below for further details on our reserves. OREO properties totaled $4.0 million at September 30, 2021 and declined $556 thousand as compared to June 30, 2021. Net losses and gains from the sales of OREO properties to taled a $67 thousand loss and a $268 thousand net gain fo r the three and nine months ended September 30, 2021, respectively, and net gains totaling $109 thousand and $540 thousand for the three and nine months ended September 30, 2020, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.0 million and $1.9 million at September 30, 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) totaled $64.8 million at September 30, 2021 as compared to $64.1 million at June 30, 2021. Performing TDRs consisted of 96 loans at September 30, 2021. On an aggregate basis, the $64.8 million in performing TDRs at September 30, 2021 had a modified weighted average interest rate of approximately 4.36 percent as compared to a pre-modification weighted average interest rate of 4.60 percent. Loan Forbearance . In response to the C OVID-19 pandemic and its economic impact on certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment, when requested by customers, all of which were insignificant. Under the applicable guidance, none of these loans were classified as TDRs at September 30, 2021 and December 31, 2020. 75 The following table presents the outstanding loan b alances and number of loans in an active payment deferral period under short-term modifications as of September 30, 2021: September 30, 2021 Amount Number of loans ($ in thousands) Commercial and industrial $ 2,579 4 Commercial real estate 64,927 17 Residential mortgage 29,485 63 Consumer 1,603 76 Total $ 98,594 160 As of September 30, 2021, Valley had approximately $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications as compared to $142.0 million of loans in deferral at June 30, 2021. Commercial real estate forbearances representing approximately 66 percent of the active deferrals at September 30, 2021 decreased $28.6 million from $93.6 million at June 30, 2021 mainly due to loans being returned to normal interest accrual status following the end of their forebearance periods during the third quarter 2021. 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 standby letters of credit. 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 third quarter 2021, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-1 scenarios. At September 30, 2021, Valley maintained the majority of its 76 weighting to the Moody’s Baseline scenario and modestly reduced its combined emphasis on the Moody’s S-3 downside and S-1 upside scenarios as compared to June 30, 2021. The Baseline weighting and the S-1 scenario reflect the positive economic developments including federal stimulus and increasing vaccination levels that are expected to improve labor market conditions and promote stronger economic growth during the remainder of 2021. However, this positive outlook could still be tempered by, among other factors, the uncertain ongoing impact of the COVID-19 pandemic on the economic recovery, as well as supply chain constrains contributing to inventory shortages and longer than anticipated elevated levels of inflation. At September 30, 2021, the Moody's Baseline forecast included the following specific assumptions: • GDP expansion by over 7.5 percent in the fourth quarter 2021; • Unemployment of 4.5 percent in the fourth quarter 2021 and improving to 3.4 percent by the third quarter 2022; and • Strong U.S. economic growth driven by continued consumer spending and congressional passage of another fiscal stimulus package. See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements. 77 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 Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 ($ in thousands) Average loans outstanding $ 32,698,382 $ 32,635,298 $ 32,515,264 $ 32,641,362 $ 31,522,268 Beginning balance - Allowance for credit losses for loans 353,724 354,313 319,723 351,354 164,604 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 353,724 354,313 319,723 351,354 264,236 Loans charged-off: Commercial and industrial (1,248) (10,893) (13,965) (19,283) (31,349) Commercial real estate — — (695) (382) (766) Residential mortgage — (1) (7) (139) (348) Total consumer (771) (1,480) (2,458) (3,389) (7,624) Total charge-offs (2,019) (12,374) (17,125) (23,193) (40,087) Charged-off loans recovered: Commercial and industrial 514 678 428 2,781 1,796 Commercial real estate 29 665 60 759 164 Construction — — 40 4 80 Residential mortgage 228 191 31 576 626 Total consumer 955 1,474 1,151 3,359 2,454 Total recoveries 1,726 3,008 1,710 7,479 5,120 Net charge-offs (293) (9,366) (15,415) (15,714) (34,967) Provision charged for credit losses 3,496 8,777 31,020 21,287 106,059 Ending balance - Allowance for credit losses for loans $ 356,927 $ 353,724 $ 335,328 $ 356,927 $ 335,328 Components of allowance for credit losses for loans: Allowance for loan losses $ 342,527 $ 339,324 $ 325,032 $ 342,527 $ 325,032 Allowance for unfunded credit commitments 14,400 14,400 10,296 14,400 10,296 Allowance for credit losses for loans $ 356,927 $ 353,724 $ 335,328 $ 356,927 $ 335,328 Components of provision for credit losses for loans: Provision for credit losses for loans $ 3,496 $ 5,810 $ 30,833 $ 17,998 $ 105,709 Provision for unfunded credit commitments — 2,967 187 3,289 350 Total provision for credit losses for loans $ 3,496 $ 8,777 $ 31,020 $ 21,287 $ 106,059 Annualized ratio of net charge-offs to average loans outstanding 0.00 % 0.11 % 0.19 % 0.06 % 0.15 % * 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 $293 thousand for the third quarter 2021 as compared to $9.4 million and $15.4 million for the second quarter 2021 and third quarter 2020, respectively. The decrease in net loan charge-offs for the third quarter 2021 was mainly due to lower commercial and industrial loan charge-offs. The partial gross charge-offs of 78 taxi medallion loans within the commercial and industrial loan category totale d $143 thousand for the third quarter 2021 as compared to $1.4 million and $6.1 million for the second quarter 2021 and third quarter 2020, re spectively. The overall level of loan charge-offs (as presented in the above table) continued to trend within management's expectations for the credit quality of the loan portfolio for the third quarter 2021. The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: September 30, 2021 June 30, 2021 September 30, 2020 Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and Industrial loans $ 103,877 1.84 % $ 109,689 1.80 % $ 130,409 1.89 % Commercial real estate loans: Commercial real estate 178,206 0.99 168,220 0.96 128,699 0.77 Construction 21,515 1.19 20,919 1.19 15,951 0.93 Total commercial real estate loans 199,721 1.01 189,139 0.98 144,650 0.78 Residential mortgage loans 24,732 0.57 25,303 0.60 28,614 0.67 Consumer loans: Home equity 4,110 1.02 4,602 1.12 5,972 1.31 Auto and other consumer 10,087 0.40 10,591 0.43 15,387 0.69 Total consumer loans 14,197 0.49 15,193 0.53 21,359 0.79 Total allowance for loan losses 342,527 1.05 339,324 1.05 325,032 1.00 Allowance for unfunded credit commitments 14,400 14,400 10,296 Total allowance for credit losses for loans $ 356,927 $ 353,724 $ 335,328 Allowance for credit losses for loans as a % loans 1.09 % 1.09 % 1.03 % The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including standby letters of credit), as a percentage of total loans was 1.09 percent at both September 30, 2021 and June 30, 2021, and 1.03 percent at September 30, 2020. During the third quarter 2021, we recorded a $3.5 million provision for credit losses as compared to $8.8 million and $31.0 million for the second quarter 2021 and the third quarter 2020, respectively. The third quarter 2021 provision reflects, among other factors, additional quantitative reserves related to certain segments of our commercial real estate portfolio, an increase in specific reserves, and non-PPP loan growth, largely offset by a decline in the economic forecast component of the reserve at September 30, 2021 as compared to June 30, 2021. There was no provision for unfunded credit commitments for the third quarter 2021 as the overall level of such reserves remained materially unchanged at September 30, 2021 as compared to June 30, 2021. At September 30, 2021, the allowance allocations for credit losses as a percentage of total loans increased in commercial and industrial and commercial real estate loan categories as compared to June 30, 2021. The allocated reserves as a percentage of commercial and industrial loans increased by 4 basis points mainly due to the third quarter 2021 repayments (loan forgiveness) of PPP loans guaranteed by the SBA with no related allowance at September 30, 2021. The allocated reserves as a percentage of commercial real estate loans increased 3 basis points largely due to higher quantitative reserves for the non-owner occupied loan portfolio during the third quarter 2021. The a llowance for credit losses as a percentage of total non-PPP loans was 1.12 percent , 1.14 percent and 1.11 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively. 79 Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, 2021 and December 31, 2020, shareholders’ equity totaled approximately $4.8 billion and $4.6 billion, respectively, which represented 11.7 percent and 11.3 percent of total assets, respectively. During the nine months ended September 30, 2021, total shareholders’ equity increased by $230.4 million primarily due to net income of $358.8 million and a $30.4 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 $145.1 million and an increase in other comprehensive loss of $13.7 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 September 30, 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 $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build since adoption (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame. 80 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2021 and December 31, 2020: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of September 30, 2021 Total Risk-based Capital Valley $ 4,264,369 13.24 % $ 3,382,946 10.50 % N/A N/A Valley National Bank 4,368,271 13.55 3,385,194 10.50 $ 3,223,994 10.00 % Common Equity Tier 1 Capital Valley 3,241,285 10.06 2,255,297 7.00 N/A N/A Valley National Bank 4,119,028 12.78 2,256,796 7.00 2,095,596 6.50 Tier 1 Risk-based Capital Valley 3,456,126 10.73 2,738,575 8.50 N/A N/A Valley National Bank 4,119,028 12.78 2,740,395 8.50 2,579,195 8.00 Tier 1 Leverage Capital Valley 3,456,126 8.63 1,602,010 4.00 N/A N/A Valley National Bank 4,119,028 10.28 1,602,931 4.00 2,003,664 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: September 30, 2021 December 31, 2020 ($ in thousands, except for share data) Common shares outstanding 407,313,664 403,858,998 Shareholders’ equity $ 4,822,498 $ 4,592,120 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 1,444,967 1,452,891 Tangible common shareholders’ equity $ 3,167,840 $ 2,929,538 Tangible book value per common share $ 7.78 $ 7.25 Book value per common share $ 11.32 $ 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 81 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 61.6 percent for the nine months ended September 30, 2021 as compared to 52.7 percent for the year ended December 31, 2020. Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 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 12 and 13 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 66 for a discussion of interest rate sensitivity.