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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-26 · 466 added, 515 removed, 801 unchanged (55% of the section changed)

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For comparison of our results of operations for the years ended December 31, 2021 and 2020, please refer to Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

Cautionary Statement Concerning Forward-Looking Statements

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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.

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

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

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors listed under the “Risk Factors” section in Part1, Item 1A of this Annual Report on Form 10-K include, but are not limited to:

• the impact of COVID-19 on the U.S.

• failure to obtain the remaining regulatory approvals for the acquisition of Bank Leumi USA on the anticipated terms and within the anticipated timeframe;

• the inability to realize expected cost savings and synergies from the Bank Leumi USA acquisition in amounts or in the timeframe anticipated;

• greater than expected costs or difficulties relating to Bank Leumi USA integration matters;

• the inability to retain customers and qualified employees of Bank Leumi USA;

• changes in estimates of non-recurring charges related to the Bank Leumi USA acquisition;

• 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 impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets;

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

• the 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;

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• 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;

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• 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;

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• the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;

• cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

• 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;

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• 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.

• the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships.

Critical Accounting Policies and Estimates

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Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in material changes in the allowance for credit losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses.

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Allowance for Credit Losses .

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On January 1, 2020, we ado pted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans, unfunded credit commitments and held to maturity debt securities measured at amortized cost.

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

Prior to 2020, an allowance for credit losses for loans was recognized based on probable incurred losses.

See Notes 1, 4 and 5 to the consolidated financial statements for further discussion of our accounting policies and methodologies for establishing the allowance for credit losses.

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• Estimates relating to the allowance for credit losses require us to project future borrower performance, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default;

• The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, gross domestic product (GDP), inflation, energy prices and unemployment;

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• The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in gross domestic product (GDP), unemployment, housing prices, interest rates, inflation, and energy prices;

• Judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

Our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance.

Management’s determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the credit risk we ascribe to individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on individually evaluated loans, significant reliance on historical loss rates on homogenous portfolios, consideration of our quantitative and qualitative evaluation of past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Changes in such estimates could significantly impact our allowance and provision for credit losses.

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Changes in Our Allowance for Credit Losses for Loans

Valley considers it difficult to quantify the impact of changes in forecast on its allowance for credit losses.

However, management believes the following discussion may enable investors to better understand the variables that drive the allowance for credit losses for loans, which amounted to $340.2 million at December 31, 2020.

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

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

As a result, approximately $50.2 million of the $87.2 million increase in our allowance for credit losses for loans from January 1, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate, as well as other qualitative factors.

Specific reserves, largely based upon management's valuation of collateral for collateral dependent loans and the present value of expected cash flows for certain troubled debt restructured loans, and quantitative reserves, based upon expected and actual transitions in the credit quality of our loan portfolio, represented $20.9 million and $16.1 million, respectively, of the remaining increase in reserves at December 31, 2020.

In addition, the valuation of certain collateral dependent loans (including New York City taxi medallion loan valuations based on the estimated value of the underlying medallions) could be adversely impacted by illiquidity or dislocation in certain markets, resulting in depressed market valuations of the underlying collateral, thus leading to additional provisions for loan losses.

Valley considers it difficult to quantify the impact of changes in the economic forecast on its allowance for credit losses for loans.

However, management believes the following discussion may enable investors to better understand the variables that drive the allowance for credit losses for loans, which totaled $375.7 million and $351.4 million at December 31, 2021 and 2020, respectively.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at December 31, 2021 and 2020.

Due to continuous actual and expected improvements in economic conditions during 2021, including a significant decrease in the uncertain impact of the COVID-19 pandemic since December 31, 2020, we decreased our probability weighting for the most severe economic scenario at December 31, 2021.

As a result, the qualitative economic component of our reserves at December 31, 2021 declined by more than $34 million as compared to December 31, 2020.

Other qualitative non-economic reserves largely based upon management judgements about the uncertain impact of the COVID-19 pandemic on the performance of our loan portfolio declined by approximately $7 million as compared to December 31, 2020.

The positive developments in these significant judgmental factors during 2021 were more than offset by increases in the quantitative portion of our allowance based upon 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.

Specific reserves totaling $71.5 million and $75.9 million, respectively, within the allowance at December 31, 2021 and 2020 are also largely based upon management's valuation of collateral for collateral dependent loans and the present value of expected cash flows for certain troubled debt restructured loans.

The majority of these reserves at both December 31, 2021 and 2020 related to New York City taxi medallion loan valuations based on the estimated value of the underlying medallions.

The valuation of the underlying medallions could be adversely impacted by further illiquidity or dislocation in the market, resulting in depressed market valuations of the underlying collateral, thus leading to additional provisions for loan losses.

See additional taxi medallion loan valuation sensitivity analysis under the "Non-performing Assets" section of this MD&A.

Goodwill and Other Intangible Assets.

We have significant goodwill and other intangible assets related to our acquisitions totaling $1.5 billion and $70.4 million at December 31, 2021, respectively.

We record all assets, liabilities, and non-controlling interests in the target in purchase acquisitions, including goodwill and other intangible assets, at fair value as of the acquisition date, and expense all acquisition related costs as incurred as required by ASC Topic 805, “Business Combinations.” The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.

We record all acquired assets, including goodwill and other intangible assets, and assumed liabilities in purchase acquisitions at fair value as of the acquisition date, and

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expense all acquisition related costs as incurred as required by ASC Topic 805, “Business Combinations.” The initial recording of goodwill and other intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets and assumed liabilities.

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

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In 2022, we will continue to monitor and evaluate the impact of COVID-19 and its impact on our market capitalization, overall economic conditions, and any triggering events that may indicate a possible impairment of goodwill allocated to our reporting units.

While not expected at this time, we may be required to record a charge to earnings should there

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be a deficiency in our estimated fair value of one or more of our reporting units during our subsequent annual (or more frequent) impairment tests.

See the "Business Segments" section for more information regarding our business segments/reporting units.

While not expected at this time, we may be required to record a charge to earnings should there be a deficiency in our estimated fair value of one or more of our reporting units during our subsequent annual (or more frequent) impairment tests.

See the "Business Segments" section in this MD&A for more information regarding our business segments/reporting units.

Fair value is determined using certain discounted cash flow and market multiple methods.

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These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporate various tax planning strategies.

In connection with these reviews, if we determine that a portion of the deferred tax asset is not realizable, a valuation allowance is established.

In connection with these reviews, if we determine that a

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portion of the deferred tax asset is not realizable, a valuation allowance is established.

Management determined it is more likely than not that Valley will realize its net deferred tax assets, except for immaterial valuation allowances, as of December 31, 2021 and 2020.

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An uncertain tax position is measured based on the largest amount of benefit that management believes is more likely than not to be realized.

During 2020 and 2019, our income tax expense reflected $1.5 million and $31.1 million increases to our tax provision related to reserve for uncertain tax liability positions and/or accrued interest related to such positions at December 31, 2020 and 2019, respectively, as compared to a $3.3 million net state tax benefit in 2018 related to the reduction of reserves at December 31, 2018 caused by the expiration of the statute of limitations for certain tax positions.

During 2021, 2020 and 2019, our income tax expense reflected increases of $1.2 million, $1.5 million and $31.1 million, respectively, to our tax provision related to reserve for uncertain tax liability positions and/or accrued interest related to such positions at December 31, 2021, 2020 and 2019, respectively.

See Notes 1 and 13 to the consolidated financial statements and the "Executive Summary" and “Income Taxes” sections in this MD&A for an additional discussion on the accounting for income taxes.

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At December 31, 2021, Valley had consolidated total assets of $43.4 billion, total net loans of $33.8 billion, total deposits of $35.6 billion and total shareholders’ equity of $5.1 billion.

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

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

Of our curr ent 232 branch network, 56 percent, 19 percent, 18 percent and 7 percent of th e branches are located in New Jersey, New York, Florida and Alabama, respectively.

Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions, including our acquisition of Oritani Financial Corp.

(Oritani) and its wholly-owned subsidiary, Oritani Bank on December 1, 2019.

See Note 2 to the consolidated financial statements for more information regarding the Oritani acquisition.

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Despite targeted branch consolidation activity, w e have significantly grown both in asset size and locations over the past several years primarily both through organic efforts and through bank acquisitions discussed below and elsewhere in this report.

The Westchester Bank Holding Corporation.

On December 1, 2021, Valley completed its acquisition of The Westchester Bank Holding Corporation (Westchester) and its principal subsidiary, The Westchester Bank, which was headquartered in White Plains, New York.

Westchester had approximately $1.4 billion in assets, $915.0 million in loans, and $1.2 billion in deposits, after purchase accounting adjustments, and a branch network of seven locations in Westchester County, New York.

The acquisition represented a significan t addition to Valley's New York franchise, and enabled Valley to expand into the Westchester County, New York market.

Full systems integration was completed in February 2022 with minimal disruption to our customers.

However, some normal post-systems integration matters involving back-office and other functions were still underway at the filing date of this report.

Dudley Venture s.

On October 8, 2021, Valley acquired certain subsidiaries of Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits.

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.

On November 16, 2021, Valley also acquired DV Financial Services, a registered broker-dealer regulated by FINRA, which is largely inactive.

The DV related acquisitions are expected to support our efforts to build differentiated sources of non-interest income.

Bank Leumi Le-Israel Corporation.

On September 23, 2021, Valley announced that it will acquire Bank Leumi Le-Israel Corporation, the U.S.

subsidiary of Bank Leumi Le-Israel B.

M., and parent company of Bank Leumi USA, and collectively referred to as "Bank Leumi USA".

Bank Leumi USA maintains its headquarters in New York City and also has commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Florida.

As of December 31, 2021, Bank Leumi USA had total assets of $8.3 billion, total deposits of $7.1 billion, and gross loans of $5.8 billion.

Valley has received regulatory approval from the FRB and OCC, as well as Valley shareholder approval of the issuance of Valley common stock in connection with the acquisition.

The acquisition remains subject to regulatory approval by the New York State Department of Financial Services, as well as other customary closing conditions.

The acquisition is anticipated to close in the second quarter of 2022.

See Note 2 to the consolidated financial statements for additional details regarding these recent and pending acquisitions.

Impact of COVID-19.

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

While the overall level of economic activity has improved in the second half of 2020 following the steep economic downturn in second quarter 2020, certain industries and businesses continue to be adversely impacted with a significant loss of their normal revenue streams and continue to experience business interruptions.

Our outlook, which remains unchanged from the end of the third quarter 2020 indicates continued macroeconomic deterioration with higher levels of credit stress related to borrowers impacted by COVID-19 and lower valuations of collateral securing our non-performing taxi medallion loan portfolio.

Uncertainties and disruptions resulting from the COVID-19 pandemic slowed our traditional new commercial loan volumes and the loan balances for residential and many consumer loan products saw moderate declines in t he second half of 2020, primarily as a result of the higher level of residential mortgage loans originated for sale due to our current interest rate risk manag ement strategies.

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

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

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

Valley National Bank is a certified Small Business Administration (SBA) lender and facilitated approximately 13,000 SBA-approved PPP loans with balances totaling $2.2 billion as of December 31, 2020.

While difficult to accurately predict, we expect the majority of these loans to be forgiven in accordance with rules, application and documentation requirements for this program.

The Consolidated Appropriations Act, 2021, which was signed into law on December 27, 2020 (Appropriations Act), provides approximately $900 billion in new COVID-19 stimulus relief partly comprised of additional funding under the PPP.

The Appropriations Act also expanded borrower eligibility under the PPP to certain second draws under the program.

During the first quarter 2021, Valley has approved PPP loan ap plications totaling approximately $534 million within its pipeline, and originated $499 million of such loans through February 19, 2021.

Our future PPP loan originations may ultimately be less than the approved loan application pipeline due to normal underwriting contingencies.

We have reopened all bank branches in our network that were either temporarily closed or had reduced lobby services due to COVID-19.

However, we continue to act with an abundance of caution in order to safeguard the health and wellness of our customers and employees and may limit capacity in our branch locations and/or require scheduled appointments in the future.

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

Our business continuity plan continues to remain in effect with many of our non-customer facing employees continuing to work remotely as we monitor the level of the health crisis in our primary markets.

In response to the COVID-19 pandemic and its economic impact on certain customers 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.

Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days.

Any extensions beyond this period were made in accordance with applicable regulatory guidance.

As of December 31, 2020, Valley had $361 million of outstanding loans remaining in their payment deferral period under short-term modifications.

The $361 million of loans in deferral represented approximately 1.1 percent of our total loan portfolio at December 31, 2020, having decreased significantly from approximately $1.1 billion, or 3.3 percent of total loans, near the start of the third quarter 2020.

Significant uncertainties persist as to the impact of future economic conditions and stress on our customers.

The severe adverse economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, contributed to a sharply increased provision for credit losses for the year ended December 31, 2020, following our initial adoption of CECL on January 1, 2020.

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

However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the first quarter 2021 and beyond is highly uncertain.

See the "Operating Environment" section of MD&A for more details.

Branch Transformation.

As previously disclosed, Valley has embarked on a strategy to continuously overhaul its retail network.

Approximately two years ago we established the foundation of what the transformation of our branch network would look like in coming years.

At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter 2019.

For the remaining 54 branches, we

Economic activity and businesses continued to improve in the second half of 2021, although the emergence of the Omicron variant of the COVID-19 virus, which spread rapidly both globally and in the U.S., cast some uncertainty on the strength of the economic recovery.

is experiencing significant global supply chain disruptions and labor shortages which have contributed to a spike in 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

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implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined ti meline.

During 2020, we permanently closed an additional 16 branches located in New Jersey, including the consolidation of 11 acquired Oritani bran ches into nearby legacy Valley branch es, and 2 Florida branches.

We also permanently closed one New Jersey branch in the first quarter 2021.

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

Federal Reserve actions.

The extent to which the COVID-19 pandemic will impact our operations and financial results during 2022 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 $2.8 billion of these loans have received forgiveness from the SBA, most of which occurred during 2021.

As of December 31, 2021, we had $436 million of PPP loans still outstanding.

As of December 31, 2021, Valley had approximately $28.0 million of outstanding loans remaining in their payment deferral periods under short-term modifications representing approximately 0.1 percent of our total loan portfolio at December 31, 2021 as compared to approximately $361 million, or 1.1 percent of total loans at December 31, 2020.

Annual Results .

Net income totaled $473.8 million, or $1.12 per diluted common share, for the year ended December 31, 2021 compared to $390.6 million in 2020, or $0.93 per diluted common share.

The increase in net income compared to 2019 was largely due to:

• a $220.9 million, or 24.6 percent, increase in our net interest income driven primarily by a $5.6 billion increase in average loan balances and a sharp reduction in interest rates of 85 basis points on the cost of total interest bearing liabilities resulting from the low interest environment, partially offset by loan yields that were 53 basis points lower and interest expense related to a $3.9 billion increase in average interest bearing liabilities;

• a $7.5 million decrease in income tax expense largely due to a $31.1 million addition to our reserves for uncertain tax positions in 2019, partially offset by increased income taxes mostly caused by higher 2020 pre-tax income;

The increase in net income in 2021 compared to 2020 was largely due to:

• a $91.0 million, or 8.1 percent, increase in our net interest income primarily driven by (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 due to normal maturities of FHLB advances and long-term repos, as well as our prepayments of certain long-term FHLB borrowings in December 2020 and June 2021 and (iv) a $1.2 billion increase in average earnings assets largely due to solid organic loan growth, partially offset by lower yields on average loans and investments;

• a $93.1 million decrease in our provision for credit losses mostly due to improvements in the economic forecast component of our CECL model during 2021;

partially offset by:

• a $101.5 million increase in our provision for credit losses for loans due to the CECL adoption and the impact of the COVID-19 pandemic on the model results;

• a $31.5 million decrease in non-interest income, due in large part to a $78.5 million gain on the sale (and leaseback) of certain Bank properties recognized in 2019, partially offset by a $23.3 million increase in the gain on sale of residential mortgage loans, as well as swap fee income which increased $25.6 million to $59.0 million for 2020;

• a $14.6 million increase in non-interest expense largely due to higher levels of expense related to our expanded franchise following the Oritani acquisition on December 1, 2019 and the COVID-19 pandemic, partially offset by a $20.0 million decrease in the loss on extinguishment of debt and a $7.1 million decrease in the amortization of tax credit investments.

See the “Net Interest Income,” “Non-Interest Income,” “Non-Interest Expense,” and “Income Taxes” sections below for more details on the items above and other infrequent items, including merger expenses and the loss on extinguishment of debt, impacting our 2020 annual results.

• a $28.0 million decrease in non-interest income 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 several other fee categories;

• a $45.4 million increase in non-interest expense largely due to salary and benefit costs which, among other things, was driven higher by strategic increases in our headcount to enhance lending and operations, increases in our branch compensation, higher medical insurance costs, as well as $7.6 million of merger expenses associated with our 2021 merger activities;

• a $27.4 million increase in income tax expense mostly caused by higher 2021 pre-tax income.

See the “Net Interest Income,” “Non-Interest Income,” “Non-Interest Expense,” and “Income Taxes” sections in this MD&A for more details on the items above and other infrequent items, including merger expenses and the loss on extinguishment of debt, impacting our 2021 annual results.

Operating Environment.

During 2020, real gross domestic product declined 3.5 percent compared to an increase of 2.2 percent in 2019.

The decline in growth was driven by decreases in household consumption, exports, restocking of inventories, business fixed investment and state and local government spending.

These decreases were partially offset by increases in residential fixed investment and federal government spending, particularly from non-defense spending, which supported economic activity.

To support economic activity, the Federal Reserve reduced the target range for the federal funds rate in the first half of 2020 and began purchasing Treasury securities and agency residential and commercial mortgage-backed securities.

As of the dated of this report, the target range for the federal funds rate is between zero and 0.25 percent.

The Federal Reserve indicated at its recent meeting that the current stance of monetary policy is appropriate to support a return to sustained expansion of economic activity.

Durin g 2021, real gross domestic product increased 5.7 percent compared to a decline of 3.4 percent in 2020.

Growth was driven by increases in household consumption (particularly for services), business fixed investment and inventory restocking.

Demand in these categories more than offset the decline in net exports and slowing government consumption.

To support economic activity, the Federal Reserve maintained the target range for the federal funds rate between zero and 0.25 percent.

In addition, the Federal Reserve continued to purchase Treasury securities and agency residential and commercial mortgage-backed securities.

The Federal Reserve indicated at its recent meeting that it expects to reduce accommodation, though it will continue to monitor the impact of incoming information on the economic outlook in their decisions.

The 10-year U.S.

Treasury note yield ended 2020 at 0.93 percent, or 99 basis points lower as compared to December 31, 2019.

Treasury note yield ended 2021 at 1.52 percent, 59 basis points higher than at December 31, 2020.

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

Treasury note yields ended the year at 0.80 percent, or 46 basis points higher, compared to the end of 2019.

For all commercial banks in the U.S., loans and leases grew approximately 3.5 percent from December 31, 2019 to December 31, 2020.

For the industry, banks reported that demand for most commercial loan products had declined sharply compared to the end of 2019.

The decline was broad-based across commercial real estate lending and loans to middle market firms.

However, banks reported sharply higher demand for residential mortgage loans, particularly those related to jumbo products.

Additionally, the industry reported that underwriting standards had generally tightened significantly for both commercial and residential loans.

Valley’s commercial and industrial originations in 2020 were primarily driven by loans associated with PPP.

In addition, Valley continued to see solid demand for residential mortgage loans across its geographies during most of 2020.

However, the path of economic activity is highly contingent on the progress made in combating COVID-19.

Should health conditions warrant more widespread restrictions to business activity, spending and investment would

Treasury note yields ended the year at 0.79 percent, 1 basis point lower compared to the end of 2020.

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be adversely impacted.

Therefore, if conditions remain subdued it could weigh on the Bank’s future financial results, as highlighted below in the MD&A.

Total loans increased by $2.5 billion to $32.2 billion at December 31, 2020 from December 31, 2019 largely due to $2.2 billion of SBA PPP loans classified as commercial and industrial loans, as well as growth in commercial mortgage loans (including construction loans) which increased $827.1 million, or 4.7 percent during the year ended December 31, 2020.

The residential mortgage category and most consumer loan categories experienced moderate declines during the year ended December 31, 2020 due to the impact of COVID-19 pandemic and a higher level of residential mortgage loans originated for sale.

During the year ended December 31, 2020, we originated $1.2 billion of residential mortgage loans for sale rather than held for investment.

For all commercial banks in the U.S., loans and leases grew approximately 4.1 percent from December 31, 2020 to December 31, 2021.

For the industry, banks reported that demand for most commercial loan products increased sharply compared to 2020.

The increase was broad-based across commercial real estate lending and for loans to middle market firms.

Overall, the industry reported that underwriting standards remained mostly unchanged for commercial loan products.

Our loan originations were strong across most products and geographies as economic activity expanded during 2021.

While the outlook for the economy and our industry remain mostly positive for 2022, many difficult to predict adverse factors largely resulting from the prolonged COVID-19 pandemic, or geopolitical events, could weigh on the economy and, as a result, our financial operations and results, as highlighted in the remaining MD&A discussion below.

Total loans increased $1.9 billion to $34.2 billion at December 31, 2021 from December 31, 2020 in spite of a $1.7 billion decrease in PPP loans within the commercial and industrial loan category caused by SBA loan forgiveness.

The overall increase in non-PPP loans was mainly due to strong organic growth during the year and $915 million of loans that we acquired from Westchester.

Excluding acquired loans from Westchester, commercial real estate (including construction), non-PPP commercial and industrial, residential mortgage and automobile loans increased 9.3 percent, 8.7 percent, 7.9 percent, and 15.8 respectively, during the year ended December 31, 2021.

Additionally, we originated $1.0 billion of residential mortgage loans for sale rather than held for investment.

Loans held for sale totaled $139.5 million and $301.4 million at December 31, 2021 and 2020, respectively.

For 2022, we are targeting net loan growth in the range of 7 to 9 percent based on gross non-PPP loans of approximately $33.7 billion at December 31, 2021, excluding PPP loans of $436 million at December 31, 2021.

However, there can be no assurance that we will achieve such levels given the potential for unforeseen changes in the market and other conditions detailed in our risk factors set forth under Item 1A.

of this Report.

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

Asset Quality.

Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans which are discussed further below, excluded those loans which were classified as purchased credit impaired (PCI) loans.

Under the new standard, Valley's former PCI loans are accounted for as purchased credit deteriorated (PCD) loans and, if applicable, are reported in our past due and non-accrual categories at December 31, 2020.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt security increased $90.1 million, or 86.3 percent to $194.6 million at December 31, 2020 as compared to December 31, 2019.

This increase was largely due to non-accrual PCD loans totaling approximately $45 million reported at December 31, 2020 and higher non-accrual taxi medallion loans within the commercial and industrial category.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $50.8 million, or 26.1 percent to $245.4 million at December 31, 2021 as compared to December 31, 2020.

This increase was largely due to higher non-accrual loans in the commercial real estate, construction and residential mortgage loan categories.

Non-accrual loans totaled $240.2 million, or 0.70 percent of our entire loan portfolio of $34.2 billion, at December 31, 2021 as compared to $185.3 million, or 0.58 percent of total loans, at December 31, 2020.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased $30.8 million to $99.0 million, or 0.31 percent of total loans at December 31, 2020 as compared to $68.2 million, or 0.23 percent of total loans, at December 31, 2019.

The increase was largely due to an increase in early stage delinquencies in commercial real estate category as well as approximately $11 million of accruing past due loans PCD loans reported at December 31, 2020.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $43.1 million to $55.9 million, or 0.16 percent of total loans at December 31, 2021 as compared to $99.0 million, or 0.31 percent of total loans, at December 31, 2020.

The decrease was largely due to lower early stage delinquencies in the commercial real estate, residential mortgage and total consumer loan categories reported at December 31, 2021.

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 downturn in economic conditions impacted by the COVID-19 pandemic and a number of our borrowers performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at December 31, 2020.

However, due to the potential for future credit deterioration caused by the downturn in economic conditions impacted by the COVID-19 pandemic or other factors, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at December 31, 2021.

See the “Non-performing Assets” section below for further analysis of our asset quality.

Deposits and Other Borrowings .

Our mix of total deposits at December 31, 2020 as compared to December 31, 2019 reflects the shift in customer preference for deposits without stated maturities resulting from the uncertainties stemming from the COVID-19 pandemic and the low interest rates offered on our time deposits.

Additionally, PPP loan originations were deposited into customers' checking accounts which increased the proportion of non-interest bearing deposits in our overall deposit mix.

Deposits and Borrowings .

Overall, average deposits increased by $2.5 billion to $33.2 billion for the year ended December 31, 2021 as compared to 2020 largely due to continued growth in both commercial and retail customer balances.

Average non-interest bearing deposits represented approximately 31 percent of total average deposits for the year ended December 31, 2021, whereas savings, NOW and money market accounts were 55 percent and time deposits were 14 percent of total average deposits for the year ended December 31, 2021.

Average non-interest bearing deposits, savings, NOW and money market accounts, and time deposits were 27 percent, 47 percent, and 26 percent, respectively, for the year ended December 31, 2020.

Average total deposits for the year ended December 31, 2020 as compared to 2019 increased by $5.4 billion due, in large part, to the aforementioned PPP loan proceeds, as well as our continuous efforts to encourage new and existing loan borrowers to maintain deposit accounts at Valley, including government deposits.

Ending balances of brokered deposits (consisting of both time and money market deposit accounts) were $3.1 billion and $4.1 billion at December 31, 2020 and 2019, respectively.

Our mix of total deposits at December 31, 2021 as compared to December 31, 2020 reflects the shift in customer preference for deposits without stated maturities resulting from the low interest rates offered on our time deposits, as well as some funding from maturing retail CDs continued to migrate to the more liquid deposit products categories.

Ending balances of brokered deposits were $1.4 billion at December 31, 2021, consisting of money market deposit accounts, as compared to $3.1 billion at December 31, 2020.

The decline was largely due to the maturity and repayment of all brokered CDs throughout 2021 as organic deposit growth outweighed the need for wholesale funding sources.

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 December 31, 2021.

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

The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in 2021.

Average short-term borrowings decreased $448.7 million to $1.6 billion for 2020 as compared to 2019 largely due to the success of our retail and government deposit gathering efforts and a moderate shift into long-term borrowings.

Average long-term borrowings increased $899.0 million to approximately $2.9 billion for 2020 as compared to 2019 largely due to new FHLB borrowings and our $115.0 million, 5.25 percent fixed-to-floating subordinated notes issued in June

2021 Form 10-K 42

For further discussion of our average interest bearing liabilities see the “Net Interest Income” section below, and for further discussion of our borrowed funds, see Note 10 to the consolidated financial statements.

The following table presents average short-term and long-term borrowings for the years ended December 31, 2021 and 2020:

(in thousands)

Average short-term borrowings:

FHLB advances $ 722,192 $ 1,281,121

Securities sold under repurchase agreements 163,223 152,392

Federal funds purchased 6,493 188,068

Total $ 891,908 $ 1,621,581

Average long-term borrowings:

FHLB advances $ 1,136,661 $ 2,100,874

Subordinated debt 533,754 356,273

Securities sold under repurchase agreements 170,685 337,159

Junior subordinated debentures issued to capital trusts 56,243 55,907

Total $ 1,897,343 $ 2,850,213

Average short-term borrowings presented in the above table decreased largely due to the success of our retail, commercial and government deposit gathering efforts in 2021.

Average long-term borrowings decreased largely due the combination of (i) $534 million and $248 million of FHLB advances which were prepaid in December 2020 and June 2021, respectively, (ii) normal repayments upon the maturities of FHLB advances and (iii) $300 million of long-term repurchase agreements which matured during the third quarter 2021.

These decreases were partially offset by $300 million of subordinated notes issued in May 2021.

See the “Net Interest Income” section below and Note 10 to the consolidated financial statements for additional details on our borrowed funds.

Selected Performance Indicators.

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The non-GAAP measure reconciliations are presented below.

2021 Form 10-K

Adjusted net income for the three years ended December 31, 2021, 2020 and 2019 was computed as follows:

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Net impairment losses on securities (net of tax) — — 2,104

(Gains) losses on securities transactions (net of tax) (377) 108 1,677

(Gains) losses on available for sale and held to maturity securities transactions (net of tax) (1)

(390) (377) 108

Severance expense (net of tax) (2)

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Tax credit investment impairment (net of tax) (3)

Branch related asset impairment (net of tax) — — 1,304

Legal expenses (litigation reserve impact only, net of tax) — — 8,726

Merger related expenses (net of tax) (4)

6,698 1,371 11,929

Income tax expense (benefit) (4)

— 31,123 (274)

Litigation reserve (net of tax) (5)

Income tax expense (6)

Gain on sale-leaseback transaction (net of tax) (7)

Gain on sale of Visa Class B shares (net of tax) (6)

Net income, as adjusted 487,677 401,738 326,858

(1) Included in gains on securities transactions, net.

(2) Severance expense is included in salary and employee benefits expense.

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

(4) Income tax expense related to reserves for uncertain tax positions in 2019, and a net income tax benefit related to the Tax Cuts and Jobs Act and the USAB acquisition in 2018.

(5) Litigation reserve included in professional and legal fees.

(6) Income tax expense related to reserves for uncertain tax positions initially recorded in 2019.

(7) The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

(6) The gain from the sale of non-marketable securities is included in other non-interest.

In addition to the items used to calculate net income, as adjusted, in the tables 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, bulk loan portfolio sales and commercial loan customer demand for certain products.

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.

2020 Form 10-K 40

Adjusted annualized return on average assets for the three years ended December 31, 2021, 2020 and 2019 was computed by dividing adjusted net income by average assets, as follows:

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Return on average shareholders' equity, as adjusted 10.27 % 8.93 % 9.19 %

2021 Form 10-K 44

ROATE and adjusted ROATE for the three years ended December 31, 2021, 2020 and 2019 were computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:

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Net interest income on a tax equivalent basis increased by $90.2 million to $1.2 billion for 2021 as compared to 2020.

The increase was mainly driven by interest income related to a $5.6 billion increase in average loan balances, including the impact of $3.4 billion of loans acquired from Oritani on December 1, 2019, and an 85 basis point reduction in the cost of our total interest bearing liabilities due to the lower interest rate environment in 2020.

The changes in our average interest earning assets and interest bearing liabilities are discussed further below.

Interest expense decreased $140.5 million to $124.3 million for 2021 mainly driven by (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, and (iii) lower average other borrowings due to normal debt maturities and our prepayments of $534 million and $248 million of long-term FHLB borrowings in December 2020 and June 2021, respectively.

Interest income on a tax equivalent basis decreased $50.3 million to $1.3 billion for 2021 largely due to lower overall yields on average loans and investments, partially offset by a $1.2 billion increase in average earnings assets largely due to solid organic loan growth.

Interest and fee income related to PPP loans totaled $84.9 million for 2021 as compared to $43.6 million for 2020.

The net interest margin on a tax equivalent basis was 3.17 percent for the year ended December 31, 2021 and increased 14 basis points as compared to 2020.

However, the yield on average interest earning assets decreased 59 basis points mainly attributable to decreased yield on average loans and average taxable investments.

The yield on average interest earning assets decreased 25 basis points mainly attributable to decreased yields on average loans and average taxable investments.

The yield on average loans decreased 21 basis points to 3.83 percent for 2021 as compared to 4.04 percent in 2020 largely due to new and refinanced loan originations at lower market interest rates, loan prepayments, and interest rates resetting on adjustable rate loans throughout 2021.

Our average taxable investment portfolio yield decreased 54 basis points during 2020 as compared to the prior year due to the combination of principal repayments on higher yielding residential mortgage-backed securities, a $10.2 million increase in net premium amortization and lower yielding new investments purchased in 2020.

Our average taxable investment portfolio yield decreased 45 basis points during 2021 as compared to the prior year due to our reinvestment of principal repayments at lower rates.

More than offsetting the decrease in the yield on average interest earning assets, the cost of average interest bearing liabilities decreased 50 basis points to 0.49 percent for 2021 as compared to the prior year.

The decrease in the overall cost as compared to 2019 was mainly due to significantly lower rates paid on our deposits products and a customer shift from higher cost maturing time deposits to deposits without stated maturities, as well as lower rates on short-term borrowings following the onset of the COVID-19 pandemic.

The cost of funds was largely influenced by decreases which occurred in March 2020 totaling 150 basis points in the daily effective federal funds rate to a

2020 Form 10-K

target range of between zero and 0.25 percent for the remainder of 2020.

The average daily effective federal funds rate was 2.16 percent in 2019.

The decrease in the overall cost as compared to 2020 was mainly due to our ability to reprice our sources of funding at lower rates.

Average interest earning assets totaling $38.2 billion for the year ended December 31, 2021 increased $1.2 billion, or 3.3 percent, as compared to 2020.

Average loan balances increased $5.6 billion to $31.8 billion in 2020 and was the major driver in the $62.1 million increase in interest income on a tax equivalent basis for loans as compared to 2019.

The growth in average loans during 2020 was due, in large part, to the $3.4 billion in loans acquired from Oritani, SBA PPP loans with average balances of $1.5 billion during the year ended December 31, 2020 and strong loan demand for commercial loans.

These items were partially offset by principal repayments that outpaced new loan originations held for investment in the residential mortgage and consumer loan categories.

The new commercial loan production in 2020 came from a blend of new and existing customer relationships with significant geographic and product diversification across our primary markets.

Average interest bearing liabilities increased $3.9 billion to $26.9 billion for the year ended December 31, 2020 from the same period in 2019 mainly due to $2.9 billion of deposits assumed in the Oritani acquisition and higher retail and government deposit balances within our branch network.

The average non-interest bearing deposits and savings, NOW and money market account balances increased by $1.9 billion and $2.9 billion, respectively, largely due to deposits from PPP loan customers, higher savings rates amongst our customers and increased customer preference for deposits without stated maturities driven by the combination of the uncertainties of the pandemic and the low rates offered on our time deposit products.

Average time deposits increased $604.5 million to $8.1 billion for 2020 as compared to 2019 mainly due to $1.2 billion of time deposits acquired from Oritani, partially offset by the normal run off of maturing retail CDs.

Average balances for retail CDs increased by $424.6 million to $4.7 billion for the year ended December 31, 2020 as compared to the prior year.

Average short-term and long-term borrowings decreased $448.7 million and increased $899.0 million in 2020, respectively, as compared to 2019 due, in part, to our ability to lock in lower rates on long-term FHLB advances to fund new loan activities.

See the "Fourth Quarter 2020" section below for more information regarding changes in our interest bearing liabilities during 2020.

Average loan balances increased $1.0 billion to $32.8 billion in 2021 and partially offset the decrease in interest income driven by the lower yields on average loans and taxable investments as compared to 2020.

The growth in average loans during 2021 was due in large part, to organic loan growth in a number of non-PPP loan categories, which was significantly offset by a $1.7 billion decrease in PPP loans caused by SBA forgiveness during the year ended December 31, 2021.

The new loan production in 2021 came from a blend of new and existing customer relationships with significant geographic and product diversification across our primary markets.

Average interest bearing liabilities decreased $1.3 billion to $25.6 billion for the year ended December 31, 2021 from the same period in 2020 mainly due to the strong growth we experienced in deposits from both commercial and retail customers and the customer shift from time deposits to transactional deposits without stated maturities.

The average non-interest bearing deposits and savings, NOW and money market account balances increased by $2.2 billion and $3.9 billion, respectively, and were partially offset by a $3.6 billion decrease in average time deposits for the year ended December 31, 2021 as compared to the prior year.

Average short-term and long-term borrowings decreased by $729.7 million and $952.9 million, respectively, in 2021, as compared to 2020 due, in part, to strong growth in deposits which provided excess liquidity and enabled us to reduce our other sources of funds.

2021 Form 10-K

Fourth Quarter 2021.

Net interest income on a tax equivalent basis totaling $316.0 million for the fourth quarter 2021 increased $14.3 million and $27.2 million as compared to the third quarter 2021 and fourth quarter 2020, respectively.

The increase compared to the third quarter 2020 was mainly due to lower rates on our deposit products combined with a shift in customer preference towards deposits without stated maturities, as well as a reduction in average short-term and long-term borrowings funded by excess liquidity.

Interest expense of $46.1 million for the three months ended December 31, 2020 decreased $8.1 million as compared to the third quarter 2020.

Overall, average interest-bearing liabilities decreased $354.6 million and average non-interest bearing deposits increased $323.1 million in the fourth quarter 2020 as compared to the third quarter 2020.

Interest income on a tax equivalent basis decreased $3.4 million to $335.0 million for the fourth quarter 2020 as compared to the third quarter 2020 mainly due to a 3 basis point decrease in the yield on average loans, as well as a moderate decline in interest and dividends from investment securities.

The decrease was mostly attributable to principal repayments on securities, and a decline in our reinvestment activity within the available for sale investment securities portfolio largely due to the low interest rate environment.

Interest income on a tax equivalent basis increased $11.2 million to $340.7 million for the fourth quarter 2021 as compared to the third quarter 2021 due to (i) increases of $639.7 million and $248.6 million in average loans and investment securities, respectively, (ii) a $2.4 million increase in periodic non-PPP loan fees and interest recovery income, and (iii) an $877 thousand increase in PPP loan related interest and fees caused by loan forgiveness in the fourth quarter 2021.

Interest expense of $24.7 million for the fourth quarter 2021 decreased $3.1 million as compared to the third quarter 2021 as we continue to reduce our cost of funding from both deposits and the repayment of other borrowings, primarily FHLB advances.

The net interest margin on a tax equivalent basis of 3.23 percent for the fourth quarter 2021 increased 8 basis points as compared to 3.15 percent for the third quarter 2021, and increased 17 basis points from 3.06 percent for the fourth quarter 2020.

The yield on average interest earning assets decreased by 4 basis points on a linked quarter basis mostly due to the impact of the lower interest rate environment.

The yield on average loans decreased to 3.86 percent for the fourth quarter 2020 from 3.89 percent for the third quarter 2020 largely due to the continued repayment of higher yielding loans, partially offset by a $2.2 million increase in interest and fees from PPP loans.

The increase in interest and fees on PPP loans was mostly caused by a moderate level of loan forgiveness activity and acceleration of net unamortized deferred loan fees during the fourth quarter 2020.

The overall cost of average interest-bearing liabilities decreased by 11 basis points to 0.69 percent for the fourth quarter 2020 as compared to the linked third quarter 2020 due to the lower rates offered on deposit products and the shift to lower cost deposits as well as lower average short- and long-term borrowing balances with repayments funded by excess liquidity.

This includes our prepayment of $534 million in higher cost long-term borrowings during December 2020 that is expected to positively impact our average cost of funds in the first quarter 2021.

The yield on average interest earning assets increased by 4 basis points on a linked quarter basis mostly due to the higher yield on averages loans.

The yields on average loans increased to 3.83 percent for the fourth quarter 2021 from 3.79 percent for the third quarter 2021 largely due to the increases in non-PPP loan fees, interest recovery income, and PPP interest and fees combined with a $493 million decline in average PPP loans during the fourth quarter 2021.

The overall cost of average interest-bearing liabilities decreased by 5 basis points to 0.39 percent for the fourth quarter 2021 as compared to the linked third quarter 2021 due to the continued customer shift to lower cost deposits, as well as lower average short and long-term borrowings caused by normal repayments funded by excess liquidity.

Our cost of total average deposits was 0.15 percent for the fourth quarter 2021 as compared to 0.18 percent for the third quarter 2021.

Looking forward, we expect ongoing interest rate pressures on the level of our net interest margin for the first quarter 2021 and beyond due to lower market rate driven yields on our overall mix of new and refinanced loan originations.

However, we are encouraged by the opportunity to reprice stated maturity deposits and borrowings maturing over the 12-month period.

We have over $4 billion of retail CDs maturing at an average cost of approximately 80 basis points during the first nine months of 2021.

Many financial market participants currently anticipate higher interest rates in 2022 as compared to 2021.

Higher levels of market interest rates would benefit certain interest earning assets on our balance sheet and likely provide us the opportunity to reinvest excess liquidity at higher rates.

Under this scenario, we would also anticipate a lag in higher funding costs given the significant excess liquidity currently present in the U.S.

banking system.

Based upon our estimates at December 31, 2021, we anticipate net interest income growth of approximately 5 to 7 percent for the full year of 2022 as compared to 2021, excluding the impact of the Bank Leumi USA acquisition expected to close in the second quarter of 2022.

2021 Form 10-K 46

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Other assets 3,285,731 3,495,464 2,762,478

Unrealized losses on securities available for sale, net

36,521 (13,327) (46,578)

Unrealized gains (1osses) on securities available for sale, net 32,435 36,521 (13,327)

Total assets $ 41,475,682 $ 40,557,326 $ 33,442,738

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Long-term borrowings 1,897,343 50,978 2.69 2,850,213 71,207 2.50 1,951,203 63,220 3.24

2,850,213 71,207 2.50 1,951,203 63,220 3.24 2,116,619 65,762 3.11

Total interest bearing liabilities

44 unchanged sentences

(25,271) 5,042 (20,229) 24,674 (16,687) 7,987

Total increase (decrease) in interest expense 58,665 (216,802) (158,137) 41,551 79,356 120,907

Total (decrease) increase in interest expense (47,500) (92,990) (140,490) 58,665 (216,802) (158,137)

Increase (decrease) in net interest income

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Non-interest income represented 10.4 percent and 11.7 percent of total interest income plus non-interest income for 2021 and 2020, respectively.

For the year ended December 31, 2020, non-interest income decreased $31.5 million as compared to the year ended December 31, 2019 largely due to the gain on the sale of several Valley properties recognized in 2019.

For the year ended December 31, 2021, non-interest income decreased $28.0 million as compared to the year ended December 31, 2020 largely due to both lower gains on sales of loans and swap fee income derived from new commercial loan transactions.

See further details below.

2020 Form 10-K 44

The following table presents the components of non-interest income for the years ended December 31, 2021, 2020, and 2019:

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Gains on sales of loans, net 26,669 42,251 18,914

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

Gains (losses) on sales of assets, net 901 (1,891) 78,333

Bank owned life insurance 8,817 10,083 8,232

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Total non-interest income $ 155,013 $ 183,032 $ 214,520

Insurance commissions decreased $3.0 million for the year ended December 31, 2020 from $10.4 million in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased $5.4 million for the year ended December 31, 2020 as compared to 2019 mostly due to waived fees related to COVID-19 customer relief efforts in 2020.

Net impairment losses on securities totaling $2.9 million for the year ended December 31, 2019 relate to one special revenue bond in default of its contractual payments.

See the “Investment Securities Portfolio” section of this MD&A and Note 4 to the consolidated financial statements for further details on our investment securities impairment analysis.

Fees from loan servicing increased $558 thousand for the year ended December 31, 2020 from $9.8 million in 2019 mainly due to additional fees from mortgage servicing rights of loans originated and sold by us during the year ended December 31, 2020.

2021 Form 10-K 48

Trust and investment services income increased $2.5 million for the year ended December 31, 2021 from $12.4 million in 2020 mainly due to higher fees generated by the Bank's asset management subsidiary due to appreciation in customer balances as well as investment advisory fees generated by DV in the fourth quarter 2021.

Service charges on deposit accounts which increased $3.2 million for the year ended December 31, 2021 as compared to 2020 are mostly attributable to a reduction in waived fees related to COVID-19 customer relief efforts.

Gains on securities transactions, net increased by $1.2 million for the year ended December 31, 2021 as compared to 2020 mainly due to net trading gains from the launch of our new municipal bond trading platform in the first quarter 2021.

Fees from loan servicing increased $1.3 million for the year ended December 31, 2021 from $10.4 million in 2020 mainly due to additional fees from mortgage servicing rights on loans originated and sold by us during the year ended December 31, 2021.

The aggregate principal balances of residential mortgage loans serviced by us for others increased approximately $76 million to $3.6 billion at December 31, 2021 from $3.5 billion at December 31, 2020.

Net gains on sales of loans increased $23.3 million for the year ended December 31, 2020 as compared to 2019 largely due to higher spreads (or margins) on individual loan sales despite a slightly higher volume of residential mortgage loans sold during 2020.

During 2020, we sold $1.0 billion of residential mortgages as compared to $935 million of residential mortgage loans sold during 2019, including $30 million and $436 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively.

Net gains on sales of loans decreased $15.6 million for the year ended December 31, 2021 as compared to 2020.

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

The net gains in the fair value of loans held for sale totaled $13.5 million and $1.0 million in 2020 and 2019, respectively.

The change in the fair value of loans held for sale totaled $11.8 million of net losses for the year ended December 31, 2021 as compared to the net gains of $13.5 million the year ended December 31, 2020.

Excluding the effect of the change in the fair value, the net gain on actual sales of loans increased $9.7 million or the year ended December 31, 2021 as compared to 2020.

This increase was mainly due to higher volume of loans sold in 2021, as well as improved spreads on the sales of individual loans which were on average approximately 21 basis points higher as compared to the prior year.

During 2021, we sold $1.2 billion of residential mortgages as compared to $1.0 billion of residential mortgage loans sold during 2020.

Residential mortgage loan originations (including both new and refinanced loans) increased 32.2 percent to $2.6 billion for the year ended December 31, 2021 as compared to $1.9 billion in 2020.

See further discussions of our residential mortgage loan origination activity under “Loans” in the "Executive Summary" section of this MD&A above and Note 3 to the consolidated financial statements for details about the fair value methodology.

Net gains on sales of assets decreased $80.2 million for the year ended December 31, 2020 as compared to 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 bank properties recognized during the first quarter 2019.

Other non-interest income increased $28.0 million for the year ended December 31, 2020 as compared to 2019 mainly due to a $25.6 million increase in fee income related to derivative interest rate swaps executed with commercial lending customers.

Net gains on sales of assets increased $2.8 million for the year ended December 31, 2021 as compared to $1.9 million net losses in 2020 primarily due to the net gains on the sale of a few former branch properties and other repossessed assets during 2021.

In addition, the net losses recorded during 2020 included impairment charges recognized on certain technology assets.

Other non-interest income decreased $22.6 million for the year ended December 31, 2021 as compared to 2020 mainly due to a $32.1 million decrease in swap fee income caused by lower transaction volume of interest rate swaps executed with commercial lending customers.

Swap fee income totaled $26.9 million and $59.0 million for the years ended December 31, 2021 and 2020, respectively.

A decline in commercial loan activity in 2021, as well as several other factors, could have a significant negative impact on our ability to generate swap fee income at or near the fees realized in 2020.

2020 Form 10-K

The decrease in swap fee income was partially offset by moderately higher fees and income in various other categories, including a $2.8 million increase in credit card and debit card fees mainly driven by greater card utilization.

Non-Interest Expense

Non-interest expense increased $14.6 million to $646.1 million for the year ended December 31, 2020 as compared to 2019.

Non-interest expense increased $45.4 million to $691.5 million for the year ended December 31, 2021 as compared to 2020 mainly driven by higher salary and employee benefits expense, as well as higher professional and legal fees.

See further details below.

The following table presents the components of non-interest expense for the years ended December 31, 2021, 2020 and 2019:

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Total non-interest expense $ 691,542 $ 646,148 $ 631,555

2021 Form 10-K

Salary and employee benefits expense increased $42.6 million for the year ended December 31, 2021 as compared to 2020.

The increase was largely due to additional salaries related to Bank branch and other operational staff retained from the Oritani acquisition, higher cash incentive compensation (including $2.2 million of special bonuses paid to hourly and part-time employees to reward them for their efforts and contributions during the COVID-19 pandemic) and increased medical expenses.

These additional expenses were partially offset by cost reductions from our ongoing branch transformation efforts and other operational improvements during the year ended December 31, 2020 and lower merger related charges.

Change in control, severance and retention expenses related to bank acquisitions was $13.9 million for the year ended December 31, 2019.

Severance costs related to operational restructuring efforts and our branch transformation strategy totaled $2.1 million and $4.8 million for the years ended December 31, 2020 and 2019, respectively.

Net occupancy and equipment expenses increased $10.8 million for the year ended December 31, 2020 as compared to 2019 largely due to higher rental expenses resulting from a sale leaseback transaction completed near the end of the first quarter 2019 and higher depreciation expense related to computer equipment and new data centers placed into service in fourth quarter 2019.

In addition, during 2020, we incurred higher equipment and certain other COVID-19 pandemic related expenses which included additional cleaning services for facilities to maintain employee and customer safety.

During 2020, we also incurred additional costs associated with branches and other facilities acquired from Oritani, which were partially offset by costs savings from branch closures during 2020 as compared to 2019.

The FDIC insurance assessment decreased in 2020 largely due to the Bank's improved capital position following the Oritani acquisition and retained earnings resulting from a stronger 2020 performance.

Amortization of other intangibles increased $6.6 million to $24.6 million at December 31, 2020 as compared to 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible, as well as $818 thousand of net impairment charges of loan servicing rights for the year ended December 31, 2020 as compared to net recoveries of impairment charges totaling $36 thousand in 2019.

The increase in amortization of core deposits intangibles was primarily due to intangibles generated in the Oritani acquisition.

The increase was primarily due to the combination of 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, higher cash and stock-based incentive compensation accruals and health insurance costs also attributed to the 2021 increase.

Change in control, severance and retention expenses related to our 2021 merger activities was $6.5 million for the year ended December 31, 2021.

Severance costs related to operational restructuring efforts and our branch transformation strategy totaled $2.1 million for the year ended December 31, 2020.

Net occupancy and equipment expenses increased $3.1 million for the year ended December 31, 2021 as compared to 2020 largely due to higher cleaning, maintenance and repair costs.

The FDIC insurance assessment of $14.2 million decreased $4.8 million during 2021 as compared to the prior year largely due to the Bank's improved capital position and overall risk profile.

Amortization of other intangibles decreased $2.8 million for the year ended December 31, 2021 as compared to 2020 largely due to lower amortization expense of core deposit intangibles, as well as a full impairment adjustment recovery of the $865 thousand valuation allowance on loan servicing rights at December 31, 2020.

See Note 8 to the consolidated financial statements for additional information.

Professional and legal fees increased $6.1 million for the year ended December 31, 2021 as compared to 2020.

The increase was mainly due to higher costs from technology transformation consulting services, as well as remote work readiness costs largely incurred in the second quarter 2020.

Loss on extinguishment of debt totaling $12.0 million for the year ended December 31, 2020 reflects prepayment penalties related to the prepayments of $584.3 million of long-term borrowings primarily consisting of FHLB advances prepaid in the fourth quarter.

These debt prepayments were funded by excess cash liquidity.

T he increase was largely attributable to (i) h igher consulting expenses mostly related to our technology transformation efforts and new product initiati ves, (ii) a $2.1 million accrual for general litigation reserves, an d (iii) $1.7 million of me rger related costs during the year ended December 31, 2021.

Loss on extinguishment of debt totaling $8.4 million for the year ended December 31, 2021 reflects the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021.

During the year ended December 31, 2020, we also incurred a loss on extinguishment of debt totaling $12.0 million related to prepayments of long-term FHLB advances and institutional repo borrowings totaling $534.3 million and $50 million, respectively.

All of the prepayments were funded by excess cash liquidity at the Bank.

See Note 10 to the consolidated financial statements for additional information.

Amortization of tax credit investments decreased $7.1 million for the year ended December 31, 2020 as compared to 2019 partly due to a decline in impairment.

The year ended December 31, 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar (See Note 14 to the consolidated financial statements for additional information).

The remainder of the variance from 2019 was mainly due to

2020 Form 10-K 46

differences in the timing and amount of such investments and recognition of the related tax credits.

Amortization of tax credit investments decreased $2.4 million for the year ended December 31, 2021 as compared to 2020 mainly due to lower amortization on low income and new market tax credits and is attributable to differences in the timing and amount of such investments and recognition of the related tax credits.

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

See Note 14 to the consolidated financial statements for additional information.

Other non-interest expense increased $6.5 million for the year ended December 31, 2021 as compared to 2020.

This increase was largely due to higher data processing costs, certain PPP loan and other COVID-19 related costs, as well as incrementally higher operating expenses in several categories due to the expansion of our operations both organically and through the acquisition of Oritani in the fourth quarter 2019.

Net gains on the sale of OREO properties included in other non-interest expense decreas ed $674 thousand for the year ended December 31, 2020 as compared to 2019.

The negative impact of these times was partially offset by moderate decreases in severa l other significant components of other expense, such as travel, entertainment and business meals expense during 2020 as compared to 2019.

The net increase in this expense category was largely due to a $4.7 million increase in data processing costs and incrementally higher operating expenses in several categories stemming from increased loan originations and expansion of our operations.

Efficiency Ratio.

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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 the loss on extinguishment of debt, merger expenses and the net gain on sale-leaseback transactions.

2021 Form 10-K 50

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for such items during the years ended December 31, 2021, 2020 and 2019:

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8,900 1,907 16,579

Litigation reserve (pre-tax) (2)

Severance expense (mainly branch transformation, pre-tax) (3)

— 2,072 4,838

Legal expenses (litigation reserve impact only, pre-tax) — — 12,184

Total non-interest expense, as adjusted 661,226 616,798 557,751

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Total non-interest income, as reported 155,013 183,032 214,520

(Gains) losses on available for sale and held to maturity debt securities transactions, net (pre-tax) (545) (524) 150

Net impairment losses on securities (pre-tax) — — 2,928

Branch related asset impairment (pre-tax) (3)

Losses on securities transactions, net (pre-tax) (524) 150 2,342

Gain on the sale of Visa Class B shares (pre-tax) (4)

Gain on sale leaseback transaction (pre-tax) (4)

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(1) Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other expense.

(2) Severance expenses are included in salary and employee benefits.

(3) Branch related asset impairment is included in net losses on sale of assets within non-interest income.

(4) The gain from the sale of non-marketable securities is included in other non-interest income.

(5) The gain on sale leaseback transactions is included in gains on the sales of assets within other non-interest income.

(2) Litigation reserve included in professional and legal fees.

(3) Severance expenses are included in salary and employee benefits expense.

(4) The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

Management continuously monitors its expenses in an effort to optimize Valley's performance.

Based upon these efforts and our revenue goals, we achieved an adjusted efficiency ratio (as shown in the table above) of 47.39 percent for 2020 that exceeded our previously announced goal of 51 percent or lower for the year.

We can provide no assurance that our adjusted efficiency ratio will remain at the level reported for 2020.

2020 Form 10-K

Income tax expense was $139.5 million for the year ended December 31, 2020, reflecting an effective tax rate of 26.3 percent, as compared to $147.0 million for the year ended 2019, reflecting an effective tax rate of 32.2 percent.

The decline in the effective tax rate in 2020 as compared to 2019 was mainly due to a $31.1 million increase in the provision for income taxes related to uncertain tax liability positions during 2019.

However, income tax expense declined by only $7.5 million as compared to 2019 largely due to an increase in taxable income for the year ended December 31, 2020.

At December 31, 2020 and 2019, our uncertain tax liability positions relate to renewable energy tax credits and other tax benefits previously recognized from our investments in mobile generators sold and leased back by DC Solar and its affiliates.

The CARES Act did not have a material impact on our reported income tax expense for the year ended December 31, 2020.

Based upon these efforts and our revenue goals, we achieved an efficiency ratio of 50.67 percent and adjusted efficiency ratio (as shown in the table above) of 48.46 percent for 2021.

We will strive to preserve our adjusted efficiency ratio at or below 50 percent during 2022, however, we can provide no assurance that our adjusted efficiency ratio will remain at the level reported for 2021.

Income tax expense was $166.9 million for the year ended December 31, 2021, reflecting an effective tax rate of 26.0 percent, as compared to $139.5 million for the year ended December 31, 2020, reflecting an effective tax rate of 26.3 percent.

The increase in income tax expense during 2021 as compared to 2020 was mainly driven by higher pre-tax income.

The CARES Act did not have a material impact on our reported income tax expense for the years ended December 31, 2021 and 2020.

Our uncertain tax liability positions totaling $30.4 million and $31.9 million at December 31, 2021 and 2020, respectively, relate to renewable energy tax credits and other tax benefits previously recognized from our investments in mobile generators sold and leased back by DC Solar and its affiliates.

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.

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

Based on the current information available, we anticipate that our effective tax rate will range from 26 percent to 28 percent for 2022.

See additional information regarding our income taxes under our “Critical Accounting Policies and Estimates” section above, as well as Note 13 to the consolidated financial statements.

2021 Form 10-K

Business Segments

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

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

Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which

involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period.

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

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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.

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

Average interest earning assets in this segment increased $102.0 million to $7.3 billion for the year ended December 31, 2021 as compared to 2020.

The increase was largely due to $255 million of loans acquired from Oritani on December 1, 2019, loan growth from residential mortgage loan originations for investment during the first quarter 2020 (prior to the economic slowdown caused by the COVID-19 pandemic).

Income before income taxes generated by the consumer lending segment increased $46.6 million to $124.1 million for the year ended December 31, 2020 as compared to $77.5 million for the year ended December 31, 2019 largely due to increases of $28.5 million and $23.5 million in net interest income and non-interest income, respectively.

The increase in net interest income was mostly driven by the lower cost of funding and increase in average loans, partially offset by lower yields on loans in the consumer segment.

The increase in non-interest income was primarily attributable to higher net gains on sales of residential mortgage loans for the year ended December 31, 2020 as compared to 2019.

The positive impact of the aforementioned items

2020 Form 10-K 48

was partially offset by increases of $4.8 million and $1.5 million in the provision for loan losses and non-interest expense, respectively.

The increase in the provision for loan losses for the year ended December 31, 2020 as compared to 2019 was mainly due to the adverse economic forecast caused by COVID-19 pandemic included in our estimate of lifetime expected credit losses for this segment, as well as additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers impacted by COVID-19 pandemic.

The increase was largely due to strong consumer demand for new vehicles which generated strong loan volume through our indirect auto loan channel, particularly during the first half of 2021.

Also, to a lesser extent, we experienced growth in our residential mortgage portfolio held for investment and customer usage of personal lines of credit secured by the cash surrender value of life insurance.

However, we continued to originate a high volume of residential mortgage loans for sale rather than investment during 2021, which led to only moderate growth in average assets for the consumer segment.

Income before income taxes generated by the consumer lending segment increased $14.1 million to $138.2 million for the year ended December 31, 2021 as compared to $124.1 million for the year ended December 31, 2020 largely due to an increase of $10.1 million in net interest income coupled with a $6.8 million credit recorded to our provision for loan losses, partially offset by a $9.4 million decrease in non-interest income.

The increase in net interest income from 2020 was mostly due to the combination of a decline in our funding cost and higher average interest earning assets in 2021, which more than offset the lower yield on average interest earning assets in the consumer segment.

The credit to our provision for loan losses was mainly due to improvement in the economic forecast component of our CECL model in 2021 as general conditions and uncertainty from the COVID-19 pandemic improved from December 31, 2020.

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

The net interest margin on the consumer lending portfolio increased 29 basis points to 2.92 percent for the year ended 2020 as compared to 2019 due to a 66 basis point decrease in the costs associated with our funding sources, partially offset by a 37 basis point decrease in the yield on average loans.

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

The 37 basis point decrease in loan yield was largely due to lower yielding new loan volumes.

The lower non-interest income was largely due to lower gains on sales of residential mortgage loans mostly resulting from a decline in the fair value adjustment on loans held for sale as of December 31, 2021 as compared to December 31, 2020.

The net interest margin on the consumer lending portfolio increased 11 basis points to 3.03 percent for the year ended December 31, 2021 as compared to 2020 due to a 41 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans.

The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates, maturity of higher cost time deposits and borrowings, and prepayment of certain long-term borrowings.

The 30 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments .

See the "Executive Summary" and the "Net Interest Income" sections above for more details on our loans, deposits and other borrowings.

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The commercial lending segment is mainly comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans.

2021 Form 10-K 52

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.

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Commercial real estate loans and construction loans totaled $20.8 billion and represented 60.9 percent of the total loan portfolio at December 31, 2021.

Average interest earning assets in this segment increased $5.3 billion to $24.6 billion for the year ended December 31, 2020 as compared to 2019.

The increase was primarily due to organic loan growth from $2.2 billion of PPP loans originated in 2020, as well as $3.1 billion of commercial loans acquired from Oritani on December 1, 2019.

For the year ended December 31, 2020, income before income taxes for the commercial lending segment increased $79.4 million to $448.6 million as compared to 2019.

Net interest income increased $195.1 million to $863.7 million for the year ended December 31, 2020 as compared to 2019 mainly due to the combined effect of a $101.5 million increase in interest income driven by higher average loans balances and a $93.6 million decrease in interest expense caused by the reduction in our cost of funds.

Non-interest income increased $23.6 million for the year ended December 31, 2020 as compared to 2019 primarily due to fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $59.0 million for the year ended December 31, 2020 as compared to $33.4 million in 2019.

The positive impact of the aforementioned items was partially offset by a $96.1 million increase in the provision for credit losses to $113.6 million for the year ended December 31, 2020 as compared to 2019.

The increase in the provision for loan losses for the year ended December 31, 2020 as compared to 2019 was mainly due to the adverse economic forecast lifetime expected credit losses during 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to borrowers impacted by the COVID-19 pandemic.

Average interest earning assets in this segment increased $929.1 million to $25.6 billion for the year ended December 31, 2021 as compared to 2020.

The increase was mainly due to the strong organic commercial real estate loan growth across the markets and geographies of our franchise, partially offset by significant PPP loan forgiveness mostly in the second half of 2021.

For the year ended December 31, 2021, income before income taxes for the commercial lending segment increased $103.8 million to $552.4 million as compared to 2020 mainly driven by an increase in net interest income and a lower provision for loan losses.

Net interest income increased $87.7 million to $951.4 million for the year ended December 31, 2021 as compared to 2020 mainly due to the $96.8 million decrease in interest expense caused by the reduction in our cost of funds, increased PPP loan fees and the higher average commercial loan balances during 2021.

The $73.9 million decrease in the provision for credit losses to $39.7 million for the year ended December 31, 2021 as compared to 2020 was mainly due to an improvement in the economic forecast component of the allowance for loan losses and a reduction in other qualitative factors related to the COVID-19 pandemic.

See the "Allowance for Credit Losses" section below for further details.

Internal transfer expense increased $46.5 million to $267.6 million for the year ended December 31, 2020 as compared to 2019.

The net interest margin for this segment increased 4 basis points to 3.5 percent during 2020 as compared to 2019 due to a 66 basis point decrease in the cost of our funding sources, mostly offset by a 62 basis point decrease in the yield on average loans.

Non-interest income decreased $29.2 million for the year ended December 31, 2021 as compared to 2020 primarily due to lower fee income related to derivative interest rate swaps executed with commercial loan customers which totaled $26.9 million for the year ended December 31, 2021 as compared to $59.0 million in 2020.

Non-interest expense and internal transfer expense increased $9.9 million and $18.7 million, respectively, during 2021 as compared to the prior year.

The increase is non-interest expenses was due to higher general and administrative loan expenses and internal transfer expense allocation was higher, mostly due to higher averages assets for the year ended December 31, 2021 as compared to 2020.

The net interest margin for this segment increased 23 basis points to 3.73 percent during 2021 as compared to 2020 due to a 41 basis point decrease in the cost of our funding sources, partially offset by a 18 basis point decrease in the yield on average loans.

The return on average interest earning assets before income taxes for this segment was 2.16 percent for 2021 compared to 1.82 percent for the prior year period.

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Average interest earning assets increased $185.8 million to $5.4 billion for the year ended December 31, 2021 as compared to 2020 primarily due to a $431.3 million increase in average interest bearing deposits with banks, partially offset by a $245.5 million decline in average investment securities.

The increase in average overnight interest bearing deposits with banks

2020 Form 10-K

was mainly due to our higher levels of excess liquidity levels that were maintained in the 2020 period in response to the uncertainties created by the COVID-19 pandemic.

The decrease in average investment securities was mainly driven by principal repayments on securities with slower reinvestment activity caused by the low interest rate environment.

For the year ended December 31, 2020, income before income taxes for the investment management segment decreased $7.4 million to $19.6 million as compared to 2019 mainly due to increases in internal transfer expense and provision for credit losses for debt securities held to maturity totaling $7.1 million and $635 thousand, respectively.

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 slower rate of reinvestment principal repayments in investment securities throughout 2021 due to the low interest rate environment.

For the year ended December 31, 2021, income before income taxes for the investment management segment decreased $7.2 million to $12.4 million as compared to 2020 mainly due to lower net interest income and higher internal transfer and non-interest expenses.

Net interest income decreased $2.3 million for the year ended December 31, 2021 as compared to 2020 due to lower yields on both the taxable and non-taxable investment portfolios, largely offset by the positive effect of the lower cost of funding.

Internal transfer and non-interest expenses increased $3.8 million and $2.5 million, respectively, for the year ended December 31, 2021 as compared to 2020.

The net interest margin for this segment decreased 8 basis points to 1.22 percent during the year ended December 31, 2021 as compared to 2020 due to a 49 basis point decrease in the yield on average investments, partially offset by a 41 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments during 2020 as compared to one year ago was largely driven by repayment and prepayment of higher yield residential mortgage-backed securities, as well as calls and maturities of state and municipal bonds.

Additionally, we have recorded a higher premium amortization expense related to the increased prepayment of mortgage-backed securities and purchased lower yielding investment securities during 2020.

The increase in average overnight investments with banks at low yields also contributed to the decline in the net interest margin for the investment management segment.

The decrease in the yield on average investments during 2021 as compared to one year ago was mainly due to higher levels of excess liquidity held in low yielding overnight investments and lower yielding new investment securities.

The return on average interest earning assets before income taxes for this segment was 0.23 percent for 2021 compared to 0.37 percent for 2020.

2021 Form 10-K

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 the loss on extinguishment of debt and merger expenses.

The pre-tax net loss for the corporate segment totaled $62.2 million for the year ended December 31, 2020 as compared to $17.0 million in 2019.

The negative change of $45.2 million was mainly due to a decrease in non-interest income coupled with an increase in non-interest expense, partially offset by higher internal transfer income.

Non-interest income decreased $79.9 million to $26.7 million for the year ended December 31, 2020 from 2019 primarily due to a $78.5 million net gain on the sale (and leaseback) of several bank locations recognized during 2019.

Non-interest expense increased $16.2 million to $468.7 million for the year ended December 31, 2020 as compared to 2019 lar gely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses, loss on extinguishment of debt, and professional and legal fees.

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net gains and losses on available for sale and held to maturity securities transactions, 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 pre-tax net loss for the corporate segment totaled $62.3 million for the year ended December 31, 2021 was relatively unchanged as compared to $62.2 million in 2020.

The net loss in 2021 was driven by fluctuations in various income and expense components.

Non-interest income increased $10.1 million to $36.8 million for the year ended December 31, 2021 from 2020 due to higher fees and income in several categories, including investment management, service charges, and gains on sales of assets.

Non-interest expense increased $31.8 million to $500.5 million for the year ended December 31, 2021 as compared to 2020 largely due to increases in salaries and employee benefits expenses and professional and legal fees.

See further details in the "Non-Interest Expense" section in this MD&A.

Internal transfer income increased $52.7 million to $402.2 million for the year ended December 31, 2020 as compared to the prior year largely due to general increases related to our growth.

Internal transfer income increased $26.1 million to $428.3 million for the year ended December 31, 2021 as compared to the same period in 2020 largely due to general increases related to our growth.

ASSET/LIABILITY MANAGEMENT

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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 attempts to achieve consistent accounting and economic benefits for financial assets and their related funding sources.

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 predominately focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities.

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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 December 31, 2021.

The model assumes changes in interest rates without any proactive change in the composition or size of the balance sheet by management.

In the model, the forecasted shape of the yield

2020 Form 10-K 50

curve remains static as of December 31, 2020.

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

In the model, the forecasted shape of the yield curve remains static as of December 31, 2021.

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

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

Actual results may differ significantly from those presented in the table above, due to the frequency and timing of changes in interest rates, and changes in spreads between maturity and re-pricing categories.

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.

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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.

Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a

2021 Form 10-K 54

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.

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- 200 (85,949) (7.05)

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 1.93 percent as compared to December 31, 2019 (which projected an increase of 0.81 percent in net interest income over a 12-month period).

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

How ever, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including, but not limited to potential changes in secondary mortgage loan sales, deposit and borrowings strategies, the slope of the yield curve and projected cash flows.

Management believes the interest rate sensitivity remains within an expected tolerance range at December 31, 2021 .

How ever, 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.

2021 Form 10-K

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2.79 36,473 — — — — — 36,473 36,473

Investment securities available for sale

2.26 427,937 301,174 146,051 93,599 93,774 276,938 1,339,473 1,339,473

Investment securities held to maturity

2.25 411,734 417,771 309,740 164,189 145,511 724,066 2,173,011 2,227,612

Trading debt securities 1.89 38,130 — — — — — 38,130 38,130

Available for sale debt securities 2.05 270,800 165,678 128,942 123,965 87,309 352,115 1,128,809 1,128,809

Held to maturity debt securities 2.22 407,645 413,461 290,240 272,391 207,638 1,077,322 2,668,697 2,660,605

Loans held for sale, at fair value

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Liquidity management is carefully performed and 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.

Among other actions, Treasury reviews historical funding requirements, our 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.

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At December 31, 2021, the Bank had various contractual obligations totaling $3.8 billion and $2.4 billion of maturing liabilities due in 12 months or less and greater than 1 year, respectively.

The following table summarized maturities of contractual obligations of the Bank at December 31, 2020:

The following table summarizes maturities of contractual obligations of the Bank at December 31, 2021:

or Less One to

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Long-term borrowings — 640,000 373,000 415,000 1,428,000

Junior subordinated debentures issued to capital trusts — — — 60,827 60,827

Lease obligations 36,402 65,200 59,781 121,723 283,106

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We enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on Bank's commitments to fund the loans, as well as on its portfolio of mortgage loans held for sale.

Commitments to extend credit and standby letters of credit are subject to change since many of these commitments are expected to expire unused or only partially used based upon our historical experience, the total amounts of these commitments do not necessarily reflect future cash requirements.

At December 31, 2021 our off-balance sheet commitments totaled $10.1 billion, inclusive of commitments of $6.7 billion due in 12 months or less.

See Note 16 to the consolidated financial statements for further details.

See Note 15 to t he consolidated financial statements for further details.

Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below.

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

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

Liquid assets totaled approximately $3.5 billion, representing 8.7 percent of earning assets, at December 31, 2021 and $3.1 billion, representing 8.3 percent of earning assets, at December 31, 2020.

Of the $3.5 billion of liquid assets at December 31, 2021, approximately $568.7 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approximately $926.0 million in principal 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.

We anticipate the receipt of approximately $736.0 million in principal from securities in the total investment portfolio over the next 12-month period due to

2021 Form 10-K

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 December 31, 2021) are projected to be approximately $9.4 billion over the next 12-month period.

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

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

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.

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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 December 31, 2020, Valley had $700 million of MULOCs outstanding for this purpose.

At December 31, 2021, Valley had $1.1 billion of MULOCs outst anding for this purpose.

Furthermore, we are able to obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity.

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

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased $55.0 million to $1.1 billion at December 31, 2020 from December 31, 2019 largely due to an increase of $60 million in FHLB advances.

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

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

($ in thousands)

FHLB advances:

Average balance outstanding $ 1,681,844

Maximum outstanding at any month-end during the period 2,510,000

Balance outstanding at end of period 940,000

Weighted average interest rate during the period 1.88 %

Weighted average interest rate at the end of the period 1.85

2020 Form 10-K 54

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased ) decreased $492.2 million to $655.7 million at December 31, 2021 from December 31, 2020 mainly due to a decrease in short-term FHLB advances utilized as a funding source due to deposit growth and excess liquidity in 2021.

Corporation Liquidity.

Valley's long-term cash requirements included obligations under subordinated debt and junior subordinated debentures issued to capital trust totaling $400 million and $60.8 million at December 31, 2020, respectively.

Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts.

As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures.

These cash needs are routinely satisfied by dividends collected from the Bank.

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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.

2021 Form 10-K 58

Investment Securities Portfolio

The primary purpose of the investment portfolio is to provide a source of earnings, be a source of liquidity, and serve as a tool for managing interest rate risk.

The decision to purchase or sell securities is based upon the current assessment of long and short-term economic and financial conditions, including the interest rate environment and other statement of financial condition components.

See additional information under "Interest Rate Sensitivity", "Liquidity" and "Capital Adequacy" sections elsewhere in this MD&A.

As of December 31, 2020, our investment portfolio was comprised of equity securities (mainly consisting of a money market mutual fund and investments in public and private Community Reinvestment Act funds), U.S.

As of December 31, 2021, our investment securities portfolio consisted of equity and debt securities, with the debt securities classified as either trading, available for sale or held to maturity.

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 and privately held entities.

Our trading debt securities portfolio wholly consists of investment grade municipal bonds .

Held to maturity and available for sale debt securities portfolios which comprise the majority of the securities we own include U.S.

Treasury securities, U.S.

government agency securities, taxable and tax-exempt issues 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 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.

2020 Form 10-K

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.

The primary purpose of our held to maturity and available for sale investment portfolios is to provide a source of earnings and liquidity, as well as serve as a tool for managing interest rate risk.

See additional information under "Interest Rate Sensitivity," "Liquidity and Cash Requirements" and "Capital Adequacy" sections elsewhere in this MD&A.

Investment securities at December 31, 2021 and 2020 were as follows:

2020 2019 2018

(in thousands)

Equity securities $ 36,473 $ 29,378

Trading debt securities 38,130 —

Available for sale debt securities

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Total investment securities held to maturity (amortized cost) $ 2,668,697 $ 2,173,011

Allowance for credit losses 1,165 1,428

Total investment securities held to maturity, net of allowance for credit losses 2,667,532 2,171,583

Total investment securities $ 3,870,944 $ 3,540,434

As of December 31, 2020, total investments decreased $402.4 million or 10.2 percent as compared to 2019 largely due to (i) a combined net decrease of $234.6 million in residential mortgage-backed securities within both the held to maturity and available for sale categories mainly driven by a higher level of prepayments during 2020, (ii) a combined $120.5 million decrease in obligations of states and state agencies within both the held to maturity and available for sale categories mainly due to normal maturities, sales, calls, and paydowns, and (iii) a $70.2 million decrease in held to maturity U.S.

Treasury securities.

At December 31, 2020, we had $1.6 billion and $1.1 billion of residential mortgage-backed securities classified as held to maturity and available for sale, respectively.

Approximately 66 percent and 56 percent of these residential mortgage-backed securities, respectively, were issued and guaranteed by Ginnie Mae.

The remainder of our outstanding residential mortgage-backed security balances at December 31, 2020 were issued by either Fannie Mae or Freddie Mac.

During the year ended 2021, we purchased approximately $1.5 million of residential mortgage backed securities mainly within the held to maturity portfolio.

The purchases were largely to reinvest continued repayments and prepayments within both

2021 Form 10-K

The following table presents the remaining contractual maturities (unadjusted for any expected prepayments) with the corresponding weighted-average yields of held to maturity and available for sale debt securities at December 31, 2020:

the available for sale and held to maturity portfolios, as well as utilize excess liquidity from our operations.

The decrease in states and municipal obligations was due to a combination of several large call provisions exercised by the securities issuers, principal paydowns and maturities.

Treasury securities in our available for sale portfolio at December 31, 2020 were sold during 2021 and resulted in a gain of $825 thousand for the year ended December 31, 2021.

At December 31, 2021, we had $2.2 billion and $904.5 million of residential mortgage-backed securities classified as held to maturity and available for sale, respectively.

Approximately 45 percent and 47 percent, respectively, were issued and guaranteed by Fannie Mae, and approximately 38 percent and 42 percent of these residential mortgage-backed securities, respectively, were issued and guaranteed by Ginnie Mae.

The remainder of our outstanding residential mortgage-backed security balances at December 31, 2021 were issued by Freddie Mac.

The following table presents the weighted-average yields, calculated on a yield-to-maturity basis, on the remaining contractual maturities (unadjusted for expected prepayments) of held to maturity debt securities at December 31, 2021:

0-1 year 1-5 years 5-10 years Over 10 years Total

($ in thousands)

Available for sale debt securities

Treasury securities $ — — % $ 51,393 2.01 % $ — — % $ — — % $ 51,393 2.01 %

government agency securities 28 3.08 2,030 2.79 — 24,099 2.72 26,157 2.73

Obligations of states and political subdivisions:

Obligations of states and state agencies

1,245 2.46 4,606 4.44 12,716 6.97 23,232 4.12 41,799 4.97

Municipal bonds 13,282 0.99 7,379 3.17 9,732 5.21 7,758 4.59 38,151 3.22

Total obligations of states and political subdivisions

14,527 1.12 11,985 3.66 22,448 6.21 30,990 4.23 79,950 4.14

Residential mortgage-backed securities (4)

1,335 0.18 17,236 2.00 90,303 2.50 981,148 1.94 1,090,022 1.99

Corporate and other debt securities — — 19,771 3.41 72,180 4.66 — 91,951 4.39

Total $ 15,890 1.04 % $ 102,415 2.49 % $ 184,931 3.79 % $ 1,036,237 2.03 % $ 1,339,473 2.29 %

Held to maturity debt securities

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Obligations of states and state agencies 2.97 4.50 4.31 3.89 4.09

3,035 3.37 43,449 4.49 105,985 5.19 110,293 3.65 262,762 4.41

Municipal bonds 2.63 3.54 4.35 4.23 3.67

Total obligations of states and political subdivisions 2.66 3.83 4.33 4.04 3.85

26,175 3.34 140,516 3.83 136,506 4.92 167,062 3.85 470,259 4.13

Residential mortgage-backed securities (2)

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Total 2.65 % 3.57 % 4.08 % 1.91 % 2.11 %

(1) Held to maturity debt securities amounts are presented at amortized costs, stated at cost less principal reductions, if any, and adjusted for accretion of discounts and amortization of premiums.

Available for sale amounts are presented at fair value.

(2) Average yields are calculated on a yield-to-maturity basis.

(1) Average yields on obligations of states and political subdivisions are generally tax-exempt and calculated on a tax-equivalent basis using a statutory federal income tax rate of 21 percent.

(4) Residential mortgage-backed securities are shown using stated final maturity.

(2) Residential mortgage-backed securities yields are shown using stated final maturity dates.

The residential mortgage-backed securities portfolio is a significant source of our liquidity through the monthly cash flow of principal and interest.

Mortgage-backed securities, like all securities, are sensitive to change in the interest rate environment, increasing and decreasing in value as interest rates fall and rise.

Mortgage-backed securities, like all securities, are sensitive to changes in the interest rate environment, increasing and decreasing in value as interest rates fall and rise.

As interest rates fall, the potential increase in prepayments can reduce the yield on the mortgage-backed securities portfolio, and reinvestment of the proceeds will be at lower yields.

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Allowance for Credit Losses and Impairment Analysis

Effective January 1, 2020, Valley adopted ASU No.

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

Measurement of Credit Losses on Financial Instruments", which requires an estimate of lifetime expected credit losses for held to maturity debt securities established as an allowance for credit losses and replaces the other-than-temporarily impaired model for available for sale debt securities.

Available for sale debt securities.

The new guidance in ASC Topic 326-30 requires credit losses to be presented as an allowance, rather than as a write-down if management does not intend to sell an available for sale debt security before recovery of its amortized cost basis.

Available for sale debt securities in unrealized loss positions are evaluated for impairment related to

2020 Form 10-K

credit losses at least quarterly.

The guidance in ASC Topic 326-30 requires credit losses to be presented as an allowance, rather than as a write-down if management does not intend to sell an available for sale debt security before recovery of its amortized cost basis.

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.

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

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

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the year ended December 31, 2020 and, as a result, there was no allowance for credit losses for available for sale debt securities at December 31, 2020.

During 2019, Valley recognized a $2.9 million impairment charge under the other-than-temporary impairment model on one special revenue bond classified as available for sale included in obligations of states and state agencies category.

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

There was no impairment recognized in earnings during the year ended December 31, 2018.

We have evalua ted all available for sale debt securities that are in an unrealized loss position as of December 31, 2021 and December 31, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the years ended December 31, 2021 and 2020 and, as a result, there was no allowance for credit losses for available for sale debt

2021 Form 10-K 60

securities at December 31, 2021 and December 31, 2020.

Held to maturity debt securities.

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

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

The provision totaled $635 thousand for the year ended December 31, 2020 driven mainly by our negative economic forecast incorporated within the allowance model since the onset of the COVID-19 pandemic.

There were no net charge-offs of debt securities during 2020.

Held to maturity debt securities were carried net of an all owance for credit losses totaling $1.2 million and $1.4 million at December 31, 2021 and 2020, respectively.

We recorded a net credit of $263 thousand for the year ended December 31, 2021 and a provision of $635 thousand for the year ended December 31, 2020.

The net credit to provision for credit losses in 2021 was mostly a result of our improved economic forecast component of the CECL model at December 31, 2021 as compared to December 31, 2020.

The provision in 2020 reflected the negative economic forecast incorporated within the allowance model from the onset of the COVID-19 pandemic in 2020 (which anticipated elevated levels of defaults, particularly on corporate bonds).

There were no net charge-offs of held to maturity debt securities during 2021 and 2020.

Investment grades .

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

2020 Form 10-K 58

The following table presents the held to maturity and available for sale debt investment securities portfolios by investment grades at December 31, 2021.

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Not rated 75,022 2,310 (224) 77,108

Total debt securities available for sale $ 1,293,506 $ 46,886 $ (919) $ 1,339,473

Total $ 1,116,091 $ 19,252 $ (6,534) $ 1,128,809

Held to maturity investment grades:*

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Not rated 147,934 187 (5,482) 142,639

Total debt securities held to maturity $ 2,173,011 $ 62,326 $ (7,725) $ 2,227,612

Total $ 2,668,697 $ 25,980 $ (34,072) $ 2,660,605

* Rated using external rating agencies.

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

The debt securities held to maturity portfolio included $143.0 million in investments not rated by the rating agencies with aggregate unrealized losses of $7.4 million at December 31, 2020 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

See Note 4 to the consolidated financial statements for additional information regarding our investment securities portfolio.

2021 Form 10-K

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 debt securities held to maturity portfolio included $147.9 million in investments not rated by the rating agencies with aggregate unrealized losses of $5.5 million at December 31, 2021 mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

See Note 4 to the consolidated financial statements for additional information regarding our investment securities portfolio.

Loan Portfolio

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At December 31,

2020 2019 2018 2017 2016

($ in thousands)

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Total 100 % 100 %

* Includes net unearned discount and deferred loan fees of $95.8 million at December 31, 2020, and net unearned premiums and deferred loan fees of $12.6 million, $21.5 million, $22.2 million, and $15.3 million at December 31, 2019, 2018, 2017, and 2016, respectively.

Net unearned discounts and deferred loans fees at December 31, 2020 include the non-credit discount on purchased credit deteriorated (PCD) loans and $43.2 million of net unearned fees related to PPP loans.

Total loans increased by $2.5 billion, or 8.5 percent to $32.2 billion at December 31, 2020 from December 31, 2019 mainly due to approximately $2.2 billion of SBA PPP loans within commercial and industrial loans, as well as continued annual growth in our commercial real estate loan portfolio.

Upon our adoption of the CECL standard on January 1, 2020, we recorded a $61.6 million gross-up for PCD loans (mainly commercial and industrial and commercial real estate loans) that increased the amortized cost basis of loans with a corresponding increase to the allowance for credit losses.

* Includes net unearned discount and deferred loan fees of $78.5 million and $95.8 million at December 31, 2021 and 2020, respectively.

Net unearned discounts and deferred loans fees at December 31, 2021 include the non-credit discount on purchased credit deteriorated (PCD) loans, and $12.1 million and $43.2 million of net unearned fees related to PPP loans at December 31, 2021 and 2020, respectively.

Total loans increased by $1.9 billion, or 6.0 percent to $34.2 billion at December 31, 2021 from December 31, 2020 largely due to a combination of strong organic loan growth and $915 million in loans acquired from Westchester, partially offset by a $1.7 billion decline in PPP loans.

During 2021, Valley also originated $1.0 billion of residential mortgage loans for sale rather than investment.

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See additional information regarding our residential mortgage loan activities below.

Commercial and industrial loans totaled $6.9 billion at December 31, 2020 and increased $2.0 billion from December 31, 2019 mainly due to PPP loan originations.

Excluding the PPP loans, commercial and industrial loans decreas ed $116.4 million largely due to our selective underwriting and tempered loan demand caused by the COVID-19 pandemic, particularly in the New Jersey and New York markets during the fourth quarter 2020, and our existing sm all to middle market lending relationships becoming more strategic with new capital expenditures due to the economic uncertainty.

Commercial and industrial loans included PPP loans of approximately $2.2 billion, net of unearned net deferred fees to taling $43.2 million at December 31, 2020.

Valley expects the majority of these borrowers to qualify for loan forgiveness under the guidelines of the SBA program.

During 2021, PPP loan forgiveness and the unknown full impact of the COVID-19 pandemic could likely weigh on Valley's ability to grow the commercial and industrial loan portfolio.

Commercial real estate loans (excluding construction loans) increased $728.3 million to $16.7 billion at December 31, 2020 from December 31, 2019.

The increase was mainly due to strong loan volumes within our loan commitment pipeline, including many pre-existing, longstanding borrowers, an active refinance market driven by low interest rates as well as some slower repayment activity caused by the COVID-19 pandemic.

Construction loans totaled $1.7 billion at December 31, 2020 and increased $98.8 million from December 31, 2019, mainly driven by loan advances on new and existing construction

Commercial and industrial loans decreased $1.0 billion to $5.8 billion at December 31, 2021 from December 31, 2020 due to $1.7 billion of PPP loans that were forgiven by the SBA during 2021 .

Non- PPP commercial and industrial loans increas ed $702.0 million largely due, in part, to expansion of our commercial lending team during 2021, solid demand in certain customer segments, including healthcare lending, and approximately $293 million of acquired loans from Westchester.

Valley expects the vast majority of the remaining $436 million of PPP loans at December 31, 2021 to qualify for forgiveness under the guidelines of the SBA program, which is expected to negatively impact our ability to organically grow this segment of the portfolio in the early stages of 2022.

2021 Form 10-K 62

projects, partially offset by the run-off of completed existing projects, and, to a lesser extent, migration of such completed projects to permanent financing during 2020.

Construction demand in our Florida markets, which have mostly reopened during the current COVID-19 pandemic, remains robust as compared to the Northeast and we intend to be strategically competitive for the strongest borrowers and projects in that market.

Residential mortgage loans totaled $4.2 billion at December 31, 2020 and decreased by $193.4 million from December 31, 2019 largely due to loan principal repayment and refinance activity and higher levels of residential mortgage loans originated for sale due to current interest rate risk management strategies.

Our new and refinanced residential mortgage loan originations increased 22.3 percent to $1.9 billion for the year ended December 31, 2020 as compared to $1.6 billion in 2019.

Of the $1.9 billion in total originations, $367 million represented Florida residential mortgage loans.

During 2020, we sold $1.0 billion of residential mortgages as compared to $934.5 million of residential mortgage loans sold during 2019, including $30 million and $436 million of pre-existing loans sold from our residential mortgage loan portfolio, respectively.

Commercial real estate loans (excluding construction loans) increased $2.2 billion to $18.9 billion at December 31, 2021 from December 31, 2020 reflecting solid organic growth mainly due to demand for non-owner occupied loans across our geographic footprint, as well as $579 million of acquired loans from Westchester.

Our organic approach to growth is a balance of loan production through expansion of lending with our existing clients and establishing new relationships with key players in our marketplaces.

During 2021, our commercial real estate production exhibited particular strength in loans secured by multi-family dwellings, warehouses and healthcare facilities.

During 2021, we also modestly expanded our commercial lending activities beyond our primary markets into other select areas of Pennsylvania, Georgia and Tennessee.

We believe this expansion, and the expansion which is expected to result from our pending acquisition of Bank Leumi USA, will provide both growth and further diversification of our commercial real estate and other commercial lending portfolios.

Construction loans totaled $1.9 billion at December 31, 2021 and increased $108.8 million from December 31, 2020, mainly driven by demand for commercial and residential construction projects.

The Westchester acquisition contributed only $22 million of acquired loans to the construction loan portfolio during December 2021.

The growth in new construction loans was partially offset by the run-off of completed existing projects, and, to a lesser extent, migration of such completed projects to permanent financing during 2021.

Construction demand in our Florida markets was particularly robust in 2021 and partly due to a faster paced reopening during the COVID-19 pandemic.

We continue to be strategically competitive for the strongest borrowers and projects in all our primary markets.

Residential mortgage loans totaled $4.5 billion at December 31, 2021 and increased by $361.3 million from December 31, 2020 largely due to a 32 percent increase in origination of new and refinanced residential mortgage loans totaling $2.6 billion for the year ended December 31, 2021 as compared to $1.9 billion in 2020.

The Westchester acquisition contributed only $30 million of acquired loans to the residential mortgage loan portfolio during December 2021.

Florida originations totaled approximately $681 million and represented 26.6 percent of total originations during 2021.

During 2021, we sold $1.2 billion of residential mortgages as compared to $1.0 billion of residential mortgage loans sold during 2020 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during 2022 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.

We retain mortgage originations based on credit criteria and loan to value levels, the composition of our interest earning assets and interest bearing liabilities and our ability to manage the interest rate risk associated with certain levels of these instruments.

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Purchased residential mortgage loans are generally selected using Valley’s normal underwriting criteria at the time of purchase and are sometimes partially or fully guaranteed by third parties or insured by government agencies such as the Federal Housing Administration.

Valley purchased approximately $24.3 million and $35 million of 1-4 family loans, qualifying for CRA purposes during 2020 and 2019, respectively.

We may continue to sell a large portion of our new fixed rate residential mortgage loan originations during 2021 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.

Consumer loans totaled $2.7 billion at December 31, 2020 and decreased $151.5 million from December 31, 2019 mainly due to decreases in automobile and home equity loan portfolios.

Automobile loans decreased $95.7 million or 6.6 percent to $1.4 billion at December 31, 2020 from December 31, 2019 as our new indirect auto loan volumes did not keep pace with the normal portfolio repayment and refinance activity during 2020.

New loan originations have declined since the beginning of the second quarter 2020 mostly due to a combination of tightening our underwriting policies and impact of the COVID-19 pandemic.

During 2020, our Florida dealership network con tributed $84.6 million in auto loan originations, representing approximately 17 percent of Valley's total new auto loan production for 2020 as compared to $169 million, or 23 percent, of total originations in 2019.

Valley purchased approximately $58.3 million a nd $24.3 million of 1-4 family loans, qualifying for CRA purposes during 2021 and 2020, respectively.

Consumer loans increased $270.1 million to $3.0 billion at December 31, 2021 from December 31, 2020 mainly due to higher volumes of automobile loans and personal lines of credit.

The Westchester acquisition contributed only $5 million of acquired loans to the consumer loan portfolio during December 2021.

Automobile loans increased $214.1 million or 15.8 percent to $1.6 billion at December 31, 2021 from December 31, 2020 driven by strong consumer demand for new and used vehicles .

We originated $872 million in auto loans through our dealership network during 2021 as compared to $492 million in 2020 .

Of the total originations, our Florida dealership network con tributed approximately 16 percent and 17 percent of Valley's total new auto loan production for 2021 and 2020, respectively.

Other consumer loans increased $86.8 million to $1.0 billion at December 31, 2021 as compared to 2020 mainly due to both higher usage and demand within our collateralized personal lines of credit portfolio.

Home equity loans decreased $30.8 million in 2021 from $431.6 million at December 31, 2020.

New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest and outpaced by repayment activity, despite the favorable low interest rate environment.

Other consumer loans totaled $913.3 million at December 31, 2020 and remained relatively unchanged as compared to 2019 mainly due to both tempered usage and demand within our collateralized personal lines of credit portfolio .

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

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

For 2021, we remain cautiously optimistic about overall loan growth, exclusive of PPP loans.

In the early stages of the first quarter 2021, our loan origination pipelines remain robust and organic growth opportunities, especially in Florida, appear to have returned to closer to pre-pandemic levels.

However, there can be no assurance that those positive trends will continue, or balances will not decline from December 31, 2020 given the potential for unforeseen changes in consumer confidence, the economy, and other market conditions.

In addition, while difficult to accurately predict, we believe that many of our SBA PPP loans will become eligible for forgiveness in 2021 in accordance with the rules of this program and is highly likely to result in a large reduction in these loan balances.

For 2022, we anticipate strong organic non-PPP loan growth of between 7 to 9 percent.

In the early stages of the first quarter 2022, we are encouraged that our loan origination pipelines remain robust and overall non-PPP loan growth should remain well-diversified across our markets and most loan categories.

However, there can be no assurance that those positive trends will continue, or balances will not decline from December 31, 2021 given the uncertain economic environment.

2021 Form 10-K

The following table reflects the contractual maturity distribution of the commercial and industrial and construction loans within our loan portfolio as of December 31, 2020:

Five Years Over Five

The following table presents the contractual maturity distribution of loans by category at December 31, 2021:

1 Year or Less 1 to 5 Years 5 to 15 Years Over 15 Years Total

(in thousands)

Commercial and industrial—fixed-rate $ 1,884,762 $ 629,218 $ 1,030,907 $ 3,544,887

Commercial and industrial—adjustable-rate 626,965 1,591,237 1,098,619 3,316,821

Construction—fixed-rate 217,919 147,489 86,750 452,158

Construction—adjustable-rate 839,709 348,675 105,283 1,293,667

$ 3,569,355 $ 2,716,619 $ 2,321,559 $ 8,607,533

Commercial and industrial $ 1,213,731 $ 2,489,051 $ 1,010,419 $ 1,134,350 $ 5,847,551

Commercial real estate 1,352,142 5,483,620 9,259,107 2,840,617 18,935,486

Construction 505,032 887,536 279,283 182,729 1,854,580

Residential mortgage 151,400 166,240 495,664 3,731,760 4,545,064

Consumer 31,022 948,276 1,965,302 26,376 2,970,976

Total loans $ 3,253,327 $ 9,974,723 $ 13,009,775 $ 7,915,832 $ 34,153,657

We may renew loans at maturity when requested by a customer.

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A rollover of the loan at maturity may require a principal reduction or other modified terms.

The following table presents the contractual maturities after one year for fixed and adjustable rate loans within each loan category at December 31, 2021:

Loans Maturing After One Year

Fixed Rate Adjustable Rate Total

(in thousands)

Commercial and industrial $ 2,624,766 $ 2,009,054 $ 4,633,820

Commercial real estate 5,769,391 11,813,953 17,583,344

Construction 307,672 1,041,876 1,349,548

Residential mortgage 3,520,267 873,397 4,393,664

Consumer 1,616,023 1,323,931 2,939,954

Total loans $ 13,838,119 $ 17,062,211 $ 30,900,330

Non-performing Assets

Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded those loans which were classified as purchased credit impaired (PCI) loans.

Under previous U.S.

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

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

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

Non-performing assets (NPAs) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which consist of automobiles and taxi medallions) at December 31, 2021.

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

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

Non-performing assets totaling $194.6 million at December 31, 2020 increased $90.1 million, or 86.3 percent, from December 31, 2019 (as shown in the table below) mainly due to higher non-accrual loans in most loan categories, including approximately $45 million of non-accrual PCD loans (largely in the commercial loan categories) reported at December 31, 2020.

The increase in non-accruals within non-PCD loans was mainly due to the negative impact of the COVID-19 pandemic.

NPAs as a percentage of total loans and NPAs totaled 0.60 percent and 0.35 percent at December 31, 2020 and 2019, respectively.

We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past five years, despite the uptick in 2020 related to non-accrual PCD loans (not required to be reported as non-performing in prior periods) and borrowers impacted by COVID-19.

Non-performing assets totaling $245.4 million at December 31, 2021 increased $50.8 million, or 26.1 percent, from December 31, 2020 (as shown in the table below) mainly due to higher non-accrual loans in the commercial real estate, construction and residential mortgage categories, partially offset by a decrease in the commercial and industrial loan category and lower OREO bala nces.

NPA s as a percentage of total loans and NPAs totaled 0.71 percent and 0.60 percent at December 31, 2021 and 2020, respectively.

We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past two years, despite the uptick in non-accrual borrowers mainly caused by the 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.

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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 economic recovery from the COVID -19 pandemic recession, lack of, or inadequate additional federal stimulus and a number of our borrowers that are performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at December 31, 2020.

During 2021, our overall credit trends remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the continuing challenges of the COVID-19 pandemic.

However, management cannot provide assurance that the non-performing assets will not increase substantially from the levels reported at December 31, 2021 due to the continuing economic uncertainty and potentially for credit deterioration.

In addition, a few borrowers are still performing under forbearance agreements at December 31, 2021 as discussed under the "Loan Forbearance" section below.

2021 Form 10-K 64

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At December 31,

2020 2019 2018 2017 2016

($ in thousands)

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Commercial real estate — 1,326

Construction — 1,343 — 18,845 —

Residential mortgage 3,314 10,351

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Commercial real estate 32 993

Construction — — — — 1,106

Residential mortgage 677 3,170

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Total accruing past due and non-accrual loans as a % of loans

0.88 0.54 0.62 0.70 0.55

Allowance for loan losses as a % of non-accrual loans

149.53 183.64

* Past due loans and non-accrual loans presented at December 31, 2019, 2018, 2017, and 2016, respectively, exclude PCI loans.

Prior to January 1, 2020, PCI loans were accounted for on a pool basis under U.S.

GAAP and were not subject to delinquency classification.

Loans past due 30 to 59 days decreased $28.8 million at December 31, 2021 as compared to December 31, 2020 partially due to two commercial real estate loans totaling $20.7 million reported in this delinquency category on December 31, 2020 that migrated to non-accrual status during 2021.

The residential mortgage loan and consumer loan delinquencies within this category decreased by $6.7 million and $3.4 million, respectively, from December 31, 2020 mainly due to improved performance and the results of our 2021 collection efforts.

2021 Form 10-K

Loans past due 30 to 59 days increased $23.1 million to $69.7 million at December 31, 2020 as compared to $46.6 million at December 31, 2019 partially due to a $12.3 million matured commercial real estate loan and two commercial real estate loan relationships with a combined total of $16.8 million reported in this delinquency category at December 31, 2020.

While one of these loans is internally classified as substandard, management believes it is well secured and in the process of collection.

Loans past due 60 to 89 days increased $1.4 million to $15.8 million at December 31, 2020 as compared to December 31, 2019 mostly due to higher residential mortgage loan delinquencies caused by a few larger borrowers.

Loans 90 days or more past due and still accruing increased $6.2 million to $13.5 million at December 31, 2020 as compared to December 31, 2019 mainly due to higher commercial and industrial loan delinquencies.

Residential mortgage loan delinquencies increased $1.1 million as compared to 2019 primarily due to one large loan included in this category at December 31, 2020.

Loans past due 60 to 89 days decreased $3.5 million to $12.2 million at December 31, 2021 as compared to December 31, 2020 mostly due to lower residential mortgage loan delinquencies, partially offset by an increase in commercial and industrial loan delinquencies in this category.

Residential loans past due 60 to 89 days decreased by $7.0 million as compared to December 31, 2020 due, in part, to loans that migrated to non-accrual status.

Loans 90 days or more past due and still accruing decreased $10.8 million to $2.8 million at December 31, 2021 as compared to December 31, 2020 partly due to premium finance loans (related to two insurance carriers) totaling $6.1 million in the commercial and industrial category reclassified to non-accrual status in 2021.

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

Non-accrual loans increased $54.9 million to $240.2 million at December 31, 2021 as compared to December 31, 2020.

Commercial and industrial non-accrual loans increased $38.1 million mainly due to the reclassification of $34.2 million of previously accruing taxi medallion loans to non-accrual status during the first quarter of 2020 and $12.7 million of non-accrual PCD loans included at December 31, 2020.

The increase was partially attributable to three loans totaling $31.0 million and one loan totaling $10.3 million that migrated to non-accrual status from the 30-59 days and 60 to 89 days past due categories during 2021.

These non-accrual loans totaling $41.1 million have allocated reserv es of $2.0 millio n within our allowance for loan losses at December 31, 2021.

In addition, non-accrual construction loans increased $17.6 million at December 31, 2021 as compared to December 31, 2020 and related to one construction borrower relationship with allocated reserves of $1.4 million at December 31, 2021.

Partially offsetting these increases, non-accrual commercial and industrial loans decreased $6.8 million mostly due to full and partial charge-offs of certain taxi medallion loans during 2021.

See further discussion of our taxi medallion loan portfolio below.

The $37.9 million increase in non-accrual commercial real estate loans was largely due to six loan relationships totaling $20.8 million and $22.1 of non-accrual PCD included at December 31, 2020.

Although the timing of collection is uncertain, management believes that most of the non-accrual loans at December 31, 2021, are well secured and largely collectible based on, in part, our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable.

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

During 2020, we continued to closely monitor the performance of our New York City and Chicago taxi medallion loans totaling $90.6 million and $6.9 million, respectively, within the commercial and industrial loan portfolio at December 31, 2020.

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, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020.

At December 31, 2020, non-accrual taxi medallion loans totaling $97.5 million had related reserves of $66.4 million, or 68.1 percent of such loans, within the allowance for loan losses as compared to $63.3 million with related reserve s of $25.0 million December 31, 2019.

Non-accrual taxi medallion loans .

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

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

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

For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.5 million within the allowance for loan losses based upon taxi medallion loan balances at December 31, 2020.

OREO (which consisted of 25 commercial and residential properties) decreased to $5.1 million at December 31, 2020 as compared to $9.4 million at December 31, 2019.

During 2020, we transferred 14 properties totaling $4.0 million and sold 19 properties for total proceeds of $9.0 million.

The sales of OREO properties resulted in net gains of $674 thousand for the year ended December 31, 2020 as compared to net gains of $1.3 million for the year ended December 31, 2019 .

However, the severe decline in the market valuation of taxi medallions over the last several years has adversely affected the estimated fair valuation of these loans.

During 2021, we closely monitored the performance of our New York City and Chicago taxi medallion loans.

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 remain on non-accrual status at December 31, 2021.

At December 31, 2021, taxi medallion loans totaling $86.0 million had related reserves of $58.5 million, or 68.0 percent of such loans, within the allowance for loan losses as compared to $97.5 million of loans with related reserves of $66.4 million December 31, 2020.

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 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 $5.7 million within the allowance for loan losses based upon the taxi medallion loan balances at December 31, 2021.

OREO (which consisted mostly of commercial properties) decreased to $2.3 million at December 31, 2021 as compared to $5.1 million at December 31, 2020.

OREO sales resulted in total proceeds of approximately $2.9 million and net losses of $152 thousand for the year ended December 31, 2021 as compared to total proceeds of $9.0 million and net gains of $674 thousand for the year ended December 31, 2020.

See Notes 1 and 3 to the consolidated financial statements for additional information regarding OREO and other repossessed assets, including our foreclosed asset activity.

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

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) decreased $15.6 million to $57.4 million at December 31, 2020 as compared to $73.0 million at December 31, 2019 mainly due to paydowns of several commercial and industrial loans during 2020.

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $14.0 million to $71.3 million at December 31, 2021 as compared to $57.4 million at December 31, 2020.

Performing TDRs consisted of 98 loans and 87 loans (primarily in the commercial and industrial loan and commercial real estate portfolios) at December 31, 2021 and 2020, respectively.

On an aggregate basis, the $57.4 million in performing TDRs at December 31, 2020 had a modified weighted

2020 Form 10-K 64

average interest rate of approximately 4.68 percent as compared to a pre-modification weighted average interest rate of 4.94 percent .

On an aggregate basis, the $71.3 million in performing TDRs at December 31, 2021 had a modified weighted average interest rate of approximately 4.19 percent as compared to a pre-modification weighted average interest rate of 4.29 percent .

See Note 5 to the consolidated financial statements for additional disclosures regarding our TDRs.

Loan Forbearance.

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

Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days.

Any extensions beyond this period were done in accordance with applicable regulatory guidance.

The following table presents the outstanding loan b alances and number of loans in an active payment deferral period under short-term modifications as of December 31, 2020:

December 31, 2020

Amount Number of loans

($ in thousands)

Commercial and industrial $ 12,835 53

Commercial real estate 299,874 55

Residential mortgage 38,615 95

Consumer 9,937 407

Total $ 361,261 610

During the fourth quarter 2020, active loan forbearances decreased from approximately 1,400 loans with total outstanding balances of $1.1 billion remaining as of September 30, 2020.

Higher Risk COVID-19 Credit Exposures.

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

The following table presents non-PPP loans and active deferrals in the COVID-19 e xposure industries at December 31, 2020:

December 31, 2020

Non-PPP loan balance % of non-PPP loans Active deferrals % of total industry loans

($ in thousands)

Doctors and surgery $ 510,772 1.7 % $ 4,609 0.9 %

Retail trade 596,015 2.0 15,974 2.7

Hotels and hospitality 504,571 1.7 — —

Restaurants and food service 328,838 1.1 25,973 7.9

Entertainment and recreation 215,695 0.7 3,564 1.7

Total $ 2,155,891 7.2 % $ 50,120 2.3 %

As of December 31, 2020, Valley had approx imately $2.2 billion, or 7.2 percent of total loans (excluding PPP loans), that were made to borrowers in these industries.

Active deferrals in this category totaled approximately $50 million, or 2.3 percent of total loans in COVID-19 exposed industries at December 31, 2020, as compared to $158 million, or 7.1 percent of total loans at September 30, 2020.

Approximately 90 percent of total loan balances within the higher risk industries were pass-rated under Valley’s internal risk rating system as of December 31, 2020.

Potential Problem Loans

Although we believe that substantially all risk elements at December 31, 2020 have been disclosed in the categories presented above, it is possible that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans.

As part of the analysis of the loan portfolio, management determined that there were approximately $258.8 million and $91.7 million in potential problem loans at December 31, 2020 and 2019, respectively.

The increase from 2019 was mainly due to many of the risk rating downgrades resulting from the adverse impacts of the COVID-19 pandemic had on borrowers, as well as inclusion of PCD loans, which were previously excluded and were accounted for under ASC Subtopic 310-30.

Potential problem loans were not classified as non-accrual loans in the non-performing asset table above.

Potential problem loans are defined as performing loans for which management has concerns about the ability of such borrowers to comply with the loan repayment terms and which may result in a non-performing loan.

Our decision to include performing loans in potential problem loans does not necessarily mean that management expects losses to occur, but rather that management recognizes potential problem loans carry a higher probability of default.

At December 31, 2020, the potential problem loans consisted of various types of performing commercial loan

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

Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley could extend for an additional 90 days.

Any extensions beyond this period were provided in accordance with applicable regulatory guidance.

Und er the applicable guidance, none of these loans were classified

2021 Form 10-K 66

credits, including industries highlighted in the "Higher Risk COVID-19 Credit Exposures" table above, that are internally risk rated substandard because the loans exhibited well-defined weaknesses and required additional attention by management.

See further discussion regarding our internal loan classification system at Note 5 to the consolidated financial statements.

There can be no assurance that Valley has identified all of its potential problem loans at December 31, 2020.

Asset Quality and Risk Elements

Lending is one of the most important functions performed by Valley and, by its very nature, lending is also the most complicated, risky and profitable part of our business.

as TDRs at December 31, 2021 and December 31, 2020 .

Vall ey had approximately $28 million of outstanding loans remaining in their payment deferral periods under short-term modifications representing approximately 0.1 percent of our total loan portfolio at December 31, 2021 as compared to approximately $361 million, or 1.1 percent of total loans at December 31, 2020.

Asset Concentration and Risk Elements

Most of our lendin g is in northern and central New Jersey, New York City , Long Island, Westchester County, New York, Florida and Alabama, except for smaller auto and residential mortgage loan portfolios derived from other neighborin g states of New Jersey.

As part of our business strategy, we have expanded commercial real estate lending to new customers in a few targeted states beyond our geographic footprint.

In addition to our primary markets, automobile loans are mostly originated in several other contiguous states.

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.

Due to the level of our underwriting standards applied to all loans, management believes the out of market loans generally present no more risk than those made within the market.

However, each loan or group of loans made outside of our primary markets poses different geographic risks based upon the economy of that particular region.

For our commercial loan portfolio, comprised of commercial and industrial loans, commercial real estate loans, and construction loans, a separate credit department is responsible for risk assessment and periodically evaluating overall creditworthiness of a borrower.

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Home equity and automobile loans are secured loans and are made based on an evaluation of the collateral and the borrower’s cr editworthiness.

In addition to our primary markets, automobile loans are mostly originated in several other contiguous states.

Due to the level of our underwriting standards applied to all loans, management believes the out of market loans generally present no more risk than those made within the market.

However, each loan or group of loans made outside of our primary markets poses different geographic risks based upon the economy of that particular region.

Management realizes that some degree of risk must be expected in the normal course of lending activities.

Allowances are maintained to absorb such lifetime expected credit losses inherent in the portfolio.

See the "Loan Portfolio Risk Elements and Credit Risk Management" section in Note 4 to the consolidated financial statements for additional information.

Allowance for Credit Losses

The allowance for credit losses (ACL) includes the allowance for loan losses and the reserve for unfunded commercial letters of credit.

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

Periods prior to 2020 have been reported in accordance with previously applicable GAAP, which followed the incurred credit losses methodology.

See the table below and Notes 1 and 5 to the consolidated financial statements for further details on the impact of the Day 1 CECL adoption and the incurred credit losses methodology.

The allowance for credit losses (ACL) includes the allowance for loan losses and the reserve for unfunded credit commitments.

Under CECL, our methodology to establish the allowance for loan losses has two basic components:

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

Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit.

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.

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(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

These adjustments are

2021 Form 10-K

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.

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

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

At December 31, 2020, Valley maintained a higher combined weighting on the S-3 and S-4 alternative downside scenarios as compared to the Moody's Baseline scenario to reflect downside risk factors, including, but not limited to the unknown effect of the latest federal economic stimulus to promote a strong economic recovery, loan customers with payment deferrals, increasing COVID-19 infection rates in many locales and the efficacy of COVID-19 vaccines and the timing of the vaccine distribution across the U.S.

Each of these risk factors may affect the performance of Valley’s loan portfolio over time.

The S-4 forecast is the most severe economic scenario and included the following assumptions at December 31, 2020 :

• The COVID-19 pandemic will persist and meaningfully impact the economy;

• The national unemployment rate will remain elevated throughout 2021 and 2022, with a peak at 11.5 percent in the third quarter 2022;

• An overall decline in spending on a wide range of products and services;

• A prolonged economic downturn will persist until the fourth quarter 2021 with real GDP growth resuming by mid-year 2022;

• The target federal funds interest rate will remain at or near zero for the foreseeable future.

At December 31, 2020, Valley maintained a higher combined weighting on the S-3 and S-4 alternative downside scenarios as compared to the Moody's Baseline scenario to reflect downside risk factors.

During 2021, we discontinued the use of the S-4 (most adverse) downside scenario as a result of the continued actual and expected economic recovery, increased vaccination levels, strong housing and labor market conditions during 2021, and began to incorporate the S-1 moderate upside scenario.

At December 31, 2021, Valley maintained the majority of its probability weighting to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-1 upside scenarios .

The Baseline weighting and the S-1 scenario reflect the positive economic outlook including higher GDP growth and lower unemployment levels that are expected to improve labor market conditions and promote stronger economic growth during 2022.

However, this positive outlook could still be tempered by, among other factors, the uncertainty associated with the COVID-19 pandemic, acceleration in consumer prices caused by elevated levels of inflation, as well as continuing supply chain issues contributing to a downside risk to the near-term forecast.

At December 31, 2021, the Moody's Baseline forecas t included the following specific assumptions:

• GDP expansion by over 5.4 percent in the first quarter 2022;

• Unemployment of 4.5 percent in the fourth quarter 2021 and improving to 3.9 percent in the first quarter 2022 and around 3.5 percent over the remainder of the forecast period ending fourth quarter 2023;

• Strong U.S.

economic growth driven by continued consumer spending.

The allowance for credit losses for loans methodology and accounting policy are fully described in Note 1 to the consolidated financial statements.

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2021 2020 2019

($ in thousands)

Average loans outstanding $ 31,785,859 $ 26,235,253 $ 23,340,330 $ 17,819,003 $ 16,400,745

Beginning balance—Allowance for credit losses for loans $ 164,604 $ 156,295 $ 124,452 $ 116,604 $ 108,367

Impact of ASU No.

2016-13 adoption on January 1, 2020 (1)

Allowance for credit losses for loans ($ in thousands)

Beginning balance $ 351,354 $ 164,604 $ 156,295

Impact of the adoption of ASU No.

2016-13 * — 37,989 —

Allowance for purchased credit deteriorated (PCD) loans * 6,542 61,643 —

61,643 — — — —

Beginning balance, adjusted 357,896 264,236 156,295

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Provision charged for credit losses 32,896 125,087 24,218

Ending balance—Allowance for credit losses for loans $ 351,354 $ 164,604 $ 156,295 $ 124,452 $ 116,604

Ending balance $ 375,702 $ 351,354 $ 164,604

Components of allowance for credit losses for loans:

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Provision for unfunded credit commitments 5,389 1,165 (1,591)

1,165 (1,591) 840 1,411 (4)

Provision for credit losses for loans $ 32,896 $ 125,087 $ 24,218

Annualized ratio of net charge-offs during the period to average loans outstanding 0.12 % 0.06 % 0.00 % 0.01 % 0.02 %

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

(2) Charge-offs and recoveries presented for periods prior to January 1, 2020 exclude loans formerly accounting for as PCI loans.

(3) Periods prior to January 1, 2020 represent the allowance and provision for unfunded letters of credit only .

Our net loan charge-offs increased $22.1 million to $38.0 million in 2020 as compared to $15.9 million in 2019 mainly due to higher gross charge-offs in the commercial and industrial loan category.

The higher level of commercial and industrial loan charge-offs in 2020 was largely driven by taxi medallion partial loan charge-offs totaling $12.5 million for the year ended

Allowance for credit losses for loans to total loans 1.10 % 1.09 % 0.55 %

* The adjustment for the year ended December 31, 2020 represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.

See Note 5 to the consolidated financial statements for additional information regarding our allowance for credit losses for loans.

2021 Form 10-K

December 31, 2020 (as compared to $6.5 million for 2019) and the partial and full charge-offs of two loans totaling $7.8 million and $6.0 million, respectively.

While net charge-offs increased largely due to borrowers impacted by the COVID-19 pandemic during 2020, they have remained within management's expectations for the credit quality of Valley's loan portfolio and its underwriting standards.

During the five-year period ended December 31, 2020, our net charge-offs were at a high of 0.12 percent of average loans during 2020 and near zero during 2018.

While we have a positive outlook for the future performance of the loan portfolio, there can be no assurance that our levels of net charge-offs will not deteriorate in 2021, especially given the uncertain course of the economic recovery, labor markets and the number of our COVID-19 impacted borrowers that remained in active deferral of contractual payments at December 31, 2020.

The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories for the past five years ended December 31,:

The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the years indicated:

Years Ended December 31,

2021 2020 2019

Allocation* Percent of Loan Category to total loans Allowance

($ in thousands)

Net loan (charge-offs) recoveries

Commercial and industrial $ (17,573) $ (32,674) $ (10,863)

Commercial real estate 2,171 287 1,079

Construction 4 452 —

Residential mortgage 536 72 (60)

Total consumer (228) (6,106) (6,065)

Total (15,090) (37,969) (15,909)

Average loans outstanding

Commercial and industrial $ 6,334,612 $ 6,418,813 $ 4,589,906

Commercial real estate 17,444,293 16,506,542 13,231,860

Construction 1,775,272 1,699,711 1,522,025

Residential mortgage 4,401,881 4,395,582 4,187,264

Total consumer 2,860,927 2,765,211 2,704,198

Total 32,816,985 31,785,859 26,235,253

Net loan charge-offs (recoveries) to average loans outstanding

Commercial and industrial 0.28% 0.51% 0.24%

Commercial real estate (0.01) 0.00 (0.01)

Construction 0.00 (0.03) 0.00

Residential mortgage (0.01) 0.00 0.00

Total consumer 0.01 0.22 0.22

Our net loan charge-offs decreased $22.9 million to $15.1 million in 2021 as compared to $38.0 million in 2020 mainly due to lower net charge-offs related to borrowers impacted by the COVID-19 pandemic (largely within the commercial and industrial loan category).

Partial loan charge-offs of taxi medallion loans totaled $4.8 million and $12.5 million, respectively, within the commercial and industrial loan category for the years ended December 31, 2021 and 2020.

The overall level of net 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 2021.

While we have a positive outlook for the future performance of the loan portfolio, there can be no assurance that our levels of net charge-offs will not deteriorate in 2022, given the uncertain path of the recovery from the COVID-19 pandemic.

2021 Form 10-K 70

The following table summarizes the allocation of the allowance for credit losses to specific loan portfolio categories for the years ended December 31,:

Allocation Percent of Loan Category to total loans Allowance

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Total allowance for credit losses for loans $ 375,702 $ 351,354

* CECL was adopted January 1, 2020.

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

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including letters of credit), as a percentage of total loans was 1.10 percent at December 31, 2021 and 1.09 percent at December 31, 2020.

The allowance for credit losses for loans increased $186.8 million at December 31, 2020 as compared to December 31, 2019 largely due to Valley's Day 1 CECL adoption adjustment of $99.6 million recorded on January 1, 2020 and the reserve build under CECL during 2020.

The reserve build in 2020 reflected several factors, including deterioration in Valley's macroeconomic outlook since the onset of the COVID-19 pandemic, additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers negatively impacted by the pandemic, the impact of lower valuations of collateral securing our non-performing taxi medallion loan portfolio and additional quantitative reserves, based upon expected and actual transitions in the credit quality of our loan portfolio.

As a result, the provision for credit losses increased $100.9 million to $125.1 million in 2020 as compared to 2019.

The allowance for credit losses for loans increased $24.3 million at December 31, 2021 as compared to December 31, 2020 due, in large part, to higher quantitative reserves, particularly for non-owner occupied loans within the commercial real estate loan portfolio during 2021.

During the fourth quarter 2021, we also recorded a $6.5 million increase to the allowance of credit losses for loans related to PCD loans acquired from Westchester and our provision for credit losses for loans included $6.2 million for non-PCD loans and unfunded credit commitments acquired from Westchester.

These items were partially offset by decreases in both the economic forecast and non-economic qualitative reserve components of our CECL model largely due to improved economic outlook and lower levels of uncertainty related to the impact of the COVID-19 pandemic on credit quality of our loan portfolio at December 31, 2021 as compared to December 31, 2020.

Loan Repurchase Contingencies

We engage in the origination of residential mortgages for sale into the secondary market.

Our loan sales totaled approximately $1.0 billion, $935 million and $676 million for 2020, 2019 and 2018, respectively.

During 2020 and 2019, loan sales increased significantly from 2018 as new loan originations and refinance activity strengthened due to a favorably low interest rate environment complemented, from time to time, by sales from the held for investment portfolio.

Our loan sales totaled approximately $1.2 billion, $1.0 billion and $935 million for 2021, 2020 and 2019, respectively.

Over the last three years, loan sales increased significantly, as new loan originations and refinance activity strengthened due to the favorably low interest rate environment complemented, from time to time, by sales from the held for investment portfolio.

In connection with loan sales, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred due to such loans.

However, the performance of our loans sold has been historically strong due to our strict underwriting standards and procedures.

Over the past several years, we have experienced a nominal amount of repurchase requests, only a few of which have actually resulted in repurchases by Valley (only two loan repurcha ses in 2020 and four loan repurchases in 2019).

Over the past several years, we have experienced a nominal amount of repurchase requests, only a few of which have actually resulted in repurchases by Valley (only five loan repurcha ses in 2021 and two loan repurchases in 2020).

None of the loan repurchases resulted in material loss.

Accordingly, no reserves pertaining to loans sold were established on our consolidated financial statements at December 31, 2021 and 2020.

Risk Factors - "We may incur future losses in

2020 Form 10-K

connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” of this report for additional information.

Risk Factors - "We may incur future losses in connection with repurchases and indemnification payments related to mortgages that we have sold into the secondary market” of this report for additional information.

Capital Adequacy

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At December 31, 2021 and 2020, shareholders’ equity totaled approximately $5.1 billion and $4.6 billion, or 11.7 percent and 11.3 percent of total assets, respectively.

During 2020, total shareholders’ equity increased by $207.9 million primarily due to (i) net income of $390.6 million, (ii) an increase in other comprehensive income of $24.5 million, and (iii) a $13.0 million increase attributable to the effect of share issuances under our stock incentive plan.

These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $192.0 million and (ii) a $28.2 million ne t cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2020.

During 2021, total shareholders’ equity increased by $491.9 million primarily due to (i) net income of $473.8 million, (ii) the additional capital issued in the Westchester acquisition totaling $211.1 million, (iii) a $35.4 million increase attributable to the effect of share issuances under our stock incentive plan.

These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $195.1 million (ii) a net loss of $10.2 million recorded in accumulated comprehensive loss and (ii) repurchases of $23.1 million or our common stock with these shares held as treasury stock.

2021 Form 10-K

Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC.

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See Note 17 to the consolidated financial statements for Valley’s and Valley National Bank’s regulatory capital positions and capital ratios at December 31, 2021 and 2020.

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

Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for the year ended December 31, 2020 will be phased in over the same time frame.

For regulatory capital purposes, in accordance 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 was deferred for a two-year period ending January 1, 2022, and will be phased in on a pro-rata basis over a three-year period ending January 1, 2025.

Additionally, 25 percent, or $19.1 million on an after tax basis of the reserve build (i.e., provision for credit losses less net charge-offs) since CECL adoption through December 31, 2021 is being phased in over the same time frame.

We estimate these deferrals when fully phased in will reduce our risk based capital ratios by approximately 14 basis points.

Typically, our primary source of capital growth is through retention of earnings.

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

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

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

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

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See Note 18 to the consolidated financial statements for additional information on Valley’s preferred stock issuances.

2020 Form 10-K 70

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-K

Item 7. Management’s Discussion and Analysis