VALLEY NATIONAL BANCORP 10-Q

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A. The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. 52 Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “intend,” “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “would,” “could,” “typically,” “usually,” “anticipate,” “may,” “estimate,” “outlook,” “project,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to: • the inability to realize expected cost savings and synergies from the Bank Leumi USA acquisition in the amounts or 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; • greater than expected non-recurring charges related to the Bank Leumi USA acquisition; • macroeconomic factors in the U.S. and globally due to COVID-19 or otherwise, including business disruptions, reductions in employment, supply chain interruptions, inflation, Federal Reserve actions impacting the level of market interest rates and an increase in business failures, specifically among our clients; • the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases and new variants of COVID-19 may arise in our primary markets; • continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets; • the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral; • the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies; • damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters; • a prolonged downturn in the economy, mainly in New Jersey, New York, Florida, Alabama, California, and Illinois, as well as an unexpected decline in commercial real estate values within our market areas; • higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; • the inability to grow customer deposits to keep pace with loan growth; • a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios; • the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; • greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; • 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; 53 • cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems; • results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; • our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; • unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; and • unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors. A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Critical Accounting Policies and Estimates Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. At September 30, 2022, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies and estimates with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies and estimates are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2021, and there have been no material changes in such policies and estimates since the date of such report. New Authoritative Accounting Guidance See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. Executive Summary Company Overview. At September 30, 2022, Valley had consolidated total assets of approximately $55.9 billion, total net loans of $44.7 billion, total deposits of $45.3 billion and total shareholders’ equity of $6.3 billion. Valley operates many convenient branch office locations and commercial banking offices in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida, California, Alabama and Illinois. Of our current 238 branch network, 55 percent, 19 percent, 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 8 percent of the branches in Alabama, California, and Illinois combined. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years both through organic efforts and bank acquisitions. Our most recent bank acquisition is discussed below. 54 Bank Leumi Le-Israel Corporation. On April 1, 2022, Valley completed its acquisition of Bank Leumi Le-Israel Corporation, the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA, collectively referred to as "Bank Leumi USA". At the acquisition date, Bank Leumi USA had approximately $8.1 billion in assets, $5.9 billion of loans and $7.0 billion of deposits, after purchase accounting adjustments. Valley issued approximately 85 million shares of common stock and paid $113.4 million in cash in the transaction. The consideration for the acquisition totaled approximately $1.2 billion, inclusive of the value of stock options. The transaction resulted in $403.2 million of goodwill and $153.4 million of combined core deposit and other intangible assets subject to amortization. See Note 2 to the consolidated financial statements for additional details regarding the acquisition of Bank Leumi USA and other recent acquisition activities. Impact of COVID-19. During the third quarter 2022, worldwide inflationary concerns continued to outweigh the other negative impacts of COVID-19. Among other factors, China's "zero COVID" policy has created disruption of China's manufacturing industry which could have prolonged negative consequences for the global economy as China exports up to one-third of the world's intermediate goods. W e continue to monitor the impact of COVID-19 including the emergence of new variants closely, including its impact on our employees, customers, communities and results of operations and other government or Federal Reserve actions. 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 wh ich $3.1 billion have received forgiveness from the SBA. As of September 30, 2022 , we had $85.8 million (includi ng $35.5 mi llion acquired from Bank Leumi USA) of PPP loans still outstanding. Quarterly Results. Net income for the third quarter 2022 was $178.1 million, or $0.34 per diluted common share as compared to $122.6 million, or $0.29 per diluted common share, for the third quarter 2021. The $55.5 million increase in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes: • a $153.0 million increase in net interest income mainly due to higher average loan balances driven by both acquired and organic loan volumes and increased yields on new and adjustable-rate loans; • a $13.8 million increase in non-interest income primarily driven by increases in wealth management and trust fees, service charges on deposit accounts and other income totaling $5.7 million, $4.9 million and $7.1 million, respectively, related to additional income resulting from the Bank Leumi USA acquisition, partially offset by lower net gains on sales of residential mortgage loans; and • a $1.5 million decrease in our provision for credit losses, partially offset by: • an $86.7 million increase in non-interest expense largely due to increases in salary and employee benefits; technology, furniture and equipment expenses; and net occupancy caused by our expanded banking operations resulting from the acquisitions of Bank Leumi USA on April 1, 2022 and The Westchester Bank Holding Corporation (Westchester) on December 1, 2021; and • a $26.0 million increase in income tax expense mostly due to higher pre-tax income in the third quarter 2022 . See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the impact of the items above on our third quarter 2022 results. Operating Environment. During the third quarter of 2022, real gross domestic product increased 2.8 percent compared to a decline of 0.6 percent in the second quarter of 2022. The increase in economic activity was driven in large part by household spending on goods and services, and a favorable mix of export activity outpacing imports. 55 Residential fixed investments declined as mortgage rates increased markedly which weighed on the headline result. Business fixed investment, inventory restocking and government spending increased at a tepid rate. During the third quarter 2022, the Federal Reserve raised the target range for the federal funds rate by 150 basis points to a target range of 3.00 percent to 3.25 percent at the end of the third quarter. Following its meeting in November, the Federal Reserve raised the federal fund rate by another 75 basis points to a target range of 3.75 percent to 4.00 percent. In addition, the Federal Reserve has continued to reduce its holdings of Treasury securities and agency debt and mortgage-backed securities. Consistent with its previously announced plan, the Federal Reserve targeted a reduction of its Treasury and agency securities portfolio by $47.5 billion per month through September 21, 2022 and, effective September 22, 2022, raised its target reduction of securities to $95 billion per month. These actions reflect the Federal Reserve’s strong commitment to returning inflation to its 2 percent objective. The 10-year U.S. Treasury note yield ended the third quarter of 2022 at 3.83 percent, 85 basis points higher compared to June 30, 2022. The spread between the 2- and 10-year U.S. Treasury note yields ended the quarter at negative 0.39 percent, a 45 basis point decline from June 30, 2022. For all commercial banks in the U.S., loans and leases increased approximately 2.5 percent from June 30, 2022 to September 30, 2022. While loan growth moderated somewhat during the quarter, survey data from the industry reported that demand for most commercial and industrial loan products increased. Alternatively, demand for most real estate related loans declined, particularly for commercial real estate loans with construction and land development purposes. During the third quarter 2022, Valley’s new loan originations decreased across most product types as compared to the second quarter, but loan growth remained at robust levels partly due to slower paydowns on existing loans due to the rising market interest rate environment. While confident in our commercial loan pipelines, we expect a more challenging overall loan origination environment moving forward, especially in the residential mortgage and consumer loan portfolios, due to the impact of higher market interest rates on customer demand and selective tightening of certain underwriting standards by Valley. Further expected increases in market interest rates, persistently high inflation, the lingering impact of supply chain issues, tight labor market conditions, and global economic fallout from the Russia-Ukraine war, among other factors, has added a higher level of uncertainty to the future path of the U.S. economy and an elevated risk of a recession. Should economic conditions deteriorate causing business activity, spending and investment to decline, it would adversely impact our financial results, as highlighted below in this MD&A. Loans. Total loans increased $1.6 billion to $45.2 billion at September 30, 2022 from June 30, 2022 primarily due to strong organic loan growth. Our loan portfolio increased 15 percent on an annualized basis during the third quarter 2022 from the second quarter 2022 as a result of solid commercial loan volumes and a continued increase in new residential mortgage loans originated for investment rather than sale. During the third quarter 2022, we sold only $48 million of residential mortgage loans. See further details on our loan activities under the “Loan Portfolio” section. Asset Quality. Non-accrual loans represented 0.65 percent and 0.72 percent of total loans at September 30, 2022 and June 30, 2022, respectively. Net recoveries of loan charge-offs totaled $5.6 million for the third quarter 2022 as compared to net loan charge-offs of $2.3 million for the second quarter 2022. Total accruing past due loans increased $25.2 million to $98.7 million, or 0.22 percent of total loans, at September 30, 2022 as compared to $73.5 million, or 0.17 percent of total loans, at June 30, 2022. See further details in the "Non-performing Assets" section below. Deposits and Other Borrowings . Overall, average deposits increased by $1.9 billion to $44.8 billion for the third quarter 2022 as compared to the second quarter 2022 mostly due to growth in our retail and brokered CD portfolios. The retail growth resulted from strategic CD campaigns, while the brokered CD growth resulted from our increased utilization of brokered deposits, as a favorable funding alternative, during the third quarter 2022 . Average non-interest-bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 36 percent, 53 percent and 12 percent of total deposits as of September 30, 2022, respectively. 56 Actual ending balances for deposits increased $1.4 billion to approximately $45.3 billion at September 30, 2022 from June 30, 2022 largely due to the increased utilization of brokered deposits, consisting of both money market and time deposit accounts, in our funding mix. Total brokered deposits increased to $3.7 billion at September 30, 2022 as compared to $2.3 billion at June 30, 2022. Non-interest bearing deposits decreased $718.9 million at September 30, 2022 as compared to June 30, 2022 largely due to fluctuations in certain commercial customer balances, as well as some migration of both commercial and retail balances to interest bearing deposit products. While our overall deposit levels increased during the third quarter 2022, w e believe the current operating environment will likely remain very challenging for Valley’s deposit gathering initiatives. As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at September 30, 2022. The following table presents average short-term and long-term borrowings for the periods indicated : Three Months Ended Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (in thousands) Average short-term borrowings: FHLB advances $ 438,267 $ 822,913 $ 690,217 $ 565,222 $ 797,070 Securities sold under repurchase agreements 140,777 142,790 170,257 144,019 160,793 Federal funds purchased 437,196 637,495 — 363,550 8,681 Total $ 1,016,240 $ 1,603,198 $ 860,474 $ 1,072,791 $ 966,544 Average long-term borrowings: FHLB advances $ 788,651 $ 788,803 $ 814,224 $ 788,802 $ 1,253,785 Subordinated debt 632,627 617,291 638,349 626,997 499,124 Securities sold under repurchase agreements — — 86,957 — 228,205 Junior subordinated debentures issued to capital trusts 56,631 56,544 56,284 56,545 56,198 Total $ 1,477,909 $ 1,462,638 $ 1,595,814 $ 1,472,344 $ 2,037,312 Average short-term borrowings increased $155.8 million during the third quarter 2022 as compared to the third quarter 2021 mostly due to an increase in the balance of federal funds purchased as a part of our overall funding strategy, partially offset by less utilization of FHLB advances. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased $117.9 million from the third quarter 2021 largely due to the repayment of long-term repurchase agreements during the third quarter 2021 and, to a lesser extent, maturities of FHLB advances over the last 12 months. Actual ending balances for short-term borrowings decreased $603.5 million to $919.3 million at September 30, 2022 as compared to June 30, 2022 largely due to the maturity of FHLB advances during the third quarter 2022 and our increased utilization of broker deposits, as a favorable alternative funding source, in our funding mix at September 30, 2022. Long-term borrowings increased to approximately $1.5 billion at September 30, 2022 as compared to $1.4 billion at June 30, 2022 primarily due to the issuance of new subordinated notes during the third quarter 2022. On September 20, 2022, Valley issued $150 million of 6.25 percent fixed-to-floating rate subordinated notes due September 30, 2032. At September 30, 2022, the subordinated notes had a carrying value of $147.5 million, net of unamortized debt issuance costs. Non-GAAP Financial Measures. The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated. The Company believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding Valley’s underlying operational performance, business, and performance trends, and may facilitate comparisons of our current and prior performance with the performance of others in the financial services industry. 57 Management utilizes these measures for internal planning, forecasting and analysis purposes. Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Selected Performance Indicators ($ in thousands, except for %) GAAP measures: Net income, as reported $ 178,119 $ 122,580 $ 391,260 $ 358,802 Return on average assets 1.30 % 1.18 % 1.03 % 1.16 % Return on average shareholders’ equity 11.39 10.23 8.89 10.14 Non-GAAP measures: Net income, as adjusted $ 181,455 $ 124,727 $ 467,571 $ 367,139 Return on average assets, as adjusted 1.32 % 1.20 % 1.23 % 1.19 % Return on average shareholders' equity, as adjusted 11.60 10.41 10.62 10.37 Return on average tangible shareholders' equity (ROATE) 17.21 14.64 13.20 14.63 ROATE, as adjusted 17.54 14.90 15.77 14.97 Efficiency ratio 49.76 49.16 51.03 48.12 September 30, 2022 December 31, 2021 Common Equity Per Share Data: Book value per common share (GAAP) $ 11.98 $ 11.57 Tangible book value per common share (non-GAAP) 7.87 7.94 Non-GAAP Reconciliations to GAAP Financial Measures Adjusted net income is computed as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Net income, as reported (GAAP) $ 178,119 $ 122,580 $ 391,260 $ 358,802 Add: Loss on extinguishment of debt (net of tax) — — — 6,024 Less: Gains on available for sale and held to maturity securities transactions (net of tax) (a) (24) (565) (74) (399) Add: Provision for credit losses (net of tax) (b) — — 29,282 — Add: Merger related expenses (net of tax) (c) 3,360 1,207 47,103 1,207 Add: Litigation reserves (net of tax) (d) — 1,505 — 1,505 Net income, as adjusted (non-GAAP) $ 181,455 $ 124,727 $ 467,571 $ 367,139 (a) Included in gains (losses) on securities transactions, net. (b) Represents the provision for credit losses for non-PCD loans, unfunded credit commitments and held to maturity debt securities acquired from Bank Leumi USA on April 1, 2022. (c) Merger related expenses are primarily within salary and employee benefits expense, technology, furniture and equipment expense, and professional and legal fees for the nine months ended September 30, 2022. (d) Included in professional and legal fees. 58 In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans, wealth management fees, and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales, brokerage fees, and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details. Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) Net income, as adjusted (non-GAAP) $ 181,455 $ 124,727 $ 467,571 $ 367,139 Average assets $ 54,858,306 $ 41,543,930 $ 50,588,010 $ 41,144,375 Annualized return on average assets, as adjusted (non-GAAP) 1.32 % 1.20 % 1.23 % 1.19 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) Net income, as adjusted (non-GAAP) $ 181,455 $ 124,727 $ 467,571 $ 367,139 Average shareholders' equity $ 6,256,767 $ 4,794,843 $ 5,869,736 $ 4,718,960 Annualized return on average shareholders' equity, as adjusted (non-GAAP) 11.60 % 10.41 % 10.62 % 10.37 % ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) Net income, as reported (GAAP) $ 178,119 $ 122,580 $ 391,260 $ 358,802 Net income, as adjusted (non-GAAP) 181,455 124,727 $ 467,571 $ 367,139 Average shareholders’ equity $ 6,256,767 $ 4,794,843 $ 5,869,736 $ 4,718,960 Less: Average goodwill and other intangible assets 2,117,818 1,446,760 1,917,217 1,449,285 Average tangible shareholders’ equity $ 4,138,949 $ 3,348,083 $ 3,952,519 $ 3,269,675 Annualized ROATE (non-GAAP) 17.21 % 14.64 % 13.20 % 14.63 % Annualized ROATE, as adjusted (non-GAAP) 17.54 % 14.90 % 15.77 % 14.97 % 59 The efficiency ratio is computed as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) Total non-interest expense, as reported (GAAP) $ 261,639 $ 174,922 $ 758,709 $ 507,028 Less: Loss on extinguishment of debt (pre-tax) — — — 8,406 Less: Amortization of tax credit investments (pre-tax) 3,105 3,079 9,194 8,795 Less: Merger related expenses (pre-tax) (a) 4,707 1,287 63,831 1,287 Less: Litigation reserve (pre-tax) (b) — 2,100 — 2,100 Total non-interest expense, as adjusted (non-GAAP) $ 253,827 $ 168,456 $ 685,684 $ 486,440 Net interest income, as reported (GAAP) $ 453,992 $ 301,026 $ 1,189,821 $ 894,600 Total non-interest income, as reported (GAAP) 56,194 42,431 153,997 116,790 Less: Gains on available for sale and held to maturity securities transactions, net (pre-tax) (c) (33) (788) (102) (557) Total net interest income and non-interest income, as adjusted (non-GAAP) $ 510,153 $ 342,669 $ 1,343,716 $ 1,010,833 Efficiency ratio (non-GAAP) 49.76 % 49.16 % 51.03 % 48.12 % (a) Included primarily within salary and employee benefits expense, technology, furniture and equipment expense, and professional and legal fees for the nine months ended September 30, 2022. (b) Included in professional and legal fees. (c) Included in gains (losses) on securities transactions, net. Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding, as follows: September 30, 2022 December 31, 2021 ($ in thousands, except for share data) Common shares outstanding 506,351,502 421,437,068 Shareholders’ equity $ 6,273,829 $ 5,084,066 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 2,079,731 1,529,394 Tangible common shareholders’ equity $ 3,984,407 $ 3,344,981 Tangible book value per common share (non-GAAP) $ 7.87 $ 7.94 Book value per common share (GAAP) $ 11.98 $ 11.57 Net Interest Income Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley. N et interest income on a tax equivalent basis totaling $455.3 million for the third quarter 2022 increased $35.7 million as compared to the second quarter 2022 and increased $153.6 million from the third quarter 2021. Interest income on a tax equivalent basis in the third quarter 2022 increased $83.7 million to $538.0 million as compared to the second quarter 2022. The increase was mostly due to higher average loan balances driven by our organic loan growth and increased yields on both new originations and adjustable rate loans in our portfolio. Interest expense of $82.7 million for the third quarter 2022 increased $47.9 million as compared to the second quarter 2022 largely due to higher interest rates on both non-maturity deposits and short-term borrowings, as well as a $1.5 billion increase in average interest bearing liabilities. 60 Average interest earning assets increased $12.2 billion to $50.5 billion for the third quarter 2022 as compared to the third quarter 2021 primarily due to the acquisitions of Bank Leumi USA and Westchester on April 1, 2022 and December 1, 2021, respectively, as well as strong organic loan growth over the 12-month period ended September 30, 2022 . Compared to the second quarter 2022, average interest earning assets increased by $1.6 billion during the third quarter 2022. The increase was primarily driven by a $1.8 billion increase in average loan balances due to organic loan growth mainly in the commercial loan categories, as well as residential mortgage loans. Average interest bearing liabilities increased $5.9 billion to $31.2 billion for the third quarter 2022 as compared to the third quarter 2021 mainly due to $2.5 billion of interest bearing deposits assumed from Bank Leumi USA, growth in commercial and retail customer deposit balances without stated maturities and brokered deposits, and $727 million of interest bearing deposits assumed from Westchester. As compared to the second quarter 2022, average interest bearing liabilities increased by $1.5 billion in the third quarter 2022 mainly due to growth in our retail and brokered CD portfolios, partially offset by maturities and less use of short-term borrowings as a funding source. The retail growth resulted from successful targeted CD campaigns, while the brokered CD growth resulted from our increased utilization of such deposits as a cost-effective funding alternative. Total average deposits, including non-interest bearing deposits, increased $1.9 billion to $44.8 billion for the third quarter 2022 as compared to the second quarter 2022. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Our net interest margin on a tax equivalent basis of 3.60 percent for the third quarter 2022 increased by 17 basis points and 45 basis points from 3.43 percent and 3.15 percent for the second quarter 2022 and third quarter 2021, respectively. The yield on average interest earning assets increased by 54 basis points on a linked quarter basis mostly due to the aforementioned higher yields on new and adjustable rate loans in the third quarter 2022 as compared to the second quarter 2022. The yield on average loans increased by 57 basis points to 4.48 percent for the third quarter 2022 as compared to the second quarter 2022 largely due to the higher level of market interest rates. The yields on average taxable and non-taxable investments also increased 9 basis points and 25 basis points, respectively, from the second quarter 2022 largely due to investment maturities and prepayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the third quarter 2022. Our cost of total average deposits increased to 0.59 percent for the third quarter 2022 from 0.19 percent for the second quarter 2022. The overall cost of average interest bearing liabilities also increased 59 basis points to 1.06 percent for the third quarter 2022 as compared to the second quarter 2022. The increased cost of funds was mainly due to higher interest rates on most of our interest bearing deposit products combined with greater utilization of brokered and retail CDs in our funding mix during the third quarter 2022. The Federal Reserve continued to raise the federal funds rate by 75 basis points after each of their meetings in July, September, and November 2022 resulting in a current target range of 3.75 percent to 4.00 percent. The higher levels of market interest rates will benefit certain interest earning assets on our balance sheet and are likely to provide us the opportunity to reinvest any excess cash, including normal repayments of loans and investments, at higher rates. Funding costs also increased during the third quarter 2022 and the early stages of the fourth quarter 2022, however at this time, we expect a continued benefit to our net interest income from the immediate repricing of certain earning assets and a degree of lag in higher funding costs due to the current market and our ability to manage the balance sheet. While our outlook for our net interest income in the fourth quarter 2022 and beyond is positive, we cannot provide any assurances with respect to the future trajectory of market interest rates or that our net interest margin or income will remain at the levels reported for the third quarter 2022. 61 The following table reflects the components of net interest income for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021: Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2022 June 30, 2022 September 30, 2021 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 44,341,894 $ 496,545 4.48 % $ 42,517,287 $ 415,602 3.91 % $ 32,698,382 $ 309,778 3.79 % Taxable investments (3) 4,815,181 31,002 2.58 4,912,994 30,610 2.49 3,302,803 15,797 1.91 Tax-exempt investments (1)(3) 635,795 6,501 4.09 684,471 6,571 3.84 429,941 3,302 3.07 Interest bearing deposits with banks 738,372 3,996 2.16 776,478 1,569 0.81 1,901,748 642 0.14 Total interest earning assets 50,531,242 538,044 4.26 48,891,230 454,352 3.72 38,332,874 329,519 3.44 Allowance for credit losses (486,747) (428,193) (346,437) Cash and due from banks 426,796 426,187 213,452 Other assets 4,499,739 4,362,789 3,314,308 Unrealized gains on securities available for sale, net (112,724) (40,591) 29,733 Total assets $ 54,858,306 $ 53,211,422 $ 41,543,930 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 23,541,694 $ 50,674 0.86 % $ 23,027,347 $ 17,122 0.30 % $ 18,771,619 $ 10,605 0.23 % Time deposits 5,192,896 15,174 1.17 3,601,088 3,269 0.36 4,126,253 4,394 0.43 Total interest bearing deposits 28,734,590 65,848 0.92 26,628,435 20,391 0.31 22,897,872 14,999 0.26 Short-term borrowings 1,016,240 5,160 2.03 1,603,198 4,083 1.02 860,474 1,464 0.68 Long-term borrowings (4) 1,477,909 11,728 3.17 1,462,638 10,313 2.82 1,595,814 11,312 2.84 Total interest bearing liabilities 31,228,739 82,736 1.06 29,694,271 34,787 0.47 25,354,160 27,775 0.44 Non-interest bearing deposits 16,035,778 16,267,946 10,701,948 Other liabilities 1,337,022 1,010,220 692,979 Shareholders’ equity 6,256,767 6,238,985 4,794,843 Total liabilities and shareholders’ equity $ 54,858,306 $ 53,211,422 $ 41,543,930 Net interest income/interest rate spread (5) $ 455,308 3.20 % $ 419,565 3.25 % $ 301,744 3.00 % Tax equivalent adjustment (1,316) (1,405) (718) Net interest income, as reported $ 453,992 $ 418,160 $ 301,026 Net interest margin (6) 3.59 % 3.42 % 3.14 % Tax equivalent effect 0.01 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 3.60 % 3.43 % 3.15 % 62 The following table reflects the components of net interest income for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 September 30, 2021 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 40,529,794 $ 1,229,536 4.04 % $ 32,641,362 $ 938,323 3.83 % Taxable investments (3) 4,525,323 81,906 2.41 % 3,191,930 45,717 1.91 Tax-exempt investments (1)(3) 574,699 16,079 3.73 % 480,599 11,621 3.22 Interest bearing deposits with banks 975,601 6,026 0.82 % 1,588,656 1,101 0.09 Total interest earning assets 46,605,417 1,333,547 3.82 % 37,902,547 996,762 3.51 Allowance for credit losses (428,078) (348,011) Cash and due from banks 378,819 263,910 Other assets 4,078,903 3,290,439 Unrealized gains on securities available for sale, net (47,051) 35,490 Total assets $ 50,588,010 $ 41,144,375 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 22,374,949 $ 77,423 0.46 % 17,730,438 32,896 0.25 % Time deposits 4,122,169 21,274 0.69 4,853,891 21,766 0.60 Total interest bearing deposits 26,497,118 98,697 0.50 22,584,329 54,662 0.32 Short-term borrowings 1,072,791 10,049 1.25 966,544 4,390 0.61 Long-term borrowings (4) 1,472,344 31,566 2.86 2,037,312 40,595 2.66 Total interest bearing liabilities 29,042,253 140,312 0.64 25,588,185 99,647 0.52 Non-interest bearing deposits 14,679,354 10,147,130 Other liabilities 996,667 690,100 Shareholders’ equity 5,869,736 4,718,960 Total liabilities and shareholders’ equity $ 50,588,010 $ 41,144,375 Net interest income/interest rate spread (5) $ 1,193,235 3.18 % $ 897,115 2.99 % Tax equivalent adjustment (3,414) (2,515) Net interest income, as reported $ 1,189,821 $ 894,600 Net interest margin (6) 3.40 % 3.15 % Tax equivalent effect 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 3.41 % 3.16 % _____________ (1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition. (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis. (6) Net interest income as a percentage of total average interest earning assets. 63 The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Change in Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2022 Compared to September 30, 2021 Nine Months Ended September 30, 2022 Compared to September 30, 2021 Change Due to Volume Change Due to Rate Total Change Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 123,594 $ 63,173 $ 186,767 $ 236,972 $ 54,241 $ 291,213 Taxable investments 8,660 6,546 15,206 22,185 14,004 36,189 Tax-exempt investments* 1,891 1,308 3,199 2,474 1,984 4,458 Interest bearing deposits with banks (624) 3,978 3,354 (581) 5,506 4,925 Total increase in interest income 133,521 75,005 208,526 261,050 75,735 336,785 Interest Expense: Savings, NOW and money market deposits 3,323 36,745 40,068 10,350 34,177 44,527 Time deposits 1,392 9,388 10,780 (3,529) 3,037 (492) Short-term borrowings 309 3,387 3,696 531 5,128 5,659 Long-term borrowings and junior subordinated debentures (874) 1,290 416 (11,929) 2,900 (9,029) Total increase (decrease) in interest expense 4,150 50,810 54,960 (4,577) 45,242 40,665 Total increase (decrease) in net interest income $ 129,371 $ 24,195 $ 153,566 $ 265,627 $ 30,493 $ 296,120 * Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate. Non-Interest Income Non-interest income increased $13.8 million and $37.2 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. The following table presents the components of non-interest income for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Wealth management and trust fees $ 9,281 $ 3,550 $ 23,989 $ 10,411 Insurance commissions 3,750 1,610 9,072 5,805 Service charges on deposit accounts 10,338 5,428 26,617 15,614 Gains (losses) on securities transactions, net 323 787 (1,058) 1,263 Fees from loan servicing 3,138 2,894 8,636 8,980 Gains on sales of loans, net 922 6,442 5,510 20,016 Bank owned life insurance 1,681 2,018 5,840 6,824 Other 26,761 19,702 75,391 47,877 Total non-interest income $ 56,194 $ 42,431 $ 153,997 $ 116,790 64 Wealth management and trust fees income increased by $5.7 million and $13.6 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 mostly due to brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly owned broker dealer subsidiary now legally named Valley Financial Management, In c. The brokerage fees totaled $3.9 million and $9.3 million for the three and nine months ended September 30, 2022, respectively. The increases in both 2022 periods were also supplemented by additional revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments, which we acquired in October 2021. Insurance commissions increased $2.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 mostly due to stronger business volumes generated by the Bank's insurance agency subsidiary. Service charges on deposit accounts increased by $4.9 million and $11.0 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 largely related to revenues resulting from deposit accounts acquired from Bank Leumi USA. Net losses on securities transactions of $1.1 million for the nine months ended September 30, 2022 were mostly due to net trading losses related to our trading municipal bond portfolio. Net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each reporting period end. Net gains on sales of loans decreased $5.5 million and $14.5 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. The third quarter 2022 decrease was mostly due to lower loan sale volumes as we sold approximately $48.4 million of residential mortgage loans compared to $234.6 million during the third quarter 2021. The mark to market change on loans held for sale at fair value resulted in net losses totaling $116 thousand and $403 thousand for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $10.4 million for the nine months ended September 30, 2022 and 2021, respectively. Our ability to generate net gains on sales of loans could continue to be challenged by a number of factors, including increases in market interest rates, lower customer demand for conforming loan products and our decision to originate certain residential mortgage loans for investment in our loan portfolio rather than sale. See further discussion of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below. Other non-interest income increased $7.1 million and $27.5 million for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively, partially due to higher fee income from derivative interest rate swaps executed with commercial lending customers caused by a greater volume of transactions and higher foreign exchange fees . Swap fee inc ome totaled $10.7 million and $8.8 million for the three months ended September 30, 2022 and 2021, respectively, and $35.8 million and $22.6 million for the nine months ended September 30, 2022 and 2021, respectively. While we believe our commercial loan swap based product will remain attractive to borrowers in the current interest rate environment, we can provide no assurance that our swap fees will remain at the level reported for the third quarter 2022. Foreign excha nge fees totaled $1.5 million and $4.0 million three and nine months ended September 30, 2022, respectively. Foreign exchange fees for the respective reporting periods in 2021 were not material. 65 Non-Interest Expense Non-interest expense increased $86.7 million and $251.7 million for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively. The following table presents the components of non-interest expense for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Salary and employee benefits expense $ 134,572 $ 93,992 $ 397,103 $ 273,190 Net occupancy expense 26,486 19,941 70,906 59,171 Technology, furniture and equipment expense 39,365 21,007 115,245 64,956 FDIC insurance assessment 6,500 3,644 16,009 10,294 Amortization of other intangible assets 11,088 5,298 26,925 16,753 Professional and legal fees 17,840 13,492 62,998 27,250 Loss on extinguishment of debt — — — 8,406 Amortization of tax credit investments 3,105 3,079 9,194 8,795 Other 22,683 14,469 60,329 38,213 Total non-interest expense $ 261,639 $ 174,922 $ 758,709 $ 507,028 Salary and employee benefits expense increased $40.6 million and $123.9 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. The increases in both 2022 periods were primarily due to strategic increases in our headcount to enhance lending and operations (including additions to staff due to the Bank Leumi USA and Westchester acquisitions), 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, salary and employee benefits expense included approximately $1.3 million and $29.3 mi llion of merger related expenses for the three and nine months ended September 30, 2022, respectively. The merger expenses, primarily consisted of change in control and severance payments, related to Bank Leumi USA during the second quarter 2022. Net occupancy expense increased $6.5 million and $11.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021 mainly due to higher lease expense, depreciation expense and repair and maintenance costs, as well as $1.5 million of merger related expense for the third quarter 2022. Technology, furniture and equipment expense increased $18.4 million and $50.3 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. The increases are largely driven by higher data processing costs related to the acquisitions of Bank Leumi USA and Westchester and additional investments in technology and equipment, and higher depreciation expense. Within this expense category, merger related costs totaled $1.8 million and $17.1 million for the three and nine months ended September 30, 2022, respectively. FDIC insurance assessment expense increased $2.9 million and $5.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021 mainly due to the Bank Leumi USA acquisition, as well as our balance sheet organic growth. Amortization of other intangible assets increased $5.8 million and $10.2 million for the three and nine months ended September 30, 2022 , respectively, as compared to the same period of 2021 mostly due to additional core deposit and other intangible assets resulting from the Bank Leumi USA acquisition. See Notes 2 and 9 to the consolidated financial statements for additional information. Professional and legal fees increased $4.3 million and $35.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. The increases were primarily due to 66 higher consulting expense mainly related to technology transformation and new product initiatives, and increased managed services. Within this expense category, merger related costs totaled $75 thousand and $11.5 million for the three and nine months ended September 30, 2022, respectively. Loss on extinguishment of debt totaled $8.4 million for the nine months ended September 30, 2021 reflecting the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021. Other non-interest expense increased $8.2 million and $22.1 million f or the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021. These increases within this expense category mostly related to incrementally higher operating expenses due to the expansion of our operations, including acquisitions of Bank Leumi USA and Westchester. In addition, the 2022 periods included a $2.0 million contribution to the Valley Bank Charitable Fund. Income Taxes Income tax expense totaled $68.4 million for the third quarter 2022 as compared to $36.6 million and $42.4 million for the second quarter 2022 and third quarter 2021, respectively. Our effective tax rate was 27.7 percent, 27.5 percent and 25.7 percent for the third quarter 2022, second quarter 2022 and third quarter 2021, respectively. The increase in the effective tax rate in the third quarter 2022 as compared to the third quarter 2021 was partly due to a $3.8 million excess stock compensation benefit recognized in the 2021 period. U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies . Based on the current information available, we anticipate that our effective tax rate will range from 27 percent to 29 percent for the remainder of 2022, exclusive of pending potential tax rate increases. Operating Segments Prior to the second quarter 2022, Valley operated as four reportable segments: Consumer Lending, Commercial Lending, Investment Management, and Corporate and Other Adjustments. Valley re-evaluated its segment reporting during the second quarter 2022 to consider the Bank Leumi USA acquisition on April 1, 2022 along with other factors, including changes in the internal structure of operations, discrete financial information reviewed by key decision-makers, balance sheet management strategies and personnel. As a result, Valley determined it operated reportable segments consisting of Consumer Lending, Commercial Lending and Treasury and Corporate Other at June 30, 2022. Treasury and Corporate Other was reorganized to consolidate Treasury and other corporate-wide functions, including the Treasury managed investment securities portfolios and overnight interest earning cash balances formerly reported under Investment Management. The discrete financial information related to the activities previously reported in the Investment Management segment is no longer provided to Valley's CEO, who is the chief operating decision maker. Each operating segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Valley regularly assesses its strategic plans, operations, and reporting structures to identify its reportable segments. There were no additional changes to Valley's reportable segments at September 30, 2022. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The prior-period balances reflect reclassifications to conform the presentation in those periods to the current operating segment structure. Valley's consolidated results were not impacted by the changes discussed above and remain unchanged for all periods presented. 67 The following tables present the financial data for Valley's operating segments for the three months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 Consumer Lending Commercial Lending Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,307,993 $ 36,033,901 $ 6,189,348 $ 50,531,242 Income before income taxes 20,137 255,802 (29,415) 246,524 Annualized return on average interest earning assets (before tax) 0.97 % 2.84 % (1.90) % 1.95 % Three Months Ended September 30, 2021 Consumer Lending Commercial Lending Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,373,897 $ 25,324,485 $ 5,634,492 $ 38,332,874 Income (loss) before income taxes 37,132 141,927 (14,055) 165,004 Annualized return on average interest earning assets (before tax) 2.01 % 2.24 % (1.00) % 1.72 % See Note 15 to the consolidated financial statements for additional details. Consumer Lending Consumer Lending represented 18.7 percent of our loan portfolio at September 30, 2022, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 11.5 percent of our loan portfolio at September 30, 2022) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 3.8 percent of total loans at September 30, 2022) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. Consumer Lending also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services. Average interest earning assets in Consumer Lending increased $934.1 million to $8.3 billion for the three months ended September 30, 2022 as compared to the third quarter 2021. The increase was mostly due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit. Loans acquired from Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021 did not materially impact this operating segment. Income before income taxes generated by Consumer Lending decreased $17.0 million to $20.1 million for the third quarter 2022 as compared to the third quarter 2021 largely due to a $11.8 million increase in the provision for loan losses, a $5.6 million increase in the internal transfer expense and higher non-interest expense. The higher internal transfer expense and non-interest expense was mostly driven by general increases related to organic growth in our retail business and the recent bank acquisitions. The increase in the provision for loan losses was mainly due to higher quantitative reserves for residential mortgage loans, loan growth, and qualitative reserve allocations related to Hurricane Ian in this category. The negative impact of these items was partially offset by a $7.8 million increase in non-interest income for the third quarter 2022 as compared to the third quarter 2021 largely due to increases in service charges on deposit accounts and brokerage fees within wealth management and trust fees, partially o ffset by 68 lower gains on sales of residential mortgage loans. The net interest income also increased by a $3.4 million in the third quarter 2022 as compared to the same quarter in the prior year, mainly driven by higher average loan balances. The net interest margin on the Consumer Lending portfolio decreased 16 basis points to 2.81 percent for the third quarter 2022 as compared to the third quarter 2021 mainly due to a 37 basis point increase in the costs associated with our funding sou rces, partially offset by a 21 basis point increase in the yield on average loans . The increase in our funding costs was mainly due to the rising market interest rate environment, additional funding sourced through brokered deposits and FHLB advances for loan growth and a shift in some customer preference to the interest-bearing deposit products from non-interest bearing during the third quarter 2022 . The 21 basis point increase in loan yield was largely due to higher yielding new loan volumes and normal repayments of lower yielding loans over the last 12-month period. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources. Commercial Lending Commercial Lending is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, Commercial Lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $8.7 billion and represented 19.2 percent of the total loan portfolio at September 30, 2022. Commercial real estate loans and construction loans totaled $28.1 billion and represented 62.1 percent of the total loan portfolio at September 30, 2022. Average interest earning assets in this segment increased approximately $10.7 billion to $36.0 billion for the three months ended September 30, 2022 as compared to the third quarter 2021 mostly due to acquired loans from Bank Leumi USA and Westchester and strong new organic loan originations primarily concentrated in the commercial real estate loan portfolio. The increases were partially offset by continued run-off of commercial and industrial PPP loans, which totaled only $85.8 million at September 30, 2022 as compared to $874.0 million at September 30, 2021, due to SBA loan forgiveness. Income before income taxes for the three months ended September 30, 2022 for Commercial Lending increased $113.9 million to $255.8 million as compared to the third quarter 2021. The increase was mainly driven by increases in both net interest income and non-interest income and lower provision for loan losses, partially offset by an increase in the internal transfer expense. Net interest income for this segment increased $135.6 million to $372.6 million for the third quarter 2022 as compared to the same period in 2021 primarily due to additional income generated on higher average loan balances and loan yield. Non-interest income increased $11.9 million to $23.5 million for the three months ended September 30, 2022 as compared to the third quarter 2021. The increase was mostly due to general increases in service charges on commercial deposit accounts, swap fee income from derivative interest rate swaps executed with commercial loan customers, foreign exchange fees and fee income from commercial letters of credit. The provision for loan losses decreased by $13.5 million as compared to the second quarter 2021. See details in the "Allowance for Credit Losses for Loans" section of this MD&A. Internal transfer expense increased $42.8 million for the third quarter 2022 as compared to the third quarter 2021 due to general increases related to both organic and acquired growth in our business. The net interest margin for this segment increased 40 basis points to 4.14 percent for the third quarter 2022 as compared to the third quarter 2021 due to a 77 basis point increase in the yield on average loans, partially offset by a 37 basis point increase in the cost of our funding sources. Treasury and Corporate Other Treasury and Corporate Other largely consists of the Treasury managed held to maturity and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are 69 allocated from Treasury and Corporate Other to the Consumer Lending and Commercial Lending 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. Other items disclosed in this segment include net gains and losses on available for sale and held to maturity securities transactions, interest expense related to subordinated notes, amortization (and impairment) of tax credit investments, as well as other non-core items, including merger expenses. Average interest earning assets in this segment increased $554.9 million during the three months ended September 30, 2022 mainly due to an increase of $1.5 billion in average taxable investment securities, partially offset by lower a verage interest bearing deposits with banks. The increase in the average investment securities balance was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA. Average interest bearing deposits with banks decreased $1.2 billion as compared to the same period in 2021 mainly due to continued funding of loan growth, fluctuations in the timing of loan and investment activity and surge deposits from customers that drove higher levels of excess liquidity in the third quarter 2021. The pre-tax loss for this segment totaled $29.4 million for the three months ended September 30, 2022 as compared to a $14.1 million for the same period in 2021. The $15.4 million increase in the pre-tax loss during the 2022 period was mainly due to increases in non-interest expense that were partially offset by an increase in internal transfer income. Non-interest expense increased $71.6 million to $205.5 million during the three months ended September 30, 2022 as compared to the same period a year ago largely due to increases in technology, furniture and equipment, and occupancy expense, as well as higher salaries and employee benefit expenses incurred during the third quarter 2022 and our expanded banking operations resulting from the Bank Leumi USA acquisition . See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. The internal transfer income increased by $48.4 million to $140.2 million for the three months ended September 30, 2022 as compared to the same period a year ago mostly due to general increases related to our growth and recent acquisitions. The net interest margin for this segment increased 88 basis points to 2.01 percent for the for the third quarter 2022 as compared to the third quarter 2021 due to a 125 basis point increase in the yield on average investments, partially offset by a 37 basis point increase in cost of our funding sources. The increase in the yield on average investments as compared to the third quarter 2021 was largely due to investment maturities and prepayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the third quarter 2022 . The following tables present the financial data for Valley's operating segment for the nine months ended September 30, 2022 and 2021: Nine Months Ended September 30, 2022 Consumer Lending Commercial Lending Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,978,732 $ 32,551,062 $ 6,075,623 $ 46,605,417 Income before income taxes 56,796 519,640 (40,905) 535,531 Annualized return on average interest earning assets (before tax) 0.95 % 2.13 % (0.90) % 1.53 % 70 Nine Months Ended September 30, 2021 Consumer Lending Commercial Lending Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,176,086 $ 25,465,276 $ 5,261,185 $ 37,902,547 Income (loss) before income taxes 104,308 411,712 (32,592) 483,428 Annualized return on average interest earning assets (before tax) 1.94 % 2.16 % (0.83) % 1.70 % Consumer Lending Consumer Lending's average interest earning assets increased $802.6 million to $8.0 billion for the nine months ended September 30, 2022 as compared to the same period in 2021. The increase was largely due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit. Income before income taxes generated by Consumer Lending decreased $47.5 million to $56.8 million for the nine months ended September 30, 2022 as compared to the same period in 2021 largely due to a $32.5 million increase in the internal transfer expense coupled with a higher provision for loan losses and higher non-interest expense. The provision for loan losses increased $21.0 million for the nine months ended September 30, 2022 from $6.5 million credit (negative) provision for the same period of 2021. The increase in provision was mainly due to higher reserves related to residential loan growth. See further details in the "Allowance for Credit Losses" section of this MD&A. Net interest income increased $9.5 million primarily due to additional income generated on higher average loan balances. Non-interest income also increased $3.1 million mostly due to increases in wealth management and trust fees and service charges on deposit accounts caused by our recent acquisitions, partially offset by lower net gains on sales of residential mortgage loans for the nine months ended September 30, 2022 as compared to the same period in 2021. Net interest margin on the Consumer Lending portfolio decreased 15 basis points to 2.89 percent for the nine months ended September 30, 2022 as compared to the same period one year ago mainly due to a 10 basis point decrease in the yield on average loans and a 5 basis point increase in the costs associated with our funding sources. The 10 basis point decrease in loan yield was largely due to lower yielding new loan volumes prior to the second quarter 2022 and normal loan repayments. The increase in our funding costs was mainly due to higher interest rates on most of our interest bearing deposit products, including brokered deposits, a low er mix of non-interest bearing deposits, and higher cost short-term borrowings due to the rising interest rate environment in 2022. Commercial Lending Average interest earning assets in Commercial Lending increased $7.1 billion to $32.6 billion for the nine months ended September 30, 2022 as compared to the same period in 2021. This increase was primarily due to strong organic loan growth over the 12-month period ended September 30, 2022, as well as loans acquired from Bank Leumi USA and Westchester. For the nine months ended September 30, 2022, income before income taxes for Commercial Lending increased $107.9 million to $519.6 million as compared to the same period in 2021 mainly driven by increases net interest income and non-interest income, partially offset by higher i nternal transfer expense and provision for loan losses. Net interest income increased $248.3 million to $951.9 million for the nine months ended September 30, 2022 as compared to the same period in 2021 mainly due to higher average commercial loan balances and loan yield during the 2022 period. Non-interest income increased $25.7 million for the nine months ended September 30, 2022 as compared to the same period in 2021 mainly due to a $13.2 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers, a $4.0 million increase in foreign exchange fees and higher service charges on commercial deposit accounts . Internal transfer expense increased $158.3 million to $371.2 71 million for the nine months ended September 30, 2022 as compared to the same period in 2021 largely due to the significant acquired and organic expansion of our operations over the last 12-month period . T he provision for credit losses increased $6.8 million to $34.6 million during the nine months ended September 30, 2022 as compared to $27.8 million for the same period in 2021 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA on April 1, 2022. See the "Allowance for Credit Losses for Loans" section below for further details. The net interest margin for this segment increased 22 basis points to 3.90 percent for the nine months ended September 30, 2022 as compared to the same period in 2021 due to a 27 basis point increase in yield on average loans, partially offset by a 5 basis point increase in the cost of our funding sources. Treasury and Corporate Other Treasury and Corporate Other's average interest earning assets increased $814.4 million during the nine months ended September 30, 2022 as compared to the same period in 2021. Within the category, a $1.3 billion increase in taxable investment securities was partially offset by a $613.1 million decrease in average interest bearing deposits with banks. The increase in average taxable investment securities was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA. The lower levels of excess liquidity were mainly due to the strong organic loan growth over the last 12-month period and a reduction in the impact of surge customer deposits as compared to the 2021 period. The pre-tax loss for this segment totaled $40.9 million for the nine months ended September 30, 2022 as compared to $32.6 million for the same period in 2021. The $8.3 million increase in pre-tax loss was mainly due to an increase in non-interest expense largely offset by higher in internal transfer income and net interest income. Non-interest expense increased $244.1 million to $617.7 million for the nine months ended September 30, 2022 as compared to the same period in 2021 partially due to a $62.6 million increase in merger related expenses, as well as other additional expenses related to our expanded banking operations and organic business growth. However, the comparative 2021 period also included an $8.4 million pre-tax l oss on extinguishment of debt. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. Internal transfer income increased $190.8 million to $463.8 million for the nine months ended September 30, 2022 as compared to the same period in 2021 due to the higher allocation of non-interest expense over the same period. Treasury and Corporate Other's net interest margin increased 74 basis points to 1.87 percent for the nine months ended September 30, 2022 as compared to the same period in 2021 due to a 79 basis point increase in the yield on average investments, and a 5 basis point increase in cost of our funding sources. The increase in the yield on average investments as compared to the same period in 2021 was largely driven by new higher yielding investments and lower premium amortization expense caused, in part, by slower principal repayments in the rising interest rate environment of 2022. ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained 72 in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities. We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 2022. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of September 30, 2022. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model. Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2022. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2022 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the third quarter 2022. The model also utilizes an immediate parallel shift in market interest rates at September 30, 2022. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet. Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income. The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below. 73 Estimated Change in Future Net Interest Income Changes in Interest Rates Dollar Change Percentage Change (in basis points) ($ in thousands) +300 $ 343,087 17.72 % +200 231,412 11.95 +100 117,300 6.06 –100 (109,262) (5.64) –200 (233,970) (12.08) –300 (378,853) (19.57) 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 6.06 percent. Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at September 30, 2022. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows. Liquidity and Cash Requirements Bank Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, 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. The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in ex cess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at September 30, 2022. Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payment related to leases, capital expenditures and other purchase commitments. In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments. Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below. On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities classified as trading and available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximate ly $2.6 billion , representing 5.2 percent of earning assets at September 30, 2022 and $3.5 billion, representing 8.7 percent of earning assets at December 31, 2021. Of the $2.6 billion of liquid assets at September 30, 2022, approximately $348 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approx imately $310 million in principal payments from securities in the total investment portfolio at September 30, 2022 over the 74 next 12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities. Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments from total loans and loans held for sale at September 30, 2022 are projected in accordance with their scheduled contractual terms to be approximately $11.2 billion over the next 12-month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtail ment of lending activities. On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $37.9 billion and $29.4 billion for the nine months ended September 30, 2022 and for the year ended December 31, 2021, respectively, representing 81.4 percent and 78.3 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities. Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well-established relationships with numerous banks. While these lending lines are uncommitted, management believes that the Bank could borrow approximately $2.1 billion from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Letters of Credit (MULOC) to collateralize certain municipal deposits held by Valley. At September 30, 2022, Valley h ad $1.6 billion of MULOCs outst anding for this purpose. Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At September 30, 2022, our borrowing capacity under the Federal Reserve Bank's discount window was $2.1 billion. We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $263.6 million to $919.3 million at September 30, 2022 as compared to December 31, 2021 mainly due a higher utilization of FHLB advances, partially offset by lower repo balances at September 30, 2022. Corporation Liquidity Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our ongoing asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures and subordinated notes. Valley's cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions. 75 Investment Securities Portfolio As of September 30, 2022, we had $43.3 million, $1.3 billion, and $3.7 billion in equity, available for sale and held to maturity debt securities, respectively. There were $4.1 million of trading debt securities at September 30, 2022 consisting of investment grade municipal bonds and U.S. Treasury securities. The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in partnerships that invest in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. The available for sale and held to maturity debt securities portfolios, which comprise the majority of the securities we own, include U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, which 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. We acquired $6.2 million, $505.9 million, and $806.6 million of equity securities, available for sale debt and held to maturity debt securities, respectively, from Bank Leumi USA on April 1, 2022. Allowance for Credit Losses and Impairment Analysis Available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive loss, net of applicable taxes. We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2022 and December 31, 2021 and determined that the declines in fair value were mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and nine months ended September 30, 2022 and the year ended December 31, 2021. As a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2022 and December 31, 2021. Held to maturity debt securities. Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero-loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party . Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.7 million and $1.2 million at September 30, 2022 and December 31, 2021, respectively. There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2022 and 2021. Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the 76 date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at September 30, 2022: September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Available for sale investment grades: * AAA Rated $ 1,116,870 $ 116 $ (137,597) $ 979,389 AA Rated 152,126 — (38,172) 113,954 A Rated 10,066 15 (984) 9,097 BBB Rated 84,667 — (8,132) 76,535 Not rated 101,092 — (8,213) 92,879 Total $ 1,464,821 $ 131 $ (193,098) $ 1,271,854 Held to maturity investment grades: * AAA Rated $ 3,290,361 $ 258 $ (498,324) $ 2,792,295 AA Rated 252,632 7 (25,167) 227,472 A Rated 9,297 2 (204) 9,095 BBB Rated 6,000 — (317) 5,683 Non-investment grade 5,517 — (1,061) 4,456 Not rated 158,213 17 (10,579) 147,651 Total $ 3,722,020 $ 284 $ (535,652) $ 3,186,652 Allowance for credit losses 1,696 — — 1,696 Total, net of allowance for credit losses $ 3,720,324 $ 284 $ (535,652) $ 3,184,956 * Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. The unrealized losses in the AAA and AA rated categories of both the held to maturity and available for sale debt securities portfolios (in the above table) were mainly related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and continued to be driven by the rising interest rate environment during the third quarter 2022. The investment securities held to maturity portfolio included $158.2 million of investments not rated by the rating agencies with aggregate unrealized losses of $10.6 million at September 30, 2022 mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million and several corporate and other debt securities. See Note 7 to the consolidated financial statements for additional information regarding our investment securities portfolio. 77 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: September 30, 2022 June 30, 2022 December 31, 2021 ($ in thousands) Loans Commercial and industrial: Commercial and industrial $ 8,615,557 $ 8,378,454 $ 5,411,601 Commercial and industrial PPP loans 85,820 136,004 435,950 Total commercial and industrial * 8,701,377 8,514,458 5,847,551 Commercial real estate: Commercial real estate 24,493,445 23,535,086 18,935,486 Construction 3,571,818 3,374,373 1,854,580 Total commercial real estate 28,065,263 26,909,459 20,790,066 Residential mortgage 5,177,128 5,005,069 4,545,064 Consumer: Home equity 467,135 431,455 400,779 Automobile 1,711,086 1,673,482 1,570,036 Other consumer 1,063,775 1,026,854 1,000,161 Total consumer loans 3,241,996 3,131,791 2,970,976 Total loans * $ 45,185,764 $ 43,560,777 $ 34,153,657 As a percent of total loans: Commercial and industrial 19.2 % 19.5 % 17.1 % Commercial real estate 62.1 61.8 60.9 Residential mortgage 11.5 11.5 13.3 Consumer loans 7.2 7.2 8.7 Total 100.0 % 100.0 % 100.0 % * Includes net unearned discount and deferred loan fees of $136.5 million, $141.2 million, and $78.5 million at September 30, 2022, June 30, 2022, and December 31, 2021, respectively. The increases from December 31, 2021 were largely due to a $98 million net purchase discount associated with the loans acquired from Bank Leumi USA on April 1, 2022. Loans increased $1.6 billion to approximately $45.2 billion at September 30, 2022 from June 30, 2022 largely due to solid organic loan originations and slower paydown activity of existing loans. C ommercial and industrial, total commercial real estate (including construction) and residential mortgage loans increased 9 percent, 17 percent and 14 percent, respectively, on an annualized basis during the third quarter 2022 . Commercial and industrial loans increased $186.9 million to $8.7 billion at September 30, 2022 as compared to June 30, 2022. Excluding PPP loans, the commercial and industrial loan organic growth totale d $237.1 million during the third quarter 2022 mainly due to solid organic loan volumes largely amongst our pre-existing long-term customer base across most of our primary market areas. In addition, the new loan pipeline was driven by direct calling efforts of our commercial lending team. SBA Paycheck Protection Program (PPP) loans decreased $50.2 million to $85.8 million at September 30, 2022 compared to $136.0 million at June 30, 2022 mainly due to loan forgiveness (repayments). Commercial real estate loans (excluding construction loans) increased $1.0 billion to $24.5 billion at September 30, 2022 from June 30, 2022 driven by solid organic growth mainly in the non-owner occupied and multifamily loan portfolios. The new loan volumes were generated across most of our geographic footprints. Construction loans increased $197.4 million to $3.6 billion at September 30, 2022 from June 30, 2022 mainly due to a high volume of advances on new, and to a lesser extent, pre-existing construction projects during the third quarter 2022. 78 Residential mortgage loans increased $172.1 million, or 13.8 percent on an annualized basis, during the third quarter 2022 primarily due to new loan activity in the purchased home market and an increase in such loans originated for investment rather than sale. New and refinanced residential mortgage loan originations totaled $342.9 million for the third quarter 2022 as compared to $540.7 million and $622.1 million for the second quarter 2022 and third quarter 2021, respectively. Florida originations totaled $92.1 million and represented 27 percent of total residential mortgage loan originations in the quarter. Of the total originations in the third quarter 2022, only $36.7 million of residential mortgage loans were originated for sale rather than held for investment as compared to $61.9 million during the second quarter 2022. During the third quarter 2022, we retained approximately 89 percent of the total residential mortgages originations in our held for investment loan portfolio. We sold approximately $48.4 million of residential mortgage loans held for sale during the third quarter 2022. We may continue to retain a higher percentage of new loan volumes during the fourth quarter 2022 due to several factors, including consumer demand and preferences for certain mortgage products and our management of the interest rate risk and the mix of the interest earning assets on our balance sheet. Additionally, the volume of both new and refinanced loan applications have continued to decline in the early stages of the fourth quarter 2022 due to the increase in the level of mortgage interest rates and may challenge our ability to grow this loan category. Home equity loans increased by $35.7 million to $467.1 million at September 30, 2022 compared to June 30, 2022. However, new home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest and we anticipate growth in this loan category to be challenged by the unfavorable rising interest rate environment. Automobile loans increased by $37.6 million, or 9.0 percent on an annualized basis, to $1.7 billion at September 30, 2022 as compared to June 30, 2022 as loan originations volumes continued to outpace loan repayments during the third quarter 2022 . However, loan originations slowed significantly during the third quarter 2022 as demand for new and used vehicle financing declined due to the higher interest rate environment. W e originated $196.6 million in auto loans through our dealership network during the third quarter 2022 as compared to $278.2 million in the second quarter 2022. Of the total originations, our Florida dealership network contributed $33.7 million in auto loan originations, representing approximately 17 percent of new loans, during the third quarter 2022. Despite increased new automobile inventories available to consumers, we anticipate that the impact of inflation on average new vehicle prices coupled with rising interest rates could have a negative impact on our ability to grow this loan category during the fourth quarter 2022. Other consumer loans increased $36.9 million to $1.1 billion at September 30, 2022 from June 30, 2022. A large part of our lendin g is in northern and central New Jersey, New York City, Long Island, and Florida. 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. Despite the moderate decline in new loan originations for the third quarter 2022, we anticipate solid organic commercial and industrial non-PPP and commercial real estate loan growth to continue in the fourth quarter 2022. Based upon current projections, we anticipate a range of 8 to 10 percent annualized loan growth for the fourth quarter 2022. However, there can be no assurance that those positive trends will continue, or balances will not decline from September 30, 2022 due to several factors, including, but not limited to persistently high inflation, the Federal Reserve's rapid monetary policy tightening, and the ongoing negative impact of Russia-Ukraine war on the global economy. In addition, w e anticipate that residential mortgage and other consumer loan activity will continue to slow meaningfully in the fourth quarter 2022. 79 Non-performing Assets Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at September 30, 2022. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell. Our NPAs decreased $19.9 million to $294.8 million at September 30, 2022 as compared to June 30, 2022 mostly due to declines in non-accrual commercial and industrial and commercial real estate loans mainly caused by a few large loan repayments, and, to a lesser extent, loan charge-offs during the third quarter 2022. NPAs as a percentage of total loans and NPAs totaled 0.65 percent and 0.72 percent at September 30, 2022 and June 30, 2022, respectively (as shown in the table below). We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio and the level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. During the nine months ended September 30, 2022, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the challenges of the global supply chain issues, high inflation and overall uncertain economy and the ongoing impact of COVID-19. However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at September 30, 2022 due to the aforementioned or other factors potentially impacting our lending customers. 80 The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: September 30, 2022 June 30, 2022 March 31, 2021 ($ in thousands) Accruing past due loans: 30 to 59 days past due: Commercial and industrial $ 19,526 $ 7,143 $ 6,723 Commercial real estate 6,196 10,516 30,807 Construction — 9,108 1,708 Residential mortgage 13,045 12,326 9,266 Total consumer 6,196 6,009 5,862 Total 30 to 59 days past due 44,963 45,102 54,366 60 to 89 days past due: Commercial and industrial 2,188 3,870 14,461 Commercial real estate 383 630 6,314 Construction 12,969 3,862 3,125 Residential mortgage 5,947 2,410 2,560 Total consumer 1,174 702 554 Total 60 to 89 days past due 22,661 11,474 27,014 90 or more days past due: Commercial and industrial 15,072 15,470 9,261 Commercial real estate 15,082 — — Residential mortgage 550 1,188 1,746 Total consumer 421 267 400 Total 90 or more days past due 31,125 16,925 11,407 Total accruing past due loans $ 98,749 $ 73,501 $ 92,787 Non-accrual loans: Commercial and industrial $ 135,187 $ 148,404 $ 96,631 Commercial real estate 67,319 85,807 79,180 Construction 61,098 49,780 17,618 Residential mortgage 26,564 25,847 33,275 Total consumer 3,227 3,279 3,754 Total non-accrual loans 293,395 313,117 230,458 Other real estate owned (OREO) 286 422 1,024 Other repossessed assets 1,122 1,200 1,176 Total non-performing assets (NPAs) $ 294,803 $ 314,739 $ 232,658 Performing troubled debt restructured loans $ 69,748 $ 67,274 $ 56,538 Total non-accrual loans as a % of loans 0.65 % 0.72 % 0.65 % Total NPAs as a % of loans and NPAs 0.65 0.72 0.65 Total accruing past due and non-accrual loans as a % of loans 0.87 0.89 0.91 Allowance for loan losses as a % of non-accrual loans 162.15 149.73 157.30 Loans past due 30 to 59 days decreased $139 thousand to $45.0 million at September 30, 2022 as compared to June 30, 2022. Construction loans within this delinquency category decreased $9.1 million due to one loan acquired from Bank Leumi USA included in this category at June 30, 2022 that is reported as 60 to 89 days past due at September 30, 2022. Commercial real estate loans past due 30 to 59 days decreased $4.3 million to $6.2 million at September 30, 2022 as compared to June 30, 2022 mainly due to one loan that became current as to all contractual payments at September 30, 2022. These decreases were largely offset by higher commercial and industrial loans 81 delinquencies mostly driven by matured loans in the process of renewal included in this category at September 30, 2022. Loans past due 60 to 89 days increased $11.2 million to $22.7 million at September 30, 2022 as compared to June 30, 2022 mainly due to the one aforementioned construction loan that migrated to this delinquency category at September 30, 2022. Loans past due 90 days or more and still accruing interest increased $14.2 million to $31.1 million at September 30, 2022 as compared to June 30, 2022. The increase was mainly driven by the two commercial real estate loan relationships totaling $9.7 million and $5.4 million, respectively, included in this delinquency category at September 30, 2022. All loans 90 days or more past due and still accruing interest are considered well-secured and in the process of collection. Non-accrual loans decreased $19.7 million to $293.4 million at September 30, 2022 as compared to $313.1 million at June 30, 2022 mainly due to decreases in non-performing c ommercial and industrial and commercial real estate loans, partially offset by one construction loan relationship totaling $12.7 million put on non-accrual status at September 30, 2022. Non-accrual commercial and industrial loans totaled $135.2 million at September 30, 2022 and included non-performing taxi medallion loans totaling $76.3 million. Non-performing taxi medallion loans decreased $4.1 million from $80.4 million at June 30, 2022 mostly due to partial loan charge-offs totaling $3.8 million related to one borrower during the third quarter 2022. The partial loan charge-offs were fully reserved for in our allowance for loan losses at June 30, 2022. At September 30, 2022, the taxi medallion loans (primarily collateralized by New York City medallions) had related reserve s of $51.4 million, or 67.3 percent of such l oans. Potential declines in the market valuation of taxi medallions and the stressed operating environment within New York City due to the COVID-19 pandemic or general deterioration in economic conditions could negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserve s of $4.7 million within the allow ance for loan losses based upon the taxi medallion loan balances at September 30, 2022. See the "Allowance for Credit Losses for Loans" section below for further details on our reserves. OREO properties totaled $286 thousand at September 30, 2022 and declined $136 thousand as compared to June 30, 2022. During the third quarter 2022, OREO activity continues to trend downward as sales of owned properties outpaced new foreclosures. The sales of OREO properties resulted in net losses of $69 thousand and $692 thousand for the three and nine months ended September 30, 2022, respectively, and net losses of $67 thousand and net gains of $268 thousand for the three and nine months ended September 30, 2021, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totale d $1.9 million and $2.5 million at September 30, 2022 and December 31, 2021, respectively. TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing interest or as non-accrual loans) totaled $69.7 million at September 30, 2022 as compared to $67.3 million at June 30, 2022. Performing TDRs consisted of 87 loans at September 30, 2022. On an aggregate basis, the $69.7 million in performing TDRs at September 30, 2022 had a modified weighted average interest rate of approximately 4.90 percent as compared to a pre-modification weighted average interest rate of 4.32 percent. Allowance for Credit Losses for Loans The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) 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 82 unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit. Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent they do not exist in the historical loss information, and (iii) net expected recoveries of charged-off loan balances. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses. The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors. The expected credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. For the third quarter 2022, we incorporated a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios. At September 30, 2022, Valley moderately increased its probability weighting to the combined Moody's S-3 downside and S-4 (most adverse) scenarios from the Moody's Baseline scenario as compared with such weighting in the June 30, 2022 ACL analysis . Our scenario weighting at September 30, 2022, as well as the standalone Moody's Baseline scenario, reflects a less optimistic outlook than at June 30, 2022 in terms of GDP growth, unemployment levels and potential near term negative economic impacts, given present uncertain economic conditions . At September 30, 2022, the Moody's Baseline forecast included the following specific assumptions: • GDP expansion by about 1.6 percent in the fourth quarter 2022; • Unemployment of 3.7 percent in the fourth quarter 2022 and 3.9 to 4.1 percent over the remainder of the forecast period ending in the third quarter 2024; and • U.S. economic growth continues in 2022; however, it is expected to be challenged by a strained supply chain, rising interest rates and elevated inflation that will negatively affect consumer spending. See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements. 83 The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated. Three Months Ended Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 ($ in thousands) Average loans outstanding $ 44,341,894 $ 42,517,287 $ 32,698,382 $ 40,529,794 $ 32,641,362 Allowance for credit losses for loans Beginning balance $ 490,963 $ 379,252 $ 353,724 $ 375,702 $ 351,354 Allowance for purchased credit deteriorated (PCD) loans (1) — 70,319 — 70,319 — Loans charged-off: Commercial and industrial (5,033) (4,540) (1,248) (11,144) (19,283) Commercial real estate (4,000) — — (4,173) (382) Residential mortgage — (1) — (27) (139) Total consumer (962) (726) (771) (2,513) (3,389) Total charge-offs (9,995) (5,267) (2,019) (17,857) (23,193) Charged-off loans recovered: Commercial and industrial 13,236 1,952 514 16,012 2,781 Commercial real estate 1,729 224 29 2,060 759 Construction — — — — 4 Residential mortgage 163 74 228 694 576 Total consumer 477 697 955 2,431 3,359 Total recoveries 15,605 2,947 1,726 21,197 7,479 Net loan recoveries (charge-offs) 5,610 (2,320) (293) 3,340 (15,714) Provision charged for credit losses 1,835 43,712 3,496 49,047 21,287 Ending balance $ 498,408 $ 490,963 $ 356,927 $ 498,408 $ 356,927 Components of allowance for credit losses for loans: Allowance for loan losses $ 475,744 $ 468,819 $ 342,527 $ 475,744 $ 342,527 Allowance for unfunded credit commitments 22,664 22,144 14,400 22,664 14,400 Allowance for credit losses for loans $ 498,408 $ 490,963 $ 356,927 $ 498,408 $ 356,927 Components of provision for credit losses for loans: Provision for credit losses for loans (2) $ 1,315 $ 38,310 $ 3,496 $ 42,883 $ 17,998 Provision for unfunded credit commitments (2) 520 5,402 — 6,164 3,289 Total provision for credit losses for loans $ 1,835 $ 43,712 $ 3,496 $ 49,047 $ 21,287 Annualized ratio of net (recoveries) charge-offs to average loans outstanding (0.05) % 0.02 % 0.00 % (0.01) % 0.06 % (1) Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022. (2) The three months ended June 30, 2022 and nine months ended September 30, 2022 both include $36.3 million and $4.7 million of provision related to non-PCD loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA in the second quarter 2022. 84 The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the indicated: Three Months Ended Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 ($ in thousands) Net loan recoveries (charge-offs) Commercial and industrial $ 8,203 $ (2,588) $ (734) $ 4,868 $ (16,502) Commercial real estate (2,271) 224 29 (2,113) 377 Construction — — — — 4 Residential mortgage 163 73 228 667 437 Total consumer (485) (29) 184 (82) (30) Total $ 5,610 $ (2,320) $ (293) $ 3,340 $ (15,714) Average loans outstanding Commercial and industrial $ 8,540,485 $ 8,304,822 $ 5,927,149 $ 7,529,507 $ 6,572,931 Commercial real estate 24,306,684 23,319,419 17,733,591 22,416,996 17,139,756 Construction 3,186,732 2,925,741 1,663,745 2,604,559 1,752,589 Residential mortgage 5,134,769 4,727,481 4,458,345 4,925,469 4,358,519 Total consumer 3,173,224 3,239,824 2,915,552 3,053,263 2,817,567 Total $ 44,341,894 $ 42,517,287 $ 32,698,382 $ 40,529,794 $ 32,641,362 Net loan (recoveries) charge-offs to average loans outstanding Commercial and industrial (0.10)% 0.03% 0.01% (0.06)% 0.25% Commercial real estate 0.01 0.00 0.00 0.01 0.00 Construction 0.00 0.00 0.00 0.00 0.00 Residential mortgage 0.00 0.00 (0.01) (0.01) (0.01) Total consumer 0.02 0.00 (0.01) 0.00 0.00 Net recoveries of loan charge-offs totaled $5.6 million for the third quarter 2022 as compared to net loan charge-offs of $2.3 million (excluding $62.4 million of Day 1 PCD loan charge-offs related to the Bank Leumi USA acquisition) for the second quarter 2022 and net loan charge-offs of $293 thousand for the third quarter 2021. The net recoveries of loan charge-offs for the third quarter 2022 were largely driven by two commercial and industrial loan relationships totaling $11.2 million in gross recoveries for the period. Partial loan charge-offs of taxi medallion loans totaled $3.8 million within the commercial and industrial loan category for the third quarter 2022 as compared to $143 thousand and $1.9 million during the third quarter 2021 and second quarter 2022, respectively. The overall level of loan charge-offs (as presented in the above table) continued to remain very low and trend well within management's expectations for the credit quality of the loan portfolio for the third quarter 2022. 85 The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: September 30, 2022 June 30, 2022 September 30, 2021 Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and industrial loans $ 154,051 1.77 % $ 144,539 1.70 % $ 103,877 1.84 % Commercial real estate loans: Commercial real estate 217,124 0.89 227,457 0.97 178,206 0.99 Construction 50,656 1.42 49,770 1.47 21,515 1.19 Total commercial real estate loans 267,780 0.95 277,227 1.03 199,721 1.01 Residential mortgage loans 36,157 0.70 29,889 0.60 24,732 0.57 Consumer loans: Home equity 4,083 0.87 3,907 0.91 4,110 1.02 Auto and other consumer 13,673 0.49 13,257 0.49 10,087 0.40 Total consumer loans 17,756 0.55 17,164 0.55 14,197 0.49 Allowance for loan losses 475,744 1.05 468,819 1.08 342,527 1.05 Allowance for unfunded credit commitments 22,664 22,144 14,400 Total allowance for credit losses for loans $ 498,408 $ 490,963 $ 356,927 Allowance for credit losses for loans as a % total loans 1.10 % 1.13 % 1.09 % The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 1.10 percent at September 30, 2022 as compared to 1.13 percent and 1.09 percent at June 30, 2022 and September 30, 2021, respectively . During the third quarter 2022, the provision for credit losses for loans totaled $1.8 million as compared to $43.7 million and $3.5 million for the second quarter 2022 and third quarter 2021, respectively. The second quarter 2022 provision was largely elevated due to $41 million of provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA. Overall, an increased economic forecast reserve component of our CECL model (driven by a more pessimistic outlook incorporated into the updated Moody's scenarios) was largely offset by lower expected quantitative loss experience at September 30, 2022 . As part of our CECL model analysis at September 30, 2022, we closely assessed the expected credit losses in our Florida loan portfolio in the wake of Hurricane Ian. As a result, our management adjustment and allocated reserves related to the hurricane were immaterial at September 30, 2022. We will continue to support our impacted customers as they recover from the storm and diligently monitor our loss assessment for material changes. Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, 2022 and December 31, 2021, shareholders’ equity totaled approximately $6.3 billion and $5.1 billion, which represented 11.2 percent and 11.7 percent of total assets, respectively. During the nine months ended September 30, 2022, total shareholders’ equity increased by approximately $1.2 billion primarily due to: • additional capital of $1.1 billion issued in the Bank Leumi USA acquisition, • net income of $391.3 million, • a $10.6 million i ncrease attributable to the effect of our stock incentive plan, partially offset by 86 • cash dividends declared on common and preferred stock totaling a combined $168.8 million, • an other comprehensive loss of $147.6 million, and • repurchases of $13.5 million of our common stock with these shares held as treasury stock. Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of September 30, 2022 and December 31, 2021, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below). For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, we deferred 100 percent of the CECL Day 1 impact to shareholders' equity plus 25 percent of the reserve build (i.e. provision for credit losses less net charge-offs) for a two-year period ending January 1, 2022. On January 1, 2022, the deferral amount totaling $47.3 million after-tax started to be phased-in by 25 percent and will increase 25 percent per year until fully phased-in on January 1, 2025. As of September 30, 2022, approximately $11.8 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk-based capital ratios by approximately 3 basis points. 87 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2022 and December 31, 2021: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of September 30, 2022 Total Risk-based Capital Valley $ 5,439,636 11.84 % $ 4,825,155 10.50 % N/A N/A Valley National Bank 5,503,746 11.99 4,820,817 10.50 $ 4,591,254 10.00 % Common Equity Tier 1 Capital Valley 4,178,402 9.09 3,216,770 7.00 N/A N/A Valley National Bank 5,121,353 11.15 3,213,878 7.00 2,984,315 6.50 Tier 1 Risk-based Capital Valley 4,393,243 9.56 3,906,078 8.50 N/A N/A Valley National Bank 5,121,353 11.15 3,902,566 8.50 3,673,004 8.00 Tier 1 Leverage Capital Valley 4,393,243 8.31 2,114,427 4.00 N/A N/A Valley National Bank 5,121,353 9.69 2,114,252 4.00 2,642,815 5.00 As of December 31, 2021 Total Risk-based Capital Valley $ 4,454,485 13.10 % $ 3,569,144 10.50 % N/A N/A Valley National Bank 4,571,448 13.45 3,567,618 10.50 $ 3,397,732 10.00 % Common Equity Tier 1 Capital Valley 3,417,930 10.06 2,379,429 7.00 N/A N/A Valley National Bank 4,308,734 12.68 2,378,412 7.00 2,208,526 6.50 Tier 1 Risk-based Capital Valley 3,632,771 10.69 2,889,307 8.50 N/A N/A Valley National Bank 4,308,734 12.68 2,888,072 8.50 2,718,185 8.00 Tier 1 Leverage Capital Valley 3,632,771 8.88 1,635,508 4.00 N/A N/A Valley National Bank 4,307,734 10.53 1,636,097 4.00 2,045,121 5.00 Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 58.2 percent for the nine months ended September 30, 2022 as compared to 60.7 percent for the year ended December 31, 2021. Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2022 and 2021. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2021 in the MD&A section - “Liquidity and Cash Requirements” and Notes 12 and 13 to the consolidated financial statements included in this report. 88 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See pa ge 72 for a discussion of interest rate sensitivity.