What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-08 · 476 added, 319 removed, 623 unchanged (56% of the section changed)

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Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

• the impact of Federal Reserve actions impacting the level of market interest rates and increases in business failures, specifically among our clients, as well as on our business, our employees and our ability to provide services to our customers;

• the potential impact of recent and possible future bank failures on the business environment in which we operate, including potential customer deposit withdrawals from Valley National Bank or business disruptions or liquidity issues that may affect our customers;

• the impact of Federal Reserve actions affecting the level of market interest rates and increases in business failures, specifically among our clients, as well as on our business, our employees and our ability to provide services to our customers;

• the impact of recent and possible future bank failures on the business environment in which we operate and resulting market volatility and reduced confidence in depository institutions, including impact on stock price, customer deposit withdrawals from Valley National Bank, or business disruptions or liquidity issues that have or may affect our customers;

• the impact of unfavorable macroeconomic conditions or downturns, instability or volatility in financial markets, unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by and factors outside of our control, such as geopolitical instabilities or events;

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• 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;

• 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;

fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;

• changes to laws and regulations, including changes affecting oversight of the financial services industry;

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Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations.

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions in accordance with these policies that affect the reported amounts of

assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated.

At March 31, 2023, 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.

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions in accordance with these policies that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated.

At June 30, 2023, 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.

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Company Overview.

At March 31, 2023, Valley had consolidated total assets of approximately $64.3 billion, total net loans of $48.2 billion, total deposits of $47.6 billion and total shareholders’ equity of $6.5 billion.

A t June 30, 2023, Valley had consolidated total assets of approximately $61.7 billion, total net loans of $49.4 billion, total deposits of $49.6 billion and total shareholders’ equity of $6.6 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.

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We have grown significantly both in asset size and locations over the past several years both through organic efforts and bank acquisitions, including our acquisition of Bank Leumi USA on April 1, 2022.

Recent Industry Developments.

Recent events, including the bank failures in March and April 2023, the rising level of interest rates and recessionary pressures have heightened concerns in the bank sector.

We have consistently operated the Bank with a focus on diversification to maintain stability through various cycles.

During the first quarter of 2023, we continued to position our balance sheet to mitigate potential risks from the market turmoil affecting the banking industry in general and Valley, its clients and communities in particular.

• Total assets increased to $64.3 billion at March 31, 2023, an increase of 11.9 percent from December 31, 2022.

Liquidity remained strong with total liquid assets of approximate ly $7.2 billion at March 31, 2023, representing 12.1 percent of earning assets.

We continue to maintain the ability to access readily available, diverse funding sources to fulfill both short-term and long-term capital needs.

Industry Developments.

The combination of rapidly rising interest rates, increased competition and economic uncertainty continues to weigh on the banking industry in the wake of the recent bank failures.

We have consistently operated the Bank with a focus on diversification to maintain stability through various economic cycles.

During the second quarter 2023, we continued to position our balance sheet to mitigate potential risks from the market uncertainty affecting the banking industry in general and Valley, its clients and communities in particular.

• Total assets decreased to $61.7 billion at June 30, 2023, a decrease of 4.1 percent from March 31, 2023.

Liquidity remained strong with total liquid assets of approximate ly $13.1 billion at June 30, 2023, representing 6.0 percent of interest earning assets.

We continue to maintain significant access to readily available, diverse funding sources to fulfill both short-term and long-term funding needs.

See "Bank Liquidity" section for additional information.

• Total deposits were $47.6 billion at March 31, 2023 and remained relatively unchanged as compared to December 31, 2022.

Our deposit base is highly diversified with 625 thousand commercial and retail deposit customers, an average account size of $58 thousand and an average customer relationship with Valley exceeding 10 years as of March 31, 2023.

Approximately $32.0 billion of our $47.6 billion in deposits at March 31, 2023 are generated from our branch network.

• Total deposits increased $2.0 billion to $49.6 billion at June 30, 2023 as compared to $47.6 billion at March 31, 2023 largely due to higher CD balances.

See the "Deposits and Other Borrowings" section for more details.

• Capital remained strong with ratios of both Valley and the Bank exceeding all capital adequacy requirements at March 31, 2023.

Total shareholders' equity increased $110.8 million to $6.5 billion at March 31, 2023 as compared to December 31, 2022.

• Capital remained strong with ratios of both Valley and the Bank exceeding all capital adequacy requirements at June 30, 2023.

Total shareholders' equity increased $63.6 million to $6.6 billion at June 30, 2023 as compared to March 31, 2023.

See the "Capital Adequacy" section for additional details.

• Total loans increased $1.7 billion, or 14.9 percent on an annualized basis to $48.7 billion at March 31, 2023 from December 31, 2022 largely due to strong organic commercial loan volumes and slow prepayments.

• Total loans increased $1.2 billion, or 10.0 percent on an annualized basis to $49.9 billion at June 30, 2023 from March 31, 2023 mainly due to continued organic loan growth in commercial loan categories and relatively low levels of prepayment activity during the second quarter 2023.

See "Loan Portfolio" section for more information.

• Asset quality continued to reflect our disciplined underwriting and lending practices during the first quarter 2023.

Non-performing assets (NPAs) as a percentage of total loans and NPAs totaled 0.50 percent and 0.58 percent at March 31, 2023 and December 31, 2022, respectively.

• Asset quality continued to reflect our disciplined underwriting and lending practices during the second quarter 2023.

Non-performing assets (NPAs) as a percentage of total loans and NPAs totaled 0.51 percent and 0.50 percent at June 30, 2023 and March 31, 2023, respectively.

See the "Non-Performing Assets" section for additional information.

• Total investment securities were $5.2 billion, or 8.0 percent of total assets, at March 31, 2023 and remained relatively unchanged as compared to December 31, 2022.

• Total investment securities were $5.1 billion, or 8.2 percent of total assets, at June 30, 2023 and remained relatively unchanged as compared to March 31, 2023.

See the "Investment Securities Portfolio" section for more details.

Quarterly Results.

Net income for the first quarter 2023 was $146.6 million, or $0.28 per diluted common share as compared to $116.7 million, or $0.27 per diluted common share, for the first quarter 2022.

Net income for the second quarter 2023 was $139.1 million, or $0.27 per diluted common share as compared to $96.4 million, or $0.18 per diluted common share, for the second quarter 2022.

The $42.6 million increase in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes:

• a $118.4 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, partially offset by higher cost of deposits;

• a $15.0 million increase in non-interest income primarily due to bank acquisition-driven growth in wealth management and trust fees, service charges on deposit accounts and other income, partially offset by a decline in swap fee income within capital markets fees;

• a $37.9 million decrease in our provision for credit losses mainly due to a provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA in the second quarter 2022;

• a $1.6 million increase in net interest income mainly due to increased yields on both new loan originations and adjustable-rate loans and higher average loan balances, largely offset by the increased cost of deposits;

• a $1.5 million increase in non-interest income primarily due to an increase in capital markets fees and wealth management and trust fees, partially offset by lower n et gains on sales of loans ;

• a $16.8 million decrease in non-interest expense was due, in part, to a $40.2 million decrease in merger expenses, partially offset by a $11.2 million restructuring charge and various other increases;

These items were partially offset by:

• a $10.9 million increase in our provision for credit losses due, in part, to a $5 million provision for credit losses on available for sale investment securities;

• a $74.8 million increase in non-interest expense largely due to our expanded banking operations and higher FDIC insurance assessment expense;

• a $17.9 million increase in income tax expense mostly due to higher pre-tax income in the first quarter 2023 .

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 first quarter 2023 results.

• a $15.2 million increase in income tax expense mostly due to higher pre-tax income in the second quarter 2023 .

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 second quarter 2023 results.

Economic Conditions.

During t he first quarter 2023, real gross domestic product (GDP) increased at an annual rate of 1.1 percent as compared to an increase of 2.6 percent during the fourth quarter 2022.

The 1.1 percent increase in real GDP reflected higher consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in private inventory investment and residential fixed investment.

During the first quarter 2023, the Federal Reserve raised the target range for the federal funds rate by 75 basis points, bringing the target range to 4.75 to 5 percent at March 31, 2023, and by an additional 25 basis points in May 2023 to a current range of 5 to 5.25 percent.

Consistent with its previously announced plan, these actions reflect the Federal Reserve’s strong commitment to returning inflation to its 2 percent objective.

The Federal Open Market Committee has indicated it will continue to increase the federal funds rate, but at a slower pace, to stabilize pricing while remaining highly attentive toward the recent banking developments, and the delay in which the cumulative tightening of its monetary policy affects the economy.

During t he second quarter 2023, real gross domestic product (GDP) increased at an annual rate of 2.4 percent as compared to an increase of 2.0 percent during the first quarter 2023.

The 2.4 percent increase in real GDP reflected robust consumer spending, private inventory investment, nonresidential fixed investment, and government spending, as well as improved supply chain.

Inflation moderately cooled, but remained well above the Federal Reserve’s target of 2 percent in the second quarter 2023.

During the first quarter 2023, the Federal Reserve raised the target range for the federal funds rate by an additional 25 basis points in May 2023 and paused rate increases in June to observe the full impact of its changes over the past year.

In July 2023, the Federal Reserve raised the target again by another 25 basis points to a range of 5.25 to 5.5 percent.

The 10-year U.S.

Treasury note yield ended the first quarter of 2023 at 3.48 percent, or 40 basis points lower as compared to the fourth quarter 2022, and the 2-year U.S.

Treasury note yield ended the first quarter 2023 at 4.06 percent, or 35 basis points lower as compared to the fourth quarter 2022.

For all commercial banks in the U.S., commercial and industrial loans decreased approximately by 1.8 percent at March 31, 2023 as compared to December 31, 2022 largely due to decreased customer need for financing inventory

and accounts receivables, investment in property or equipment and mergers or acquisitions.

Many banks increased the cost of credit lines through widening the spreads of loan rates over the costs of funds to firms of all sizes and increasing premiums for riskier loans, while a significant portion of banks also tightened loan covenants and collateralization requirements for firms of all sizes.

A majority of banks that reported tightening standards or terms on commercial and industrial loans cited a less favorable or more uncertain economic outlook and reduced risk tolerance.

Further increases in market interest rates, persistently high inflation, heightened recessionary concerns and the potential for additional fallout from the recent banking crisis, including bank regulatory actions, among other factors, have added a higher level of uncertainty to the future path of the U.S.

economy and an elevated risk of a recession.

Treasury note yield ended the second quarter 2023 at 3.81 percent, or 33 basis points higher as compared to the first quarter 2023, and the 2-year U.S.

Treasury note yield ended the second quarter 2023 at 4.87 percent, or 81 basis points higher as compared to the first quarter 2023.

commercial banks, commercial and industrial loans decreased approximately by 1.3 percent at June 30, 2023 as compared to March 31, 2023, while consumer loans increased by 1.3 percent.

Alternatively, demand for commercial real estate loans remained flat compared to the prior quarter.

Overall the commercial real estate market was constricted by the financial environment this quarter as rising interest rates eroded investment profitability.

Despite higher mortgage rates, demand for residential real estate remained steady, although sales were constrained by low inventories.

While many economic measures continue to defy recessionary concerns, further increases in market interest rates, the inverted yield curve, high inflation, and the potential for additional fallout from the recent banking crisis, including bank regulatory actions, among other factors, have added a higher level of uncertainty to the future path of the U.S.

economy and created a challenging banking environment.

Should economic conditions deteriorate, causing business activity, spending and investment to decline, it may adversely impact our financial results, as highlighted in this MD&A.

Deposits and Other Borrowings

Overall, average deposits increased by $918.1 million to $47.2 billion for the first quarter 2023 as compared to the fourth quarter 2022, mostly due to higher time deposits driven by an increased utilization of fully insured brokered deposits, partially offset by a decrease in average non-interest bearing deposits.

Overall, average deposits increased by $311.6 million to $47.5 billion for the second quarter 2023 as compared to the first quarter 2023 mostly due to higher time deposits driven by successful retail CD generation and increased utilization of fully insured indirect customer (i.e., brokered) deposits, partially offset by a decrease in average non-interest bearing deposits.

The decline in non-interest bearing deposits was largely due to a moderate shift in customer balances to our interest bearing deposit products in a rising interest rate environment and outflows due to attractive investment alternatives to deposits in the marketplace.

Average non-interest-bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 30 percent, 50 percent and 21 percent of total deposits as of March 31, 2023, respectively.

Actual ending balances for deposits decreased $46.0 million to approximately $47.6 billion at March 31, 2023 from December 31, 2022.

Within the deposit categories, non-interest bearing deposits, and savings, NOW and money market deposits decreased $887.5 million and $713.4 million, respectively, and were mostly offset by an increase in time deposits.

Time deposits increased $1.6 billion to $11.1 billion within our overall deposit mix at March 31, 2023 from December 31, 2022 largely due to higher fully FDIC-insured brokered CD balances at March 31, 2023.

Total fully insured brokered deposits, consisting of time deposits and money market accounts, increased $1.2 billion to $7.1 billion at March 31, 2023 as compared to $5.9 billion at December 31, 2022.

NOW and money market deposits;

and time deposits represented approximately 27 percent, 47 percent and 26 percent of total deposits as of June 30, 2023, respectively.

Actual ending balances for deposits increased $2.0 billion to approximately $49.6 billion at June 30, 2023 from March 31, 2023 mainly due to a $3.8 billion increase in time deposits, partially offset by decreases in non-interest bearing deposits, and savings, NOW and money market deposits totaling $1.1 billion and $626.1 million, respectively.

The increase in time deposits from March 31, 2023 was partially driven by higher fully-insured indirect customer CD balances at June 30, 2023.

Total fully-insured indirect customer deposits, consisting of both brokered time deposit and money market accounts, increased $3.2 billion to $10.3 billion at June 30, 2023 from March 31, 2023.

Non-interest bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 29 percent, 48 percent and 23 percent of total deposits as of March 31, 2023, respectively, as compared to 30 percent, 50 percent and 20 percent of total deposits as of December 31, 2022, respectively.

The following table lists, by maturity, uninsured certificates of deposit at March 31, 2023:

and time deposits represented approximately 25 percent, 45 percent and 30 percent of total deposits as of June 30, 2023, respectively, as compared to 29 percent, 48 percent and 23 percent of total deposits as of March 31, 2023, respectively.

The following table lists, by maturity, uninsured certificates of deposit at June 30, 2023:

(in thousands)

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Total $ 2,039,587

Total estimated uninsured deposits were approximately $14.9 billion, or 31 percent of total deposits, at March 31, 2023.

While our diversified commercial and consumer deposit base has remained stable during the early stages of the second quarter 2023, w e believe deposit gathering initiatives may remain challenging due to market competition, attractive investment alternatives, such as U.S.

Treasury securities, changes in customer behavior and other factors.

As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at March 31, 2023.

Total estimated uninsured deposits, excluding collateralized government deposits and intercompany deposits (i.e., deposits eliminated in consolidation), totaled approximately $12.1 billion, or 24 percent of total deposits, at June 30, 2023 as compared to $14.9 billion, or 31 percent of total deposits, at March 31, 2023.

While our diversified commercial and consumer deposit base has remained relatively stable during the early stages of the third quarter 2023, deposit gathering initiatives could remain challenging due to market competition, attractive investment alternatives, such as U.S.

Treasury securities, and other factors.

As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2023.

The following table presents average short-term and long-term borrowings for the periods indicated :

Three Months Ended

March 31, 2023 December 31, 2022 March 31, 2022

Three Months Ended Six Months Ended

June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022

(in thousands)

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Total $ 2,339,727 $ 1,686,830 $ 1,462,638 $ 2,015,081 $ 1,469,515

Average short-term borrowings increased $2.2 billion during the first quarter 2023 as compared to the first quarter 2022 mostly due to the higher utilization of FHLB advances in March 2023 to prudently increase our excess liquidity position.

A verage long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased $210.4 million as compared to the first quarter 2022 mainly due to the issuance of $150 million of subordinated notes during the third quarter 2022 and new FHLB advances issued during the first quarter 2023 .

Actual ending balances for short-term borrowings increased $6.3 billion to $6.4 billion at March 31, 2023 as compared to December 31, 2022.

In March 2023, we significantly increased our short-term borrowings, mostly consisting of FHLB advances, to bolster our liquidity position out of an abundance of caution in the wake of the two recent bank failures.

Since March 31, 2023, many of our short-term FHLB advances have matured and been repaid, resulting in a more normal liquidity position.

Average short-term borrowings increased $1.1 billion during the second quarter 2023 as compared to the first quarter 2023 mostly due to the higher utilization of FHLB advances in March 2023 to increase our excess liquidity

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased $652.9 million as compared to the first quarter 2023 mainly due to the new FHLB advances issued in March 2023 and the second quarter 2023.

Actual ending balances for short-term borrowings decreased $5.3 billion to $1.1 billion at June 30, 2023 as compared to March 31, 2023 mainly due to maturities and repayment of FHLB advances.

In March 2023, we increased our short-term borrowings to bolster our liquidity position out of an abundance of caution in the wake of the two bank failures and subsequently managed these balances to a lower level during the second quarter 2023, partially through the greater use of time deposits.

We continue to closely monitor changes in the current banking environment and have substantial access to additional liquidity.

Long-term borrowings increased to approximately $2.2 billion at March 31, 2023 as compared to $1.5 billion at December 31, 2022 mainly due to new FHLB advances also issued during the first quarter 2023 as part of our overall funding and liquidity strategies.

Actual ending balances for long-term borrowings totaled $2.4 billion at June 30, 2023 and remained relatively unchanged as compared to March 31, 2023.

See the "Bank Liquidity" section for more details on our available funding sources.

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These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.

The following table presents our annualize performance ratios :

The following table presents our annualized performance ratios :

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Selected Performance Indicators ($ in thousands)

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in thousands)

Net income, as reported (GAAP) $ 139,060 $ 96,413 $ 285,611 $ 213,141

Losses on available for sale and held to maturity debt securities, net (net of tax) (a)

Provision for credit losses for available for sale securities (b)

Merger related expenses (net of tax) (c)

Losses (gains) on available for sale and held to maturity debt securities, net (net of tax) (a)

6 (56) 23 (50)

Restructuring charge (net of tax) (b)

8,015 — 8,015 —

Provision for credit losses for available for sale securities (c)

Non-PCD provision for credit losses, (net of tax) (d)

— 29,282 — 29,282

Merger related expenses (net of tax) (e)

— 40,164 2,962 43,743

Net income, as adjusted (non-GAAP) $ 147,081 $ 165,803 $ 301,611 $ 286,116

(a) Included in gains (losses) on securities transactions, net.

(b) Provision relates to one security fully charged off with no resulting tax benefit during the three months ended March 31, 2023.

(c) Merger related expenses are primarily within salary and employee benefits expense for the three months ended March 31, 2023 and 2022.

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.

(b) Represents severance expense related to workforce reductions within salary and employee benefits expense.

(d) Represents provision for credit losses for non-PCD loans and unfunded credit commitments acquired during the period.

(e) Included primarily within salary and employee benefits expense.

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.

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in thousands)

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in thousands)

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in thousands)

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Net income, as adjusted (non-GAAP) 147,081 165,803 301,611 286,116

Average shareholders’ equity $ 6,440,215 $ 5,104,709

Average shareholders’ equity (GAAP) $ 6,546,452 $ 6,238,985 $ 6,493,627 $ 5,673,014

Average goodwill and other intangible assets

2,051,591 2,105,585 2,056,487 1,823,538

Average tangible shareholders’ equity $ 4,378,854 $ 3,566,353

Average tangible shareholders’ equity (non-GAAP) $ 4,494,861 $ 4,133,400 $ 4,437,140 $ 3,849,476

Annualized ROATE (non-GAAP) 12.37 % 9.33 % 12.87 % 11.07 %

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

($ in thousands)

Total non-interest expense, as reported (GAAP) $ 282,971 $ 299,730 $ 555,137 $ 497,070

Restructuring charge (pre-tax) (a)

11,182 — 11,182 —

Amortization of tax credit investments (pre-tax) 5,018 3,193 9,271 6,089

Merger related expenses (pre-tax) (a)

Merger related expenses (pre-tax) (b)

— 54,496 4,133 59,124

Total non-interest expense, as adjusted (non-GAAP) $ 266,771 $ 242,041 $ 530,551 $ 431,857

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Total non-interest income, as reported (GAAP) 60,075 58,533 114,374 97,803

Losses on available for sale and held to maturity debt securities, net (pre-tax) (b)

Losses (gains) on available for sale and held to maturity debt securities, net (pre-tax) (c)

9 (78) 33 (69)

Total net interest income and non-interest income, as adjusted (non-GAAP) $ 479,849 $ 476,615 $ 970,192 $ 833,563

Efficiency ratio (non-GAAP) 55.59 % 50.78 % 54.69 % 51.81 %

(a) Merger related expenses are primarily within salary and employee benefits expense for the three months ended March 31, 2023 and 2022.

(b) Included in gains (losses) on securities transactions, net.

(a) Represents severance expense related to workforce reductions within salary and employee benefits expense.

(b) Included primarily within salary and employee benefits expense.

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:

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Common shares outstanding 507,619,430 506,374,478

Shareholders’ equity $ 6,511,581 $ 6,400,802

Shareholders’ equity (GAAP) $ 6,575,184 $ 6,400,802

Preferred stock 209,691 209,691

Goodwill and other intangible assets 2,046,882 2,066,392

Tangible common shareholders’ equity $ 4,245,783 $ 4,124,719

Tangible common shareholders’ equity (non-GAAP) $ 4,318,611 $ 4,124,719

Book value per common share (GAAP) $ 12.54 $ 12.23

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Net Interest Income

N et interest income on a tax equivalent basis totaling $437.5 million for the first quarter 2023 decreased $29.8 million as compared to the fourth quarter 2022 and increased $119.1 million as compared to the first quarter 2022.

The decrease as compared to the fourth quarter 2022 was mainly due to (i) the negative impact of the significant increase in our excess cash liquidity and other borrowings resulting from prudent and cautionary measures taken by us during the market turmoil of March 2023, (ii) higher interest rates on our average interest bearing deposits and other borrowings, as well as (iii) fewer days in the first quarter 2023.

Interest expense increased $103.5 million to $284.2 million for the first quarter 2023 as compared to the fourth quarter 2022 l argely due to a $4.0 billion increase in average interest bearing liabilities, including increases of $2.1 billion and $1.9 billion in average time deposits and short-term borrowings, respectively.

Interest income on a tax equivalent basis increased $73.7 million to $721.7 million in the first quarter 2023 as compared to the fourth quarter 2022.

The increase wa s mostly due to higher average loan balances driven by our organic new loan volumes, slowing loan prepayments, and increased yields on both new originations and adjustable rate loans in our portfolio.

Average interest earning assets increased $15.1 billion to $55.4 billion for the first quarter 2023 as compared to the first quarter 2022 mainly due to a $13.2 billion increase in average loan balances and higher average investment balances partly caused by the acquisition of Bank Leumi USA on April 1, 2022.

Compared to the fourth quarter 2022, average interest earning assets increased by $3.0 billion during the first quarter 2023.

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 and $1.1 billion increase in average interest bearing cash held mainly overnight with the Federal Reserve Bank of New York as part of our liquidity management.

Average interest bearing liabilities increased $11.5 billion to $37.6 billion for the first quarter 2023 as compared to the first quarter 2022 mainly due to increases of $9.1 billion and $2.2 billion in average time deposits and short-term borrowings, respectively.

The increases in average time deposits and short-term borrowings were largely due to the liquidity management efforts during March 2023, and our increased usage of fully FDIC-insured brokered CD and successful retail CD initiatives as part of our funding sources for loan growth over the last 12 months.

As compared to the fourth quarter 2022, average interest bearing liabilities increased by $4.0 billion in the first quarter 2023 largely due to a $2.1 billion increase in average time deposits mainly driven by the higher fully insured brokered CD balances and additional FHLB advances within short-term borrowings.

Net interest income on a tax equivalent basis totaling $421.3 million for the second quarter 2023 decreased $16.2 million as compared to the first quarter 2023 and increased $1.7 million as compared to the second quarter 2022.

The decrease as compared to the first quarter 2023 was mainly due to a $3.3 billion increase in average interest bearing liabilities and higher interest rates on most interest bearing deposit products and short-term borrowings, partially offset by higher loan yields.

As a result, interest expense increased $83.5 million to $367.7 million for the second quarter 2023 as compared to the first quarter 2023.

Interest income on a tax equivalent basis increased $67.3 million to $789.0 million in the second quarter 2023 as compared to the first quarter 2023.

The increase was mostly due to higher yields on both new originations and adjustable rate loans in our portfolio and a $1.6 billion increase in average loan balances driven by organic new loan volumes and a continuation of slower loan prepayments.

Average interest earning assets increased $8.5 billion to $57.4 billion for the second quarter 2023 as compared to the second quarter 2022 mainly due to a $6.9 billion increase in average loan balances and $1.4 billion increase in average interest bearing cash balances largely due to higher excess cash held overnight as part of our prudent liquidity management navigating the fallout from the recent bank failures.

Compared to the first quarter 2023,

average interest earning assets increased by $2.0 billion during the second quarter 2023.

The increase was primarily driven by a $1.6 billion increase in average loan balances mainly due to organic commercial loan growth and a $351.6 million increase in average interest bearing cash as compared to the prior linked quarter.

Average interest bearing liabilities increased $11.2 billion to $40.9 billion for the second quarter 2023 as compared to the second quarter 2022 mainly due to increases of $8.1 billion and $2.3 billion in average time deposits and short-term borrowings, respectively.

The increases in average time deposits and short-term borrowings were largely due to the enhanced liquidity management efforts during the first half of 2023, including increased usage of fully FDIC-insured indirect customer CD and successful retail CD initiatives.

As compared to the first quarter 2023, average interest bearing liabilities increased by $3.3 billion in the second quarter 2023 largely due to a $2.5 billion increase in average time deposits mainly driven by increased usage of fully FDIC-insured indirect customer CD and successful retail CD initiatives, as well as an increase in short-term borrowings, as part of our funding and liquidity sources.

See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Net interest margin on a tax equivalent basis of 3.16 percent for the first quarter 2023 decreased by 41 basis points from 3.57 percent for the fourth quarter 2022 and remained unchanged from the first quarter 2022.

The decrease as

compared to the fourth quarter was largely driven by (i) the net impact of the excess liquidity measures taken in March 2023 and (ii) two fewer days during the first quarter 2023, partially offset by higher yields on average interest earning assets.

The yield on average interest earning assets increased by 26 basis points on a linked quarter basis mostly due to the aforementioned higher yields on new and adjustable rate loans in the first quarter 2023 as compared to the fourth quarter 2022.

The yield on average loans increased by 28 basis points to 5.48 percent for the first quarter 2023 as compared to the fourth quarter 2022 largely due to the higher level of market interest rates.

The yields on average taxable and non-taxable investments also increased 12 basis points and 9 basis points, respectively, from the fourth quarter 2022, l argely due to investment maturities and repayments 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 first quarter 2023.

Our cost of total average deposits increased to 1.96 percent for the first quarter 2023 from 1.36 percent for the fourth quarter 2022.

The overall cost of average interest bearing liab ilities also increased 87 basis points to 3.02 percent for the first quarter 2023 as compared to the fourth quarter 2022 largely due to a 148 basis point increase in cost of average short-term borrowings.

Based upon our revised estimates at March 31, 2023, we anticipate net interest income growth of approximately 10 to 12 percent for the full year of 2023, down from 16 to 18 percent previously estimated in the MD&A of Valley's Form 10-K for the year ended December 31, 2022.

While our revised outlook for our net interest income is still 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 first quarter 2023.

The following table reflects the components of net interest income for the three months ended March 31, 2023, December 31, 2022 and March 31, 2022:

Net interest margin on a tax equivalent basis of 2.94 percent for the second quarter 2023 decreased by 22 basis points and 49 basis points from 3.16 percent and 3.43 percent for the first quarter 2023 and the second quarter 2022, respecti vely.

The decrease as compared to the first quarter 2023 was largely driven by higher interest rates on interest bearing deposits and short-term borrowings, partially offset by a 29 basis point increase in the yield on average interest earning assets.

The yield on average loans increased by 30 basis points to 5.78 percent for the second quarter 2023 as compared to the first quarter 2023 largely due to higher interest rates on new originations and adjustable rate loans.

The yields on average taxable and non-taxable investments also increased 13 basis points and 16 basis points, respectively, from the first quarter 2023 mostly due to investment maturities and prepayments redeployed into new higher yielding securities during the first half of 2023.

Our cost of total average deposits increased to 2.45 percent for the second quarter 2023 from 1.96 percent and 0.19 percent for the first quarter 2023 and the second quarter 2022, respectively.

The overall cost of average interest bearing liabilities also increased 57 basis points to 3.59 percent for the second quarter 2023 as compared to the first quarter 2023 primarily driven by the rising market interest rates on deposits during the first half of 2023.

Based upon our current estimates at June 30, 2023 , we anticipate net interest income growth in the low single digits (i.e., less than 10 percent) for the full year of 2023 , revised down fro m 16 to 18 percent previously estimated in the M D&A of Valley's Form 10-K for the year ended December 31, 2022.

While we are seeing initial signs of stabilization in net interest income and margin as compared to the declines in both experienced in the first quarter 2023, 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 second quarter 2023.

The following table reflects the components of net interest income for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and

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Three Months Ended

March 31, 2023 December 31, 2022 March 31, 2022

June 30, 2023 March 31, 2023 June 30, 2022

Balance Interest Average

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2.94 % 3.16 % 3.43 %

The following table reflects the components of net interest income for the six months ended June 30, 2023 and 2022:

Six Months Ended

June 30, 2023 June 30, 2022

Average Balance Interest Average Rate Average Balance Interest Average Rate

($ in thousands)

Interest earning assets:

$ 48,663,070 $ 1,370,446 5.63 % $ 38,592,151 $ 732,991 3.80 %

Taxable investments (3)

5,049,563 76,910 3.05 4,377,990 50,725 2.32

Tax-exempt investments (1)(3)

626,261 13,800 4.41 543,646 9,757 3.59

Interest bearing deposits with banks 2,023,900 49,481 4.89 1,096,181 2,030 0.37

Total interest earning assets 56,362,794 1,510,637 5.36 44,609,968 795,503 3.57

Allowance for credit losses (456,410) (398,258)

Cash and due from banks 429,957 354,433

Other assets 4,705,742 3,864,997

Unrealized gains on securities available for sale, net (164,291) (13,671)

Total assets $ 60,877,792 $ 48,417,469

Liabilities and shareholders’ equity

Interest bearing liabilities:

Savings, NOW and money market deposits $ 22,948,425 $ 315,608 2.75 % $ 21,781,907 $ 26,749 0.25 %

Time deposits 10,973,830 206,062 3.76 3,577,933 6,100 0.34

Total interest bearing deposits 33,922,255 521,670 3.08 25,359,840 32,849 0.26

Short-term borrowings 3,344,069 84,156 5.03 1,101,535 4,889 0.89

Long-term borrowings (4)

2,015,081 46,078 4.57 1,469,515 19,838 2.70

Total interest bearing liabilities 39,281,405 651,904 3.32 27,930,890 57,576 0.41

Non-interest bearing deposits 13,387,299 13,989,897

Other liabilities 1,715,461 823,668

Shareholders’ equity 6,493,627 5,673,014

Total liabilities and shareholders’ equity $ 60,877,792 $ 48,417,469

Net interest income/interest rate spread (5)

$ 858,733 2.04 % $ 737,927 3.16 %

Tax equivalent adjustment (2,948) (2,098)

Net interest income, as reported $ 855,785 $ 735,829

Net interest margin (6)

3.04 % 3.30 %

Tax equivalent effect 0.01 0.01

Net interest margin on a fully tax equivalent basis (6)

3.05 % 3.31 %

_____________

(1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate.

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Change in Net Interest Income on a Tax Equivalent Basis

Three Months Ended March 31, 2023

Compared to March 31, 2022

Three Months Ended June 30, 2023 Compared to June 30, 2022 Six Months Ended June 30, 2023 Compared to June 30, 2022

Volume Change

Change Change

Volume Change

(in thousands)

5 unchanged sentences

Total increase in interest income

83,281 251,336 334,617 236,959 478,175 715,134

Interest Expense:

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Total increase in interest expense

42,523 290,384 332,907 68,933 525,395 594,328

Total increase (decrease) in net interest income $ 40,758 $ (39,048) $ 1,710 $ 168,026 $ (47,220) $ 120,806

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Non-Interest Income

Non-interest income increased $15.0 million for the three months ended March 31, 2023 as compared to the same period of 2022.

The following table presents the components of non-interest income for the three months ended March 31, 2023 and 2022:

Non-interest income increased $1.5 million and $16.6 million for the three and six months ended June 30, 2023, respectively, as compared to the same period of 2022.

The following table presents the components of non-interest income for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in thousands)

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Total non-interest income $ 60,075 $ 58,533 $ 114,374 $ 97,803

Wealth management and trust fees income increased $4.5 million for the three months ended March 31, 2023 as compared to the same period in 2022 primarily due to higher brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly owned broker dealer subsidiary on April 1, 2022.

Brokerage fees totaled $4.8 million for the three months ended March 31, 2023.

Capital markets income decreased $3.5 million for the three months ended March 31, 2023 as compared to the same quarter in 2022.

This decrease was largely driven by lower fee income from transactions executed for commercial customer related interest rate swaps, partially offset by an increase in foreign exchange fees .

Swap fees income totaled $7.8 million and $14.0 million for the three months ended March 31, 2023 and 2022, respectively.

Foreign excha nge fees totaled $2.0 million and $369 thousand for the three months ended March 31, 2023 and 2022, respectively.

Service charges on deposit accounts increased $4.3 million for the three months ended March 31, 2023 as compared to the same period in 2022 largely related to higher checking account revenues resulting from additional deposit accounts acquired from Bank Leumi USA.

Net gains and losses on securities transactions for the three months ended March 31, 2023 and 2022 were almost entirely due to net trading gains and losses related to our municipal bond trading portfolio.

Other non-interest income increased $7.8 million for the three months ended March 31, 2023 as compared to the same quarter in 2022 mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi USA and organic growth of our business operations over the last 12 months.

Wealth management and trust fees income increased $1.6 million and $6.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

The increase as compared to the second quarter 2022 was mainly driven by higher revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments.

The increase for the six months ended June 30, 2023 was largely related to higher brokerage fees related to our broker dealer subsidiary, Valley Financial Management, Inc., acquired on April 1, 2022 from Bank Leumi USA.

Brokerage fees totaled $9.7 million and $4.9 million for the six months ended June 30, 2023 and 2022, respectively.

Capital markets income increased $2.3 million and decreased $1.2 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mainly due to changes in volume of interest rate swap transactions executed for commercial loan customers.

Service charges on deposit accounts increased $4.7 million for the six months ended June 30, 2023 compared to the same period in 2022 largely due to the additional deposit accounts acquired from Bank Leumi USA on April 1, 2022.

Net gains on sales of loans decreased $2.4 million and $2.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mostly due to lower loan sale volumes as we continued to retain a higher percentage of new loan volumes during the first half of 2023.

During the six months ended June 30, 2023, we sold $71.8 million of residential mortgage loans as compared to $326.2 million for same period in 2022.

Other non-interest income increased $6.9 million for the six months ended June 30, 2023 as compared to the same period in 2022.

The increase for the six months ended June 30, 2023 was mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi USA and organic growth of our business operations over the last 12 months.

Non-Interest Expense

Non-interest expense increased $74.8 million for the three months ended March 31, 2023 as compared to the same period in 2022.

The following table presents the components of non-interest expense for the three months ended March 31, 2023 and 2022:

Non-interest expense decreased $16.8 million and increased $58.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

The following table presents the components of non-interest expense for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

(in thousands)

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Total non-interest expense $ 282,971 $ 299,730 $ 555,137 $ 497,070

Salary and employee benefits expense increased $37.3 million for the three months ended March 31, 2023 as compared to the same period of 2022.

The increase was primarily due to increases in our headcount to support our expansion of operations resulting from the Bank Leumi USA acquisition, significant organic growth in our operations, as well as inflationary pressures in the labor market.

Salary and employee benefits expense also included $4.1 million of merger related expenses primarily consisting of severance and retention compensation for the three months ended March 31, 2023.

Net occupancy expense increased $1.3 million for the three months ended March 31, 2023 as compared to the same period of 2022 mainly due to higher rent and depreciation expense, partially offset by lower repair and maintenance costs in the first quarter 2023.

Technology, furniture and equipment expense increased $10.5 million for the three months ended March 31, 2023 as compared to the same periods of 2022.

The increase was largely driven by additional investments in technology and equipment and higher depreciation expense in the first quarter 2023.

FDIC insurance assessment expense increased $5.0 million for the three months ended March 31, 2023 as compared to the same period of 2022 mainly due to growth in our balance sheet, as well as a two basis point increase in the initial base rate effective for the first quarter 2023.

Amortization of other intangible assets increased $6.1 million for the three months ended March 31, 2023 as compared to the same period of 2022 mainly due to higher amortization expense of core deposits and other intangible assets resulting from Bank Leumi USA acquisition.

Salary and employee benefits expense decreased $5.2 million and increased $32.0 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

As compared to second quarter 2022, the decline was largely due to decreases in cash incentive compensation expense and Bank Leumi USA merger related costs (which totaled $28.0 million in the second quarter 2022), partially offset by higher salary expense and a restructuring charge of $11.2 million, consisting of severance expense related to recent workforce reductions.

The increase for the six months ended June 30, 2023 was primarily driven by higher headcount from the Bank Leumi USA acquisition and organic growth in our operations, the aforementioned restructuring charge, and inflationary pressures on our overall labor costs.

These increases were partially offset by lower cash incentive compensation expense and merger related costs.

The merger related costs totaled $4.1 million for the six months ended June 30, 2023 as compared to $28.0 million for the same period in 2022.

Net occupancy expense increased $3.5 million and $4.8 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mainly driven by increased lease expense.

Technology, furniture and equipment expense decreased $17.4 million and $6.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.

The second quarter 2023 decrease was largely due to Bank Leumi USA merger related expenses (largely consisting of technology related costs) totaling $15.3 million for the second quarter 2022.

The decrease for the six months ended June 30, 2023 was mainly due to decline in merger related expense, partially offset by higher depreciation expense as compared to the same period in 2022.

FDIC insurance assessment expense increased $5.1 million and $10.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods of 2022 mainly due to growth in our balance sheet, as well as a two basis point increase in the initial base rate effective for 2023.

Amortization of other intangible assets increased $4.5 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to higher amortization expense of core deposits and other intangible assets resulting from Bank Leumi USA acquisition.

See Note 9 to the consolidated financial statements for additional information.

Professional and legal fees increased $2.1 million for the three months ended March 31, 2023 as compared to the same period of 2022.

The increase was primarily due to higher consulting expense mainly related to technology transformation and new product initiatives, partially offset by lower managed services expense in the first quarter 2023.

Other non-interest expense increased $11.3 million f or the three months ended March 31, 2023 as compared to the same period of 2022 largely due to general increases related to the Bank Leumi acquisition, advertising and charges related to collateral liabilities in connection with derivative transactions .

Income tax expense totaled $57.2 million and $39.3 million for the three months ended March 31, 2023 and 2022, respectively.

Our effective tax rate was 28.1 percent and 25.2 percent for the three months ended March 31, 2023 and 2022, respectively.

The increase in the effective tax rate in the first quarter 2023 as compared to the same period of 2022 was mainly due to a smaller benefit in excess stock compensation and a newly established valuation allowance against a loss provision on available for sale debt securities.

Professional and legal fees decreased $9.0 million and $6.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022, largely due to declines in merger related expense, partially offset by higher technology transformation consulting and managed services.

Within the category, merger

related expenses (related to the Bank Leumi USA acquisition) totaled $11.4 million and $12.2 million for the three and six months ended June 30, 2023 and 2022, respectively.

Other non-interest expense increased $6.0 million and $17.3 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 primarily due to general increases in several categories caused by our acquired and organic growth in operations, higher charitable contributions, and increased charges related to collateral liabilities in connection with derivative transactions.

We continuously monitor and closely manage our non-interest expense in an effort to optimize our operating efficiency.

To offset the current headwinds impacting our net interest income and margin, we began the implementation of a new cost saving initiative in late June 2023.

The identified cost savings are expected to primarily come from workforce reductions, more efficient third-party consulting and service usage, and specific technology cost reductions.

As noted above, we incurred $11.2 million of severance expense associated with these efforts during the second quarter 2023.

Overall, the new initiative is expected to generate more than $40 million of annual pre-tax cost savings and be realized over the next 12 months.

Income tax expense totaled $51.8 million for the second quarter 2023 as compared to $57.2 million and $36.6 million for the first quarter 2023 and second quarter 2022, respectively.

Our effective tax rate was 27.1 percent, 28.1 percent and 27.5 percent for the second quarter 2023, first quarter 2023 and second quarter 2022, respectively.

The decline in the effective tax rate in the second quarter 2023 was primarily due to the release of a state valuation allowance related to New Jersey net operating loss carryforwards.

GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year.

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Operating Segments

At March 31, 2023 and December 31, 2022, Valley managed its business operations under reportable segments consisting of Consumer Banking, Commercial Banking and Treasury and Corporate Other.

Valley manages its business operations under reportable segments consisting of Consumer Banking, Commercial Banking and Treasury and Corporate Other.

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 and no changes to the reportable segments were determined necessary during the first quarter 2023.

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.

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

Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

The balances presented for three months ended March 31, 2022 in the tables below reflect reclassifications to conform with the presentation of the current operating segment structure implemented in the second quarter 2022.

These reclassifications did not impact Valley's consolidated results.

See Valley's Form 10-K for the year ended December 31, 2022 for additional information.

The following tables present the financial data for Valley's operating segments for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, 2023

The following tables present the financial data for Valley's operating segments for the three months ended June 30, 2023 and 2022:

Three Months Ended June 30, 2023

Banking Commercial

5 unchanged sentences

0.55 % 2.44 % (3.49) % 1.33 %

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Banking Commercial

7 unchanged sentences

Consumer Banking

Consumer Banking represented 18.2 percent of our loan portfolio at March 31, 2023, 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 11.3 percent of our loan portfolio at March 31, 2023) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (which represented 3.5 percent of total loans at March 31, 2023) is relatively unaffected by movements in the market level of interest rates.

Consumer Banking represented 18.0 percent of our loan portfolio at June 30, 2023, 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 11.1 percent of our loan portfolio at June 30, 2023) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (which represented 3.3 percent of total loans at June 30, 2023) 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 Banking 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 within Consumer Banking increased $1.1 billion to $8.8 billion for the three months ended March 31, 2023 as compared to the same period of 2022 .

The increase was largely due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, and, to a lesser extent, growth in automobile, home equity and secured personal lines of credit.

Income before income taxes for Consumer Banking decreased $22.0 million to $1.0 million for the first quarter 2023 as compared to the first quarter 2022 mainly driven by lower net interest income, and, to a lesser extent, increases in the provision for loan losses and internal transfer expense.

Net interest income decreased $13.9 million in the first quarter 2023 as compared to the same period of 2022 due to additional interest expense generated from higher average deposit and other borrowing balances, as well as an increase in interest rate s.

The provision for loan losses increased $4.6 million for the three months ended March 31, 2023 due to additional reserves related to residential loan growth, as well as deterioration in our economic forecast component within our CECL model as compared to one year ago.

Average interest earning assets within Consumer Banking increased $937.2 million to $8.9 billion for the three months ended June 30, 2023 as compared to the same period of 2022 .

Income before income taxes for Consumer Banking decreased $1.5 million to $12.2 million for the second quarter 2023 as compared to the second quarter 2022 mainly driven by lower net interest income and, to a lesser extent, an increase in non-interest expense.

Net interest income decreased $23.0 million in the second quarter 2023 as compared to the same period of 2022 due to additional interest expense generated from higher average deposit and other borrowing balances, as well as an increase in the cost of such interest bearing liabilities .

The negative impact of these items was partially offset by an increase in non-interest income and lower internal transfer expense.

Non-interest income increased $8.4 million mainly due to increases in wealth management and trust fees, capital markets and service charges on deposit accounts, partially offset by lower gains on sales of loans.

Internal transfer expense decreased $15.6 million for the second quarter 2023 as compared to the second quarter 2022 due to the lower allocation of non-interest expense over the same period.

The provision for loan losses decreased $1.9 million for the three months ended June 30, 2023 due to a decrease in non-economic qualitative factors as compared to one year ago.

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

Internal transfer expense increased $2.2 million for the first quarter 2023 as compared to the first quarter 2022.

Net interest margin on the Consumer Banking portfolio decreased 101 basis points to 1.93 percent for the first quarter 2023 as compared to the first quarter 2022 mainly due to a 179 basis point increase in the costs associated with our funding sou rces, partially offset by a 78 basis point increase in the yield on average loans .

The increase in our funding costs was mainly driven by higher interest rates on most of our interest bearing commercial and retail deposit products, increased utilization of fully FDIC-insured brokered deposits and higher cost of other borrowings held during the first quarter 2023 .

Net interest margin on the Consumer Banking portfolio decreased 134 basis points to 1.60 percent for the second quarter 2023 as compared to the second quarter 2022 mainly due to a 224 basis point increase in the costs associated with our funding sou rces, partially offset by a 90 basis point increase in the yield on average loans .

The increase in our funding costs was mainly driven by higher interest rates on most of our interest bearing commercial and retail deposit products, increased utilization of fully FDIC-insured indirect customer deposits and higher cost of other borrowings held during the second quarter 2023 .

The 90 basis point increase in loan yield was largely due to higher yielding new loan volumes and adjustable rate loans in our portfolio.

See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.

The return on average interest earning assets before income taxes for the consumer banking segment was 0.05 percent for the first quarter 2023 compared to 1.20 percent for the first quarter 2022.

The return on average interest earning assets before income taxes for the consumer banking segment was 0.55 percent for the second quarter 2023 compared to 0.69 percent for the second quarter 2022.

Commercial Banking

1 unchanged sentence

Due to the portfolio’s interest rate characteristics, Commercial Banking is Valley’s business segment that is most sensitive to movements in market interest rates.

Commercial and industrial loans totaled approximately $9.0 billion and represented 18.6 percent of the total loan portfolio at March 31, 2023.

Commercial real estate loans and construction loans totaled $30.8 billion and represented 63.2 percent of the total loan portfolio at March 31, 2023.

Average interest earning assets in Commercial Banking increased $12.1 billion to $39.1 billion for the three months ended March 31, 2023 as compared to the first quarter 2022.

This increase was primarily due to strong organic loan growth concentrated in the commercial real estate loan portfolio as well as commercial loans acquired from Bank Leumi USA.

Income before income taxes for Commercial Banking increased $86.8 million to $223.6 million for the three months ended March 31, 2023 as compared to the same period of 2022 mainly due to an increase in net interest income, partially offset by higher internal transfer expense and non-interest expense.

Net interest income for this segment increased $131.6 million to $378.2 million for the first quarter 2023 as compared to the same period in 2022 primarily due to higher average commercial loan balances and higher interest rates on new and adjustable loans.

Internal transfer expense increased $31.7 million to $131.6 million for the three months ended March 31, 2023 as compared to the first quarter 2022 largely due to general in creases related to both organic and acquired growth in our business operations over the last 12-month period.

Non-interest expense also increased $10.6 million to $35.7 million for the three months ended March 31, 2023 as compared to the first quarter 2022.

The provision for credit losses increased $1.4 million to $3.0 million as compared to the same period in 2022 mainly due to a moderate increase in certain qualitative reserves.

Commercial and industrial loans totaled approximately $9.3 billion and represented 18.6 percent of the total loan portfolio at June 30, 2023.

Commercial real estate loans and construction loans totaled $31.6 billion and represented 63.4 percent of the total loan portfolio at June 30, 2023.

Average interest earning assets in Commercial Banking increased $6.0 billion to $40.6 billion for the three months ended June 30, 2023 as compared to the second quarter 2022 primarily due to strong organic loan growth concentrated in the commercial real estate loan portfolio.

Income before income taxes for Commercial Banking increased $120.5 million to $247.5 million for the three months ended June 30, 2023 as compared to the same period of 2022 mainly due to an increase in net interest income and decreases in the provision for credit losses and internal transfer expense, partially offset by higher non-interest expense.

Net interest income for this segment increased $41.0 million to $373.7 million for the second quarter 2023 as compared to the same period in 2022 primarily due to higher average commercial loan balances and higher interest rates on new and adjustable loans.

Internal transfer expense decreased $55.0 million to $102.4 million for the three months ended June 30, 2023 as compared to the second quarter 2022.

The provision for credit losses decreased $35.5 million to $2.8 million as compared to the same period in 2022 mainly due to elevated provision for credit losses for the second quarter 2022 related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA.

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

The net interest margin for this segment increased 22 basis poin ts to 3.87 percent for the first quarter 2023 as compared to the first quarter 2022 due to a 201 basis point increase in the yield on average loans, partially offset by a 179 basis point increase in the cost of our funding sources.

The return on average interest earning assets before income taxes for the consumer banking segment was 2.29 percent for the three months ended March 31, 2023 compared to 2.03 percent to the same period in 2022.

Non-interest expense increased $10.9 million to $35.4 million for three months ended June 30, 2023 as compared to the second quarter 2022.

The net interest margin for this segment decreased 16 basis poin ts to 3.69 percent for the second quarter 2023 as compared to the second quarter 2022 due to a 224 basis point increase in the cost of our funding sources, partially offset by a 208 basis point increase in the yield on average loans.

The return on average interest earning assets before income taxes for the commercial banking segment was 2.44 percent for the three months ended June 30, 2023 compared to 1.47 percent for the same period in 2022.

Treasury and Corporate Other

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Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer Banking and Commercial Banking 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 within Treasury and Corporate Other increased $1.8 billion to $7.5 billion for the three months ended March 31, 2023 mainly due to investment securities acquired from Bank Leumi USA, as well as other select investment securities purchases largely classified as held to maturity over the last 12-month period .

Average interest bearing deposits with banks increased $427.7 million as compared to the same period in 2022 due to additional cash held as a cautionary liquidity management measure in March 2023.

For the three months ended March 31, 2023, loss before income taxes in this segment totaled $20.9 million compared to $3.8 million for the same period in 2022.

The $17.1 million increase in the pre-tax loss during the first quarter 2023 period was mainly due to higher non-interest expense, partially offset by increases in internal transfer income and non-interest income.

Non-interest expense increased $62.5 million to $218.2 million during the three months ended March 31, 2023 as compared to the same period in 2022 largely due to expenses related to our expanded banking operations and organic business growth including higher salary and employee benefits expense, net occupancy, technology, furniture and equipment, professional and legal fees and other.

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 interest 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 of tax credit investments, as well as other non-core items, including merger expenses.

Average interest earning assets within Treasury and Corporate Other increased $1.5 billion to $7.9 billion for the three months ended June 30, 2023 mainly due to a $1.4 billion increase in average overnight interest bearing deposits with banks as compared to the same period in 2022.

Our average overnight cash levels increased in the second quarter 2023 as a cautionary liquidity manageme nt measure resulting from the bank failures in March and April 2023.

For the three months ended June 30, 2023, loss before income taxes in this segment totaled $68.8 million compared to $7.7 million for the same period in 2022.

The $61.1 million increase in the pre-tax loss during the second quarter 2023 period was mainly due to lower internal transfer income and net interest income, partially offset by a decrease in non-interest expense.

The internal transfer income decreased $70.6 million to $124.4 million for the three months ended June 30, 2023 as compared to the same period a year ago due to the lower allocation of non-interest expense over the same period.

Non-interest expense decreased $32.1 million to $224.4 million during the three months ended June 30, 2023 as compared to the same period in 2022 mainly attributable to merger expenses incurred during the second quarter 2022 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 $33.9 million to $162.5 million for the three months ended March 31, 2023 as compared to the same period a year ago due to the higher allocation of non-interest expense over the same period.

Non-interest income increased $15.7 million during the three months ended March 31, 2023 as compared to the same period in 2022 mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi

USA and organic growth of our business operations over the last 12-month period.

Provision for credit losses increased $4.9 million mainly due to a corporate bond issued by Signature Bank within our AFS debt securities portfolio that was fully charged-off during the first quarter 2023.

The net interest margin for this segment increased 5 basis points to 1.51 percent for the first quarter 2023 as compared to the first quarter 2022 due to a 184 basis point increase in the yield on average investments, partially offset by a 179 basis point increase in cost of our funding sources.

The net interest margin for this segment decreased 93 basis points to 1.19 percent for the second quarter 2023 as compared to the second quarter 2022 due to a 224 basis point increase in cost of our funding sources, partially offset by a 131 basis point increase in the yield on average investments.

The increase in the yield on average investments as compared to the same period a year ago was largely driven by new higher yielding investments and a reduction in premium amortization expense mostly caused by slower principal repayments in the rising interest rate environment.

The following tables present the financial data for Valley's operating segments for the six months ended June 30, 2023 and 2022:

Six Months Ended June 30, 2023

Banking Commercial

Banking Treasury and Corporate Other Total

($ in thousands)

Average interest earning assets $ 8,836,859 $ 39,826,630 $ 7,699,305 $ 56,362,794

Income before income taxes 13,224 471,069 (89,758) 394,535

Annualized return on average interest earning assets (before tax)

0.30 % 2.37 % (2.33) % 1.40 %

Six Months Ended June 30, 2022

Banking Commercial

Banking Treasury and Corporate Other Total

($ in thousands)

Average interest earning assets $ 7,848,764 $ 30,743,387 $ 6,017,817 $ 44,609,968

Income (loss) before income taxes 36,659 263,838 (11,490) 289,007

Annualized return on average interest earning assets (before tax)

0.93 % 1.72 % (0.38) % 1.30 %

Consumer Banking

Consumer Banking's average interest earning assets increased $988.1 million to $8.8 billion for the six months ended June 30, 2023 as compared to the same period in 2022.

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 home equity loans and secured personal lines of credit.

Income before income taxes generated by Consumer Banking decreased $23.4 million to $13.2 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly driven by lower net interest income, and, to a lesser extent, increases in non-interest expense and the provision for loan losses.

Net interest income decreased $37.0 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to additional interest expense generated from higher average deposit balances, as well as an increase in interest rate s on such balances.

The provision for loan losses increased $2.7 million for the six months ended June 30, 2023 due to additional reserves related to residential loan growth, and changes in the economic forecast component within our CECL model as compared to one year ago.

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

The negative impact of these items was partially offset by an $8.9 million increase in non-interest income coupled with a $13.4 million decrease in the internal transfer expense f or the six months ended June 30, 2023 as compared to the same period in 2022.

The increase in non-interest income was mainly driven by increases in wealth management and trust fees and service charges on deposit accounts.

Net interest margin on the Consumer Banking portfolio decreased 116 basis points to 1.76 percent for the six months ended June 30, 2023 as compared to the same period one year ago mainly due to a 202 basis point increase in the costs associated with our funding sources, partially offset by an 86 basis point increase in the yield on average loans.

The 86 basis point increase in loan yield was largely due to higher yielding new loan volumes and adjustable rate loans in our portfolio.

See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.

The return on average interest earning assets before income taxes for the consumer banking segment was 0.30 percent for the six months ended June 30, 2023 compared to 0.93 percent as compared to the same period one year ago .

Commercial Banking

Average interest earning assets in Commercial Banking increased $9.1 billion to $39.8 billion for the six months ended June 30, 2023 as compared to the same period in 2022.

This increase was primarily due to strong organic loan growth, especially in the commercial real estate portfolio over the 12-month period ended June 30, 2023, as well as loans acquired from Bank Leumi USA on April 1, 2022.

For the six months ended June 30, 2023, income before income taxes for Commercial Banking increased $207.2 million to $471.1 million as compared to the same period in 2022 mainly due to an increase in net interest income and a lower provision for credit losses, partially offset by higher non-interest expense.

Net interest income increased $172.6 million to $751.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 primarily due to higher average commercial loan balances and higher interest rates on new and adjustable loans.

T he provision for credit losses decreased $34.1 million to $5.8 million during the six months ended June 30, 2023 as compared to $39.9 million for the same period in 2022 mainly due to a provision for non-PCD loans and unfunded credit commitments acquired from Bank Leumi in the second quarter 2022.

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

Non-interest expense increased $21.6 million to $71.1 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to acquired and organic growth in our commercial operations .

See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

The net interest margin for this segment increased 1 basis point to 3.78 percent for the six months ended June 30, 2023 as compared to the same period in 2022 due to a 203 basis point increase in yield on average loans, partially offset by a 202 basis point increase in the cost of our funding sources.

The return on average interest earning assets before income taxes for the commercial banking segment was 2.37 percent for the six months ended June 30, 2023 compared to 1.72 percent for the same period in 2022.

Treasury and Corporate Other

Treasury and Corporate Other's average interest earning assets increased $1.7 billion during the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to investment securities acquired from Bank Leumi USA, as well as other select new investment securities purchases over the last 12-month period .

Average interest bearing deposits with banks increased $47.5 million as compared to the same period in 2022 due to additional cash held as a cautionary liquidity management measur e starting in March 2023 and through most of the second quarter 2023.

The loss before income taxes for this segment totaled $89.8 million for the six months ended June 30, 2023 as compared to $11.5 million for the same period in 2022.

The $78.3 million increase in pre-tax loss was mainly due to an increase in non-interest expense and decreases in both net interest income and internal transfer income, partially offset by higher non-interest income.

Non-interest expense increased $30.4 million to $442.6 million for the six months ended June 30, 2023 as compared to the same period in 2022 largely due to expenses related to our expanded banking operations and organic business growth including higher salary and employee benefits expense, technology, furniture and equipment and professional and legal fees.

Internal transfer income decreased $36.7 million to $286.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 due to the higher allocation of non-interest expense over the same period.

Non-interest income increased $8.9 million during the six months ended June 30, 2023 as compared to the same period in 2022 mostly due to incremental increases in several operating non-interest income categories caused by acquired and organic growth of our business operations over the last 12-month period.

See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.

Provision for credit losses increased $4.4 million mainly due to a corporate bond issued by Signature Bank within our AFS debt securities portfolio that was fully charged-off during the first quarter 2023.

Treasury and Corporate Other's net interest margin decreased 46 basis points to 1.35 percent for the six months ended June 30, 2023 as compared to the same period in 2022 due to a 202 basis point increase in cost of our funding sources, partially offset by a 156 basis point increase in the yield on average investments.

The increased yield on average investments as compared to the same period in 2022 was largely driven by new higher yielding investments and a reduction in premium amortization expense mostly caused by slower principal repayments in the rising interest rate environment.

ASSET/LIABILITY MANAGEMENT

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The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities.

The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of March 31, 2023.

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 March 31, 2023.

In the model, the forecasted shape of the yield curve remains static as of June 30, 2023.

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

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of March 31, 2023.

Although the size of Valley’s balance sheet is forecasted to remain static as of March 31, 2023 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the first quarter 2023.

The model also utilizes an immediate parallel shift in market interest rates at March 31, 2023.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2023.

Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2023 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 second quarter 2023.

The model also utilizes an immediate parallel shift in market interest rates at June 30, 2023.

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

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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.

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.

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–300 (213,209) (12.02)

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12-month period by 2.73 percent.

Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at March 31, 2023.

interest income over the next 12-month period by 3.99 percent.

Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at June 30, 2023.

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.

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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 adheres to certain internal liquidity guidelines including ratios of loans to deposits below 110 percent and wholesale funding to total funding below 25 percent.

Management maintains flexibility to temporarily exceed these limits in certain operating environments.

Our loan to deposits and wholesale funding to total funding ratios were approximately 102.2 percent and 26.9 percent at March 31, 2023, respectively.

The level of wholesale funding and resulting excess cash on our balance sheet at March 31, 2023 was mostly due to the cautionary liquidity actions taken in March 2023.

Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payment related to leases, capital expenditures and other purchase commitments.

Liquidity measures Valley's ability to satisfy its current and future cash flow needs.

Our objective is to have liquidity available to fulfill loan demands, repay deposits and other liabilities, and execute balance sheet strategies in all market conditions while adhering to internal controls and income targets.

Valley's liquidity program is managed by the Treasury Department and routinely monitored by the Asset and Liability Management Committee and two board committees.

Among other actions, Treasury actively monitors Valley's current liquidity profile, sources and stability of funding, availability of assets for pledging or sale, opportunities to gather additional funds, and anticipated future funding needs, including the level of unfunded commitments.

The Bank adheres to certain internal liquidity measures including ratios of loans to deposits below 110 percent and wholesale funding to total funding below 25 percent, as summarized in the table below.

Management maintains flexibility to temporarily exceed these thresholds in certain operating environments.

The following table presents Valley's loan to deposits and wholesale funding to total funding ratios at June 30, 2023 and December 31, 2022:

2023 December 31,

Loans to deposits 100.5 % 98.5 %

Wholesale funding to total funding 24.8 13.8

Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payments 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 $7.2 billion , representing 12.1 percent of earning assets at March 31, 2023 and $2.4 billion, representing 4.6 percent of earning assets at December 31, 2022.

Of the $7.2 billion of liquid assets at March 31, 2023, approximately $870 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approx imately $521.1 million in principal payments from securities in the total investment portfolio at March 31, 2023 over the next 12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received.

Loan principal payments from total loans and loans held for sale at March 31, 2023 are projected to be approximately $16.8 billion over the next 12-month period.

The following table summarizes Valley's sources of liquid assets:

2023 December 31,

(in thousands)

Cash and due from banks $ 463,318 $ 444,325

Interest bearing deposits with banks 1,491,091 503,622

Trading debt securities 3,409 13,438

Held to maturity debt securities (1)

182,280 177,614

Available for sale debt securities (2)

1,236,946 1,261,397

Loans held for sale 33,044 18,118

Total liquid assets $ 3,410,088 $ 2,418,514

(1) Represents securities 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) within the held to maturity debt security portfolio.

(2) Includes a pproximately $847 million and $333 million of various investment securities that were pledged to counterparties to support our earning asset funding strategies at June 30, 2023 and December 31, 2022, respectively.

Total liquid assets represented 6.0 percent and 4.6 percent of earning assets at June 30, 2023 and December 31, 2022, respectively.

Other sources of funds on the asset side are derived from scheduled loan payments of principal and interest, as well as prepayments received.

At June 30, 2023, estimated cash inflows from total loans are projected to be approximately $14.7 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, fully FDIC-insured brokered and municipal deposits, and short-term and long-term borrowings.

Our core deposit base, which generally excludes all fully insured brokered deposits, as well as retail certificates of deposit over $250 thousand, represents the largest of these sources.

Average core deposits totaled approximately $44.9 billion and $38.1 billion for the three months ended March 31, 2023 and for the year ended December 31, 2022, respectively, representing 81.2 percent and 79.2 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.

In addition to direct customer deposits, the Bank has ample access to readily available, diverse funding sources to fulfill its current and projected capital needs.

The Bank is 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.

At March 31, 2023, available borrowing potential, above and beyond amounts already utilized, at these institutions totaled $11.8 billion, including borrowing capacity under the Federal Reserve Bank's discount window totaling $4.3 billion.

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.

The Bank has access to approximately $1.5 billion of uncommitted lines for the purchase of federal funds from these banks on a collective basis.

Additionally, Valley's collateral pledged to the FHLB may be used to obtain municipal letters of credit (MULOC) to collateralize certain municipal deposits held by Valley.

At March 31, 2023, Valley h ad $1.0 billion of MULOCs outstanding for this purpose.

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 increased $6.3 billion to $6.4 billion at March 31, 2023 as compared to December 31, 2022.

In March 2023, we increased our short-term borrowings out of an abundance of caution to prudently bolster our liquidity position in the wake of the two recent bank failures.

Since March 31, 2023, short-term FHLB advances have been allowed to mature resulting in a more normal liquidity

We continue to closely monitor changes in the current banking environment and have substantial access to additional liquidity as highlighted above.

Additionally, the Federal Reserve established the Bank Term Funding Program on March 12, 2023 as funding source for eligible depository institutions.

We anticipate the receipt of approx imately $386.2 million in principal payments from securities in the total investment portfolio at June 30, 2023 over the next 12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, fully FDIC-insured indirect customer deposits, collateralized municipal deposits, and short-term and long-term borrowings.

Our core deposit base, which generally excludes all fully insured indirect customer deposits, as well as retail certificates of deposit over $250 thousand, represents the largest of these source s.

Average core deposits totaled approximately $42.0 billion and $38.1 billion for the six months ended June 30, 2023 and for the year ended December 31, 2022, respectively, representing 74.6 percent and 79.2 percent of average interest 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, rates prevailing in the capital markets, competition, and the need to manage interest rate risk sensitivity.

In addition to customer deposits, the Bank has ample access to readily available borrowing sources available to supplement its current and projected funding needs.

The following table presents short-term borrowings outstanding at June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(in thousands)

FHLB advances $ 1,000,000 $ 24,035

Securities sold under agreements to repurchase 88,899 114,694

Total short-term borrowings $ 1,088,899 $ 138,729

The following table summarizes the Bank's estimated unused available non-deposit borrowing capacities at June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

(in thousands)

FHLB borrowing capacity* $ 13,093,000 $ 6,891,000

Unused FRB discount window* 7,684,000 2,099,000

Unused federal funds lines available from commercial banks 2,065,000 1,940,000

Unencumbered investment securities 1,326,000 3,502,000

Total $ 24,168,000 $ 14,432,000

* FHLB and FRB borrowings are collateralized by certain pledged securities, including but not limited to U.S.

government and agency mortgage-backed securities and blanket qualifying first lien on certain real estate and residential mortgage secured loans.

Additionally, the Federal Reserve established the Bank Term Funding Program on March 12, 2023 as a funding source for eligible depository institutions.

The Program can provide short-term liquidity (up to one year) against the par value of certain high-quality collateral, such as U.S.

Treasury securities, and eliminate the potential need for an institution to sell those securities in times of stress.

Treasury securities, and eliminate the potential need for an

institution to sell those securities in times of stress.

Advances under the Program can be requested until March 11, 2024.

As of March 31, 2023, Valley did not participate in this Program, but currently has this option as an available short-term liquidity source.

This Program is currently another short-term liquidity source for Valley.

Valley had no outstanding borrowings under the Program at June 30, 2023.

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.

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Investment Securities Portfolio

As of March 31, 2023, we had $50.2 million, $1.3 billion, and $3.8 billion in equity, available for sale debt securities and held to maturity debt securities, respectively.

As of June 30, 2023, we had $61.0 million, $1.2 billion, and $3.8 billion in equity, available for sale debt securities and held to maturity debt securities, respectively.

The available for sale and held to maturity debt securities portfolios, which comprise the majority of the securities we own, include:

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Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities.

We also had $6.9 million of trading debt securities at March 31, 2023 consisting of investment grade municipal bonds and U.S.

We also had $3.4 million of trading debt securities at June 30, 2023 consisting of U.S.

Treasury securities.

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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 that the fair value is less than the 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 March 31, 2023 and December 31, 2022 and determined that the declines in fair value were mainly attributable to changes in market v olatility, 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, Valley recognized a credit related impairment of one corporate bond issued by Signature Bank resulting in both a provision for credit losses and full charge-off of the security totaling $5.0 million during the three months ended March 31, 2023.

There was no other impairment recognized within the available for sale debt securities portfolio during the three months ended March 31, 2023.

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 that the fair value is less than the amortized cost basis.

Declines in fair value that have not been recorded through an allowance for credit losses,

such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2023 and December 31, 2022 and determined that the declines in fair value were mainly attributable to changes in market v olatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

There was no other impairment recognized within the available for sale debt securities portfolio during the three months ended June 30, 2023 and the three and six months ended June 30, 2022.

Valley does not intend to sell any of its available for sale debt securities in an unrealized loss position prior to

recovery of our amortized cost basis, and it is more likely than not that Valley will not be required to sell any of its securities prior to recovery of our amortized cost basis.

None of the available for sale debt securities were past due as of March 31, 2023 and t here was no allowance for credit losses for available for sale debt securities at March 31, 2023 and December 31, 2022.

None of the available for sale debt securities were past due as of June 30, 2023 and t here was no allowance for credit losses for available for sale debt securities at June 30, 2023 and December 31, 2022.

Held to maturity debt securities.

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

Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.6 million at both March 31, 2023 and December 31, 2022.

Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.4 million and $1.6 million at June 30, 2023 and December 31, 2022, respectively.

Investment grades.

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

The following table presents the available for sale and held to maturity debt investment securities portfolios by investment grades at March 31, 2023:

March 31, 2023

The following table presents the available for sale and held to maturity debt investment securities portfolios by investment grades at June 30, 2023:

June 30, 2023

Losses Fair Value

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BBB Rated 69,905 — (8,598) 61,307

Non-investment grade 5,000 — (1,222) 3,778

Not rated 120,644 — (13,828) 106,816

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The unrealized losses in the AAA and AA rated categories of both the available for sale and held to maturity debt securities portfolios (in the above table) were largely 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 last 12 months.

The investment securities available for sale and held to maturity portfolio included $104.3 million and $173.4 million, respectively, of investments not rated by the rating agencies with aggregate unrealized losses of $10.8 million and $13.6 million, respectively, at March 31, 2023.

The unrealized losses within non-rated available for sale debt securities was mostly related to several large corporate bonds negatively impacted by rising interest rates, and not changes in underlying credit.

The unrealized losses within non-rated held to maturity debt securities 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.

The investment securities available for sale and held to maturity portfolio included $120.6 million and $178.8 million, respectively, of investments not rated by the rating agencies with aggregate unrealized losses of $13.8 million and $16.0 million, respectively, at June 30, 2023.

The unrealized losses within non-rated available for sale debt securities mostly related to several large corporate bonds negatively impacted by rising interest rates, and not changes in underlying credit.

The unrealized losses within non-rated held to maturity debt

securities mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.1 million and several corporate and other debt securities.

See Note 7 to the consolidated financial statements for additional information regarding our investment securities portfolio.

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The following table reflects the composition of the loan portfolio as of the dates presented:

2023 March 31,

2023 December 31,

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Total 100.0 % 100.0 % 100.0 %

* Includes net unearned discount and deferred loan fees of $125.4 million and $120.5 million at March 31, 2023 and December 31, 2022, respectively.

Total loans increased $1.7 billion, or 14.9 percent on an annualized basis to $48.7 billion at March 31, 2023 from December 31, 2022 mainly due to continued strong organic loan growth in commercial loan categories and a slower loan prepayment activity within the loan portfolio during the first quarter 2023 .

Total commercial real estate (including construction) and commercial and industrial loans increased 18.3 percent and 10.9 percent, respectively, on an annualized basis during the first quarter 2023.

Residential mortgage loans held for sale at fair value totaled $17.2 million and $18.1 million at March 31, 2023 and December 31, 2022, respectively.

Commercial and industrial loans increased $239.1 million to $9.0 billion at March 31, 2023 as compared to December 31, 2022.

The organic growth was mainly a result of the solid new loan volumes from our pre-existing long-term customer base across most of our geographic footprints, as well as the continued efforts of our commercial banking relationship teams.

Commercial real estate loans (excluding construction loans) increased $1.3 billion to $27.1 billion at March 31, 2023 from December 31, 2022 reflecting solid organic growth mainly due to demand for non-owner occupied loans across our geographic footprint.

Our organic approach of loan production is primarily the expansion of lending with our existing clients while also establishing new relationships in our primary and new market areas.

We continue to grow our commercial lending activities from out of market expansion efforts in states such as Pennsylvania, Georgia and Tennessee, as well as our relatively new markets in California and Illinois.

In addition, our commercial real estate production remained strong in loans secured by multi-family dwellings, warehouses and healthcare facilities.

At March 31, 2023, commercial real estate loans collateralized by office buildings were approximately $3.1 billion of the $27.1 billion portfolio.

* Includes net unearned discount and deferred loan fees of $119.1 million, $125.4 million and $120.5 million at June 30, 2023, March 31, 2023 and December 31, 2022, respectively.

Total loans increased $1.2 billion, or 10.0 percent on an annualized basis to $49.9 billion at June 30, 2023 from March 31, 2023 mainly due to continued organic loan growth in commercial loan categories and relatively low levels of loan prepayment activity during the second quarter 2023 .

Residential mortgage loans held for sale at fair value totaled $23.0 million and $17.2 million at June 30, 2023 and March 31, 2023, respectively.

At June 30, 2023, loans held for sale also included one non-performing construction loan totaling $10.0 million, net of charge-offs, transferred from the loan portfolio during the second quarter 2023.

Commercial and industrial loans increased $243.4 million to $9.3 billion at June 30, 2023 as compared to March 31, 2023.

The organic and diverse growth was mainly a result of new loan volumes from our pre-existing long-term customer base.

Commercial real estate loans (excluding construction loans) increased $742.0 million to $27.8 billion at June 30, 2023 from March 31, 2023 reflecting solid organic growth mainly within non-owner occupied and multi-family loans across our geographic market areas.

At June 30, 2023 , commercial real estate loans collateralized by office buildings were approximately $3.2 billion of the $27.8 billion portfolio.

These loans are geographically disbursed largely across Florida, Alabama, New Jersey, New York, and Manhattan with a combined weighted average loan to value ratio of 52 percent and debt service coverage ratio of 1.78.

Construction loans increased only $25.1 million to $3.7 billion at March 31, 2023 from December 31, 2022 mainly driven by advances on pre-exiting construction loan projects in New Jersey, New York and Florida.

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

Residential mortgage loans increased $121.7 million, or 9.1 percent on an annualized basis, during the first quarter 2023 as we largely originated new loans for the held for investment portfolio rather than for sale.

New and refinanced residential mortgage loan originations totaled $194.4 million for the first quarter 2023 as compared to $309.1 million and $552.6 million for the fourth quarter 2022 and first quarter 2022, respectively.

Construction loans increased only $89.8 million to $3.8 billion at June 30, 2023 from March 31, 2023 and was largely due to advances on pre-existing construction loan projects in New Jersey, New York and Florida.

Residential mortgage loans increased $74.1 million, or 5.4 percent on an annualized basis, during the second quarter 2023 as we largely originated new loans for the held for investment portfolio rather than for sale.

New and refinanced residential mortgage loan originations totaled $188.0 million for the second quarter 2023 as compared to

$194.4 million and $540.7 million for the first quarter 2023 and second quarter 2022, respectively.

Florida originations totaled $63.2 million and represented 33.61 percent of total residential mortgage loan originations in the quarter.

During the first quarter 2023, we retained approximately 86.3 percent of the total residential mortgage originations in our held for investment loan portfolio.

Of the total originations in the first quarter 2023, only $26.6 million of residential mortgage loans were originated for sale rather than held for investment as compared to $144.5 million during the first quarter 2022 .

We may continue to retain a higher percentage of new loan volumes during the second quarter 2023 mainly due to 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 has remained relatively low in the early stages of the second quarter 2023 due to the high level of mortgage interest rates and tight housing inventories and may challenge our ability to grow this loan category.

Home equity loans increased by $12.7 million to $516.6 million at March 31, 2023 compared to December 31, 2022 as a result of modest growth in new originations that continues to be challenged by the unfavorable high interest rate environment.

Automobile loans decreased by $29.1 million, or 6.7 percent on an annualized basis, to $1.7 billion at March 31, 2023 as compared to December 31, 2022 largely due to lower consumer demand for new and used vehicle financing because of the higher interest rate environment.

During the first quarter 2023, the interest rates on new car loans reached the highest level since 2008.

We originated $31.5 million in auto loans through our dealership network during the first quarter 2023 as compared to $73.1 million in the fourth quarter 2022.

Of the total originations, our Florida dealership network represented approximately 18 percent of new loans, during the first quarter 2023.

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 continue to have a negative impact on our ability to grow this loan category during the second quarter 2023.

Other consumer loans increased $54.1 million to $1.1 billion at March 31, 2023 as compared to December 31, 2022 mainly due to moderate growth in our collateralized personal lines of credit portfolio.

During the second quarter 2023, we retained approximately 73.2 percent of the total residential mortgage originations in our held for investment loan portfolio.

Of the total originations in the second quarter 2023, $50.4 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 .

Additionally, the volume of both new and refinanced loan applicat ions has remained relatively low in the early stages of the third quarter 2023 due to the high level of mortgage interest rates and tight housing inventories and may challenge our ability to grow this loan category.

Home equity loans increased by $18.9 million to $535.5 million at June 30, 2023 compared to March 31, 2023 as a result of lower new originations and line utilization in an unfavorable high interest rate environment.

Automobile loans decreased by $84.3 million, or 19.6 percent on an annualized basis, to $1.6 billion at June 30, 2023 as compared to March 31, 2023 largely due to continued low consumer demand for new and used vehicle financing because of the higher interest rate environment.

During the second quarter 2023, the interest rates on new car loans reached the highest level since 2008.

We originated $16.2 million in auto loans through our Florida dealership network during the second quarter 2023 as compared to $31.5 million in the first quarter 2023.

Of the total originations, our Florida dealership network represented approximately 20 percent of new loans, during the second quarter 2023.

Despite adequate new automobile inventories available to consumers, we anticipate that the impact of inflation on average new vehicle prices coupled with rising interest rates could continue to have a negative impact on our ability to grow this loan category during the third quarter 2023.

Other consumer loans increased $133.5 million to $1.3 billion at June 30, 2023 as compared to March 31, 2023 mainly due to moderate growth in our collateralized personal lines of credit portfolio.

A significant 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.

While confident in our commercial loan pipelines and diverse residential and consumer loan offerings, there can be no assurance that the growth trends experienced in most loan categories during the first quarter 2023 will continue, or loan balances will not decline from March 31, 2023.

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.

Annualized loan growth slowed to 10 percent during the second quarter 2023 from 16 percent in the first quarter 2023 as we worked through the majority of the strong loan pipeline that was present at the beginning of 2023.

We will continue to be selective on the lending side and generally supportive of compelling projects led by our high quality and tenured customer base.

Moving forward, we anticipate moderate levels of overall loan growth in the mid to high single digits on an annualized basis for the remainder of 2023.

Non-performing Assets

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consist of automobiles and taxi medallions) at March 31, 2023.

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consist of automobiles and taxi medallions) at June 30, 2023.

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

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

Our NPAs decreased $27.0 million to $244.9 million at March 31, 2023 as compared to December 31, 2022 mainly due to two large charge-offs within non-accrual commercial and industrial and construction loans during the first quarter 2023.

NPAs as a percentage of total loans and NPAs totaled 0.50 percent and 0.58 percent at March 31, 2023 and December 31, 2022, respectively (as shown in the table below).

Our NPAs increased $11.2 million to $256.1 million at June 30, 2023 as compared to March 31, 2023 mostly due to increases in both non-accrual commercial real estate loans and commercial and industrial loans, partially offset by decreases in construction loans and residential mortgage loans.

NPAs as a percentage of total loans and NPAs totaled 0.51 percent and 0.50 percent at June 30, 2023 and March 31, 2023, respectively (as shown in the table below).

Our total NPAs has remained relatively low as a percentage of the total loan portfolio and the level of NPAs, which is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties.

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Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio.

During the three months ended March 31, 2023, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the unexpected challenges across the banking system, slower economic growth, persistently elevated inflation and the overall uncertain economy .

However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at March 31, 2023 due to the aforementioned or other factors potentially impacting our lending customers.

During the six months ended June 30, 2023, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the recent challenges across the banking system, slower economic growth, elevated inflation and the overall uncertain economy .

However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at June 30, 2023 due to the aforementioned or other factors potentially impacting our lending customers.

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:

2023 March 31,

2023 December 31,

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

0.63 0.70 0.77

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

171.76 180.54 170.02

Loans past due 30 to 59 days increased $11.2 million to $54.7 million at March 31, 2023 as compared to December 31, 2022 mostly due to several large co mmercial and industrial loans and one matured commercial real estate loan in the process of renewal included in this delinquency category at March 31, 2023.

These increases were partially offset by improved performance within the residential mortgage and consumer loan categories.

Loans past due 60 to 89 days increased $7.0 million to $27.8 million at March 31, 2023 as compared to December 31, 2022 primarily due to higher commercial and industrial loans largely driven by a few large loans included in this delinquency category at March 31, 2023.

Loans 90 days or more past due and still accruing interest decreased $8.8 million to $17.8 million at March 31, 2023 as compared to December 31, 2022 mainly due to the renewals in the normal course of two matured loans during the first quarter 2023 that were previously included in this delinquency category at December 31, 2022.

Loans past due 30 to 59 days decreased $20.9 million to $33.8 million at June 30, 2023 as compared to March 31, 2023 due, in part, to the commercial real estate loans totaling $10.2 million included in this delinquency category at March 31, 2023 that reclassified to non-accrual loans at June 30, 2023.

Commercial and industrial loans 30 to 59 days past due decreased $14.5 million mainly due to improved performance during the second quarter 2023.

Loans past due 60 to 89 days decreased $14.8 million to $12.9 million at June 30, 2023 as compared to March 31, 2023 largely due to a commercial and industrial loan relationship totaling $21.2 million included in this delinquency category at March 31, 2023 that became current to all its contractual payments at June 30, 2023.

Loans 90 days or more past due and still accruing interest decreased $2.8 million to $15.0 million at June 30, 2023 as compared to March 31, 2023 mainly due to decreases in the commercial and industrial and construction loan categories, partially offset by one new matured commercial real estate loan of $2.2 million expected to be paid off in the near term.

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

Non-accrual loans decreased $27.8 million to $242.0 million at March 31, 2023 as compared to $269.8 million at December 31, 2022 mainly driven by decreases in commercial and industrial loans and construction loans.

Non-accrual commercial and industrial loans decreased $20.3 million primarily due to the charge-off of one loan participation that was fully reserved for in our allowance for loan losses at December 31, 2022.

The decrease of $5.6 million in construction loans is mostly related to t he partial charge-off of one loan relationship during the first quarter 2023 that had related allowance reserves totaling $4.3 million at December 31, 2022 .

Although the timing of collection is uncertain, management believes that the majority of the non-accrual loans at March 31, 2023, are well secured and largely collectible based in part, on our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable.

Non-accrual loans increased $12.1 million to $254.1 million at June 30, 2023 as compared to $242.0 million at March 31, 2023 mostly driven by an increase in the commercial real estate loan category.

Non-accrual commercial real estate loans increased $14.8 million to $82.7 million at June 30, 2023 due, in part, to the aforementioned migration of two loans totaling $10.2 million from the 30 to 59 days past due delinquency category at March 31, 2023 and one new $4.5 million non-performing loan at June 30, 2023.

Non-accrual construction loans decreased $5.6 million to $63.0 million at June 30, 2023 from March 31, 2023 primarily due to the $4.2 million partial charge-off of one loan, which was transferred to loans held for sale at June 30, 2023.

Although the timing of collection is uncertain, management believes that the majority of the non-accrual loans at June 30, 2023, are well secured and largely collectible based in part, on our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable.

Any estimated shortfall in each collateral valuation results in an allocation of specific reserves within our allowance for credit losses for loans.

Non-performing taxi medallion loans totaled $66.0 million of the $78.6 million non-accrual commercial and industrial loans at March 31, 2023.

At March 31, 2023, all taxi medallion loans in the loan portfolio were on non-accrual status and had related reserves of $41.9 million, or 64.0 percent of such loans, within the allowance for loan losses.

Potential further declines in the market valuation of taxi medallions and the current operating environment mainly within New York City may negatively impact the performance of this portfolio.

OREO properties totaled $1.2 million at March 31, 2023 and increased $903 thousand as compared to December 31, 2022.

There were no sales of OREO properties in the first quarter 2023 and net gains on sales of OREO in the first quarter 2022 were not material.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totale d $1.5 million and $2.6 million at March 31, 2023 and December 31, 2022, respectively.

Non-performing taxi medallion loans totaled $65.8 million of the $84.4 million non-accrual commercial and industrial loans at June 30, 2023.

At June 30, 2023, all taxi medallion loans in the loan portfolio were on non-accrual status and had related reserves of $41.7 million, or 63.4 percent of such loans, within the allowance for loan losses.

Potential further declines in the market valuation of taxi medallions and the c urrent operating environment mainly within New York City may negatively impact the performance of this portfolio.

OREO properties totaled $824 thousand at June 30, 2023 and decreased $365 thousand as compared to March 31, 2023.

Th e sales of OREO p roperties and net gains on sales of OREO during t he three and six months ended June 30, 2023 and 2022 were not material.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totale d $454 thousand and $2.6 million at June 30, 2023 and December 31, 2022, respectively.

Allowance for Credit Losses for Loans

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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.

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 within the commercial and industrial loan categories 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.

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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.

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.

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.

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

At March 31, 2023, the probability weightings used in our economic forecast, inclusive of the Moody's Baseline, S-3 downside and S-4 adverse scenarios, remained unchanged from December 31, 2022.

The standalone Moody's Baseline scenario reflects a slightly more optimistic outlook as compared to December 31, 2022 in terms of GDP growth and unemployment levels, but the overall outlook remained relatively weak.

The updated Moody's forecasts were not materially impacted by the recent bank failures, as they noted the failures did not appear to be symptomatic of serious broad-based issues in the financial system.

At March 31, 2023, the Moody's Baseline forecast included the following specific assumptions:

• GDP expansion approximately 1 percent in the second quarter 2023;

• Unemployment of 3.5 percent in the second quarter 2023 and 3.7 to 4.0 percent over the remainder of the forecast period ending in the first quarter 2025;

• Continued concerns about increased federal debt burden pushed by rising interest rates, high inflation, elevated house prices and lower consumer spending;

• The Federal Reserve continues its tightening monetary policy, including an increase of 25 basis points at its May 2023 meeting but intends to keep rates steady through 2023 with no reductions until 2024;

• Inflation remains elevated but continues to trend downward, while reporting at approximately 5 percent in March 2023.

At June 30, 2023, Valley continued to maintain the majority of its probability weighting used in the economic forecast to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-4 adverse scenarios.

However, the standalone Moody's Baseline scenario reflected a more pessimistic outlook as compared to March 31, 2023 in terms of GDP growth, unemployment levels and potential near term negative economic impacts given the present uncertain economic conditions.

At June 30, 2023, the Moody's Baseline forecast included the following specific assumptions:

• GDP expansion of approximately 0.6 percent in the third quarter 2023;

• Unemployment of 3.6 percent in the third quarter 2023 and 3.8 to 4.3 percent over the remainder of the forecast period ending in the second quarter 2025;

• Continued concerns about increased debt burden pushed by rising interest rates, high inflation, and elevated house prices;

• Consumer spending remained a source of growth and its contribution grew to the largest in nearly two years, as the cost-of-living adjusted boosted after-tax income adding another 2.5 percent to growth;

• The Federal Reserve opted to pause its rate hikes in June 2023, keeping the federal funds rate at 5 - 5.25 percent with possible additional reductions in 2023;

• Inflation remains elevated but continues to trend downward, while reporting at approximately 4 percent in May 2023.

See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements.

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

2023 December 31,

Three Months Ended Six Months Ended

2023 March 31,

2023 June 30,

2022 June 30,

2023 June 30,

($ in thousands)

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Impact of the adoption of ASU No.

— (1,368) — (1,368) —

Allowance for purchased credit deteriorated (PCD) loans, net (2)

— — 70,319 — 70,319

Beginning balance, adjusted 460,969 481,887 449,571 481,887 446,021

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Total recoveries 2,702 2,205 2,947 4,907 5,592

Total net loan (charge-offs) recoveries (30,368) (22,442) 50

Total net loan charge-offs (8,625) (30,368) (2,320) (38,993) (2,270)

Provision charged for credit losses 6,332 9,450 43,712 15,782 47,212

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2022-02 effective January 1, 2023.

(2) Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022.

The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the periods indicated:

Three Months Ended

March 31, 2023 December 31, 2022 March 31, 2022

Three Months Ended Six Months Ended

June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022

($ in thousands)

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Total loans 0.07 0.25 0.02 0.16 0.01

Net loan charge-offs totaled $30.4 million for the first quarter 2023 as compared to $22.4 million for the fourth quarter 2022 and net recoveries of loan charge-offs $50 thousand for the first quarter 2022.

The first quarter 2023 net loan charge-offs largely related to one commercial and industrial loan participation charged-off.

This loan was fully reserved for in our allowance for loan losses as of December 31, 2022 and its remaining balance, net of charge-offs, was immaterial at March 31, 2023.

The amount of net loan charge-offs (as presented in the above table) and the low level of individual loan charge-offs for the first quarter 2023 continued to trend within management's expectations for the credit quality of the loan portfolio at March 31, 2023.

Net loan charge-offs totaled $8.6 million for the second quarter 2023 as compared to $30.4 million and $2.3 million for the first quarter 2023 and the second quarter 2022, respectively.

The decrease from the first quarter 2023 was mainly due to the elevated net loan charges-offs during the first quarter 2023 largely related to one commercial and industrial loan participation charged-off.

Gross charge-offs totaled $11.3 million for the second quarter 2023 and included the $4.2 million partial charge-off related to the valuation of a non-performing construction loan transferred from the held for investment loan portfolio to loans held for sale at June 30, 2023.

This construction loan had specific reserves of $5.2 million within the allowance for loan losses at March 31, 2023 and, as a result, the partial charge-off was fully reserved for prior to the second quarter 2023.

The amount of net loan charge-offs (as presented in the above table) and the low level of individual loan charge-offs for the second quarter 2023 continued to trend within management's expectations for the credit quality of the loan portfolio at June 30, 2023.

The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:

March 31, 2023 December 31, 2022 March 31, 2022

June 30, 2023 March 31, 2023 June 30, 2022

Allocation Allocation

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Allowance for credit losses for loans as a % total loans 0.92 % 0.95 % 1.13 %

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 0.95 percent at March 31, 2023 as compared to 1.03 percent and 1.07 percent at December 31, 2022 and March 31, 2022, respectively.

During the first quarter 2023, the provision for credit losses for loans totaled $9.5 million as compared to $7.3 million and $3.5 million for the fourth quarter 2022 and first quarter 2022, respectively.

At March 31, 2023, our allowance for credit losses for loans as a percentage of total loans decreased as compared to December 31, 2022 largely due to the impact of the first quarter 2023 loan charge-offs with prior allocated reserves.

The reduction in allocated reserves for specific loans was partially offset by a moderate uptick in non-economic qualitative reserves for commercial and industrial loans within our CECL model at March 31, 2023.

The economic component of our current CECL model was relatively stable as compared to December 31, 2022.

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 0.92 percent at June 30, 2023 as compared to 0.95 percent and 1.13 percent at March 31, 2023 and June 30, 2022, respectively.

During the second quarter 2023, the provision for credit losses for loans tota led $6.3 million as compared to $9.5 million and $43.7 million for the first quarter 2023 and second quarter 2022, respectively.

At June 30, 2023, our allowance for credit losses for loans as a percentage of total loans decreased as compared to March 31, 2023 as higher economic forecast reserves driven by a more pessimistic Moody's Baseline outlook was more than offset by lower non-economic qualitative reserves for commercial loans .

The net impact of other changes in quantitative reserves for each loan category was not significant to the total allowance for loan losses at June 30, 2023 .

Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity.

At March 31, 2023 and December 31, 2022, shareholders’ equity totaled approximately $6.5 billion and $6.4 billion, which represented 10.1 percent and 11.1 percent of total assets, respectively.

During the three months ended March 31, 2023, total shareholders’ equity increased by approximately $110.8 million primarily due to:

At June 30, 2023 and December 31, 2022, shareholders’ equity totaled approximately $6.6 billion and $6.4 billion, which represented 10.7 percent and 11.1 percent of total assets, respectively.

During the six months ended June 30, 2023, total shareholders’ equity increased by approximately $174.4 million primarily due to the following:

• net income of $285.6 million,

• other comprehensive income of $20.4 million,

• a $7.7 million in crease attributable to the effect of our stock incentive plan,

• additional capital issued totaling $3.8 million,

• a $990 thousand net cumulative effect adjustment to retained earnings for the adoption of ASU 2022-02, partially offset by

• cash dividends declared on common and preferred stock totaling a combined $60.4 million and

• a $505 thousand de crease attributable to the effect of our stock incentive plan.

• cash dividends declared on common and preferred stock totaling a combined $120.9 million,

• repurchases of $2.1 million of our common stock with these shares held in treasury stock and

• other comprehensive loss of $745 thousand.

Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC.

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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 a minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes.

As of March 31, 2023 and December 31, 2022, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

As of June 30, 2023 and December 31, 2022, 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 March 31, 2023, approximately $23.6 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 6 basis points.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at March 31, 2023 and December 31, 2022:

As of June 30, 2023, approximately $23.6 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 6 basis points.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2023 and December 31, 2022:

Actual Minimum Capital

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($ in thousands)

As of March 31, 2023

As of June 30, 2023

Total Risk-based Capital

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Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share.

Our retention ratio was approximately 60.7 percent for the three months ended March 31, 2023 as compared to 61.4 percent for the year ended December 31, 2022.

Cash dividends declared amounted to $0.11 per common share for each of the three months ended March 31, 2023 and 2022.

Our retention ratio was approximately 60.0 percent for the six months ended June 30, 2023 as compared to 61.4 percent for the year ended December 31, 2022.

Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2023 and 2022.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis