VALLEY NATIONAL BANCORP 10-Q

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A. The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. 50 Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “intend,” “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “would,” “could,” “typically,” “usually,” “anticipate,” “may,” “estimate,” “outlook,” “project,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to: • the 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 a potential U.S. Government shutdown on economic activity in the markets in which we operate and, in general, on levels of end market demand in the economy; • the impact of 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 (including the Israel-Hamas war); natural and other disasters (including severe weather events) and health emergencies, acts of terrorism or other external events; • risks associated with our acquisition of Bank Leumi Le-Israel Corporation (Bank Leumi USA), including (i) the inability to realize expected cost savings and synergies from the acquisition in the amounts or timeframe anticipated and (ii) greater than expected costs or difficulties relating to integration matters; • the loss of or decrease in lower-cost funding sources within our deposit base; • the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; • the inability to attract new customer deposits to keep pace with loan growth strategies; • a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios; • greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; • 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; 51 • changes to laws and regulations, including changes affecting oversight of the financial services industry; changes in the enforcement and interpretation of such laws and regulations; and changes in accounting and reporting standards; • higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; • results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; • our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; • a prolonged downturn in the economy, as well as an unexpected decline in commercial real estate values collateralizing a significant portion of our loan portfolio; and • unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors. A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A of this Form 10-Q. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Critical Accounting Estimates 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 September 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. Our critical accounting policies and estimates are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2022, and there have been no material changes in such policies and estimates since the date of such report. New Authoritative Accounting Guidance See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. Executive Summary Company Overview. A t September 30, 2023, Valley had consolidated total assets of approximately $61.2 billion, total net loans of $49.7 billion, total deposits of $49.9 billion and total shareholders’ equity of $6.6 billion. Valley 52 operates many convenient branch office locations and commercial banking offices in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida, California, Alabama and Illinois. Of our current 230 branch network, 55 percent, 18 percent, and 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 9 percent of the branches in Alabama, California, and Illinois combined. We have grown significantly both in asset size and locations over the past several years through organic efforts and bank acquisitions, including our acquisition of Bank Leumi USA on April 1, 2022. As originally planned, Valley completed its conversion of the legacy Valley and Bank Leumi USA operating systems to a single core operating system in October 2023. Industry Developments. The combination of rapidly rising interest rates, increased competition and economic uncertainty continues to weigh on the banking industry. We have consistently operated the Bank with a focus on diversification to maintain stability through various economic cycles. During the third 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 $520.3 million, or 0.8 percent, to $61.2 billion at September 30, 2023 from June 30, 2023 largely driven by lower excess cash liquidity maintained overnight on our balance sheet. Our liquid assets totaled $2.6 billion at September 30, 2023, representing 4.6 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 the "Bank Liquidity" section for additional information. • Total deposits increased $265.5 million to $49.9 billion at September 30, 2023 as compared to $49.6 billion at June 30, 2023, largely due to increases in direct customer interest bearing deposits, partially offset by a net decrease of $338.5 million in indirect customer deposits driven by maturity of certain brokered CDs. 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 September 30, 2023. Total shareholders' equity increased $52.1 million to $6.6 billion at September 30, 2023 as compared to June 30, 2023. See the "Capital Adequacy" section for additional details. • Total loans increased $220.3 million , or 1.8 percent on an annualized basis to $50.1 billion at September 30, 2023 from June 30, 2023 mainly due to select organic commercial real estate loan growth during the third quarter 2023. See the "Loan Portfolio" section for more information. • Asset quality continued to reflect our disciplined underwriting and lending practices during the third quarter 2023. Non-performing assets (NPAs) as a percentage of total loans and NPAs totaled 0.52 percent and 0.51 percent at September 30, 2023 and June 30, 2023, respectively. See the "Non-Performing Assets" section for additional information. • Total investment securities were $5.1 billion, or 8.3 percent of total assets, at September 30, 2023 and remained relatively unchanged as compared to June 30, 2023. See the "Investment Securities Portfolio" section for more details. Quarterly Results. Net income for the third quarter 2023 was $141.3 million, or $0.27 per diluted common share, as compared to $178.1 million, or $0.34 per diluted common share, for the third quarter 2022. The $36.8 million decrease in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes: • a $41.6 million decrease in net interest income as higher yields on both new loan originations and adjustable-rate loans were more than offset by an increase in the cost of deposits; • a $7.1 million increase in our provision for credit losses; and 53 • a $5.5 million increase in non-interest exp ense was due, in part, to a higher salary and employee benefits expense, an FDIC insurance assessment and charges for collateral liabilities related to derivative transactions; Which were partially offset by: • a $2.5 million increase in non-interest income that was primarily driven by net gains on sales of assets and higher wealth management and trust fees, partially offset by lower capital markets income; and • a $14.9 million decrease in income tax expense mostly due to lower pre-tax income in the third 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 third quarter 2023 results. U.S. Economic Conditions. During the third quarter 2023, real gross domestic product (GDP) increased at an annual rate of 5.4 percent as compared to an increase of 2.1 percent during the second quarter 2023. The 5.4 percent increase in real GDP reflected accelerated economic growth fueled by continued robust consumer spending, private inventory investment, nonresidential fixed investment and government spending. Inflation moderately cooled, but remained at 3.7 percent in the third quarter 2023 . During each of May and July 2023, the Federal Reserve raised the target range for the federal funds rate by an additional 25 basis points, which resulted in a current target range of 5.25 to 5.50 percent. The Federal Reserve paused rate increases in August, September and November 2023 largely to observe the full impact of its significant rate hikes since the beginning of 2022. The 10-year U.S. Treasury note yield ended the third quarter 2023 at 4.59 percent, or 78 basis points higher as compared to the second quarter 2023, and the 2-year U.S. Treasury note yield ended the third quarter 2023 at 5.03 percent, or 16 basis points higher as compared to the second quarter 2023. U.S. commercial banks saw commercial and industrial loans remain relatively unchanged with minimal growth from June 30, 2023, to September 30, 2023. Overall, commercial real estate lending continued to be stressed, particularly affecting regional and midsize banks that may be overexposed to office space l ending. In light of higher uncertainty, inflated property prices, and concerns about debt repayments, most banks have become more selective in their new commercial real estate originations. Additionally, the combination of high interest rates and tight inventories have kept residential real estate sales and both refinanced and purchased residential mortgage loan activity low during the third quarter 2023. Despite strong economic growth during the third quarter 2023 the following factors have added a higher level of uncertainty to the future path of the U.S. economy and created a challenging operating environment for the banking sector including elevated inflation, the potential for additional fallout from the recent banking crisis, including bank regulatory actions, the inverted yield curve and potential further increases in market interest rates. In addition, geopolitical tensions in the Middle East which could threaten a spike in oil prices and a possibility of the government shutdown, 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 these economic conditions further 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 $2.4 billion to $49.8 billion for the third quarter 2023 as compared to the second quarter 2023, mostly due to a $2.7 billion increase in average time deposits, partially offset by a decrease in average non-interest bearing deposits. The increase in time deposits was mainly driven by successful retail CD generation and increased utilization of fully insured indirect customer (i.e., brokered) deposits. The decline in average non-interest bearing deposits was largely due to a shift in customer balances to our interest bearing deposit products in a rising interest rate environment, outflows due to attractive investment alternatives to deposits in the 54 marketplace, and customer use of cash reserves in place of financing. Average non-interest-bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 24 percent, 46 percent and 30 percent of total deposits as of September 30, 2023, respectively. Actual ending balances for deposits increased $265.5 million to $49.9 billion at September 30, 2023 from June 30, 2023 mainly due to increases of $833.5 million in savings, NOW and money market deposits and $194.8 million in time deposits, partially offset by a $762.8 million decrease in non-interest bearing deposits. The increase in savings, NOW and money market deposits was largely driven by increases in digital and national specialized deposits, as well as some shift in customer balances from non-interest bearing deposits during the third quarter 2023. The increase in time deposits was largely due to successful retail deposit campaigns, partially offset by the maturity of indirect customer deposits. Non-interest bearing balances continued to be challenged by the high level of market interest rates and the aforementioned changes in customer behavior at September 30, 2023. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 24 percent, 46 percent and 30 percent of total deposits as of September 30, 2023, respectively, as compared to 25 percent, 45 percent and 30 percent of total deposits as of June 30, 2023, respectively. The following table lists, by maturity, uninsured certificates of deposit at September 30, 2023: (in thousands) Less than three months $ 545,661 Three to six months 842,290 Six to twelve months 921,329 More than twelve months 128,929 Total $ 2,438,209 Total estimated uninsured deposits, excluding collateralized government deposits and intercompany deposits (i.e., deposits eliminated in consolidation), totaled approximately $11.7 billion, or 23 percent of total deposits, at September 30, 2023 as compared to $12.1 billion, or 24 percent of total deposits, at June 30, 2023. While our diversified commercial and consumer deposit base has remained relatively stable during the early stages of the fourth 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 September 30, 2023. 55 The following table presents average short-term and long-term borrowings for the periods indicated : Three Months Ended Nine Months Ended September 30, 2023 June 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 (in thousands) Average short-term borrowings: FHLB advances $ 349,728 $ 3,656,593 $ 438,267 $ 2,165,507 $ 565,222 Securities sold under repurchase agreements 82,442 99,327 140,777 93,709 144,019 Federal funds purchased 4,348 122,537 437,196 105,019 363,550 Total $ 436,518 $ 3,878,457 $ 1,016,240 $ 2,364,235 $ 1,072,791 Average long-term borrowings: FHLB advances $ 1,688,285 $ 1,523,500 $ 788,651 $ 1,365,258 $ 788,802 Subordinated debt 750,249 759,334 632,627 754,835 626,997 Junior subordinated debentures issued to capital trusts 56,978 56,893 56,631 56,892 56,545 Total $ 2,495,512 $ 2,339,727 $ 1,477,909 $ 2,176,985 $ 1,472,344 Average short-term borrowings decreased $3.4 billion during the third quarter 2023 as compared to the second quarter 2023 mostly due to the maturity and repayment of several FHLB advances as we trimmed our elevated excess liquidity position during the third quarter. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) moderately increased $155.8 million as compared to the second quarter 2023 mostly due to new FHLB advances issued in the second quarter 2023. Actual ending balances for short-term borrowings decreased $1.0 billion to $89.8 million at September 30, 2023 as compared to June 30, 2023 mainly due to the aforementioned maturities of FHLB advances and the decrease in our excess overnight cash positions as part of our liquidity management strategies during the third quarter 2023. Long-term borrowings totaled $2.3 billion at September 30, 2023 as compared to $2.4 billion at June 30, 2023. The decrease was largely due to the maturity and repayment of $125.0 million of 5.125 percent subordinated notes issued in September 2013 and due on September 27, 2023, which had already been fully disallowed from a regulatory capital perspective. Non-GAAP Financial Measures The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated. Valley believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding its underlying operational performance, business, and performance trends, and may facilitate comparisons of current and prior performance with the performance of others in the financial services industry. Management utilizes these measures for internal planning, forecasting and analysis purposes. Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management. These non-GAAP financial measures should not be considered in isolation, as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. 56 The following table presents our annualized performance ratios : Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Selected Performance Indicators ($ in thousands) GAAP measures: Net income, as reported $ 141,346 $ 178,119 $ 426,957 $ 391,260 Return on average assets 0.92 % 1.30 % 0.93 % 1.03 % Return on average shareholders’ equity 8.56 11.39 8.72 8.89 Non-GAAP measures: Net income, as adjusted $ 136,363 $ 181,455 $ 437,974 $ 467,571 Return on average assets, as adjusted 0.89 % 1.32 % 0.96 % 1.23 % Return on average shareholders' equity, as adjusted 8.26 11.60 8.94 10.62 Return on average tangible shareholders' equity (ROATE) 12.39 17.21 12.71 13.20 ROATE, as adjusted 11.95 17.54 13.04 15.77 Efficiency ratio 56.72 49.76 55.34 51.03 September 30, 2023 December 31, 2022 Common Equity Per Share Data: Book value per common share (GAAP) $ 12.64 $ 12.23 Tangible book value per common share (non-GAAP) 8.63 8.15 Adjusted net income is computed as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Net income, as reported (GAAP) $ 141,346 $ 178,119 $ 426,957 $ 391,260 Add: Losses (gains) on available for sale and held to maturity debt securities, net (net of tax) (a) 318 (24) 341 (74) Add: Restructuring charge (net of tax) (b) (484) — 7,531 — Add: Provision for credit losses for available for sale securities (c) — — 5,000 — Add: Non-PCD provision for credit losses, (net of tax) (d) — — — 29,282 Add: Merger related expenses (net of tax) (e) — 3,360 2,962 47,103 Add: Add: Net gains on sales of office buildings (net of tax) (f) (4,817) — (4,817) — Net income, as adjusted (non-GAAP) $ 136,363 $ 181,455 $ 437,974 $ 467,571 (a) Included in gains (losses) on securities transactions, net. (b) Represents severance expense related to workforce reductions within salary and employee benefits expense. (c) Included in provision for credit losses for available for sale and held to maturity securities (tax disallowed). (d) Represents provision for credit losses for non-PCD assets and unfunded credit commitments acquired during the period. (e) Included primarily within salary and employee benefits expense. (f) Included in gains (losses) on sale of assets, net within non-interest income. In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial 57 loan customer transactions reported in capital markets fees. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales, brokerage fees, and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details. Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 ($ in thousands) Net income, as adjusted (non-GAAP) $ 136,363 $ 181,455 $ 437,974 $ 467,571 Average assets $ 61,391,688 $ 54,858,306 $ 61,050,973 $ 50,588,010 Annualized return on average assets, as adjusted (non-GAAP) 0.89 % 1.32 % 0.96 % 1.23 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 ($ in thousands) Net income, as adjusted (non-GAAP) $ 136,363 $ 181,455 $ 437,974 $ 467,571 Average shareholders' equity $ 6,605,786 $ 6,256,767 $ 6,531,424 $ 5,869,736 Annualized return on average shareholders' equity, as adjusted (non-GAAP) 8.26 % 11.60 % 8.94 % 10.62 % ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 ($ in thousands) Net income, as reported (GAAP) $ 141,346 $ 178,119 $ 426,957 $ 391,260 Net income, as adjusted (non-GAAP) 136,363 181,455 437,974 467,571 Average shareholders’ equity (GAAP) $ 6,605,786 $ 6,256,767 $ 6,531,424 $ 5,869,736 Less: Average goodwill and other intangible assets 2,042,486 2,117,818 2,051,727 1,917,217 Average tangible shareholders’ equity (non-GAAP) $ 4,563,300 $ 4,138,949 $ 4,479,697 $ 3,952,519 Annualized ROATE (non-GAAP) 12.39 % 17.21 % 12.71 % 13.20 % Annualized ROATE, as adjusted (non-GAAP) 11.95 % 17.54 % 13.04 % 15.77 % 58 The efficiency ratio is computed as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 ($ in thousands) Total non-interest expense, as reported (GAAP) $ 267,133 $ 261,639 $ 822,270 $ 758,709 Less: Restructuring charge (pre-tax) (a) (675) — 10,507 — Less: Amortization of tax credit investments (pre-tax) 4,191 3,105 13,462 9,194 Less: Merger related expenses (pre-tax) (b) — 4,707 4,133 63,831 Total non-interest expense, as adjusted (non-GAAP) $ 263,617 $ 253,827 $ 794,168 $ 685,684 Net interest income, as reported (GAAP) $ 412,418 $ 453,992 $ 1,268,203 $ 1,189,821 Total non-interest income, as reported (GAAP) 58,664 56,194 173,038 153,997 Add: Losses (gains) on available for sale and held to maturity debt securities, net (pre-tax) (c) 443 (33) 476 (102) Less: Net gains on sales of office buildings (pre-tax) (d) (6,721) — (6,721) — Total net interest income and non-interest income, as adjusted (non-GAAP) $ 464,804 $ 510,153 $ 1,434,996 $ 1,343,716 Efficiency ratio (non-GAAP) 56.72 % 49.76 % 55.34 % 51.03 % (a) Represents severance expense related to workforce reductions within salary and employee benefits expense. (b) Included primarily within salary and employee benefits expense. (c) Included in gains (losses) on securities transactions, net. (d) Included in gains (losses) on sales of assets, net. Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding, as follows: September 30, 2023 December 31, 2022 ($ in thousands, except for share data) Common shares outstanding 507,660,742 506,374,478 Shareholders’ equity (GAAP) $ 6,627,299 $ 6,400,802 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 2,038,202 2,066,392 Tangible common shareholders’ equity (non-GAAP) $ 4,379,406 $ 4,124,719 Book value per common share (GAAP) $ 12.64 $ 12.23 Tangible book value per common share (non-GAAP) $ 8.63 $ 8.15 Net Interest Income Net interest income on a tax equivalent basis totaling $413.7 million for the third quarter 2023 decreased $7.6 million and $41.7 million as compared to the second quarter 2023 and third quarter 2022, respectively. The decrease as compared to the second quarter 2023 was mainly due to increased interest rates on most interest bearing deposit products, partially offset by higher loan yields and a reduction in average short-term borrowings. As a result of the higher cost of deposits, total interest expense increased $32.9 million to $400.6 million for the third quarter 2023 as compared to the second quarter 2023. Interest income on a tax equivalent basis increased $25.3 million to $814.3 million in the third quarter 2023 as compared to the second quarter 2023. The increase was mostly due to higher yields on both new originations and adjustable rate loans in our portfolio and a $561.5 million increase in average 59 loan balances driven by organic new loan volumes over the last six months and a continuation of slower loan prepayments in the third quarter 2023. Average interest earning assets increased $6.3 billion to $56.8 billion for the third quarter 2023 as compared to the third quarter 2022 mainly due to a $5.7 billion increase in average loan balances and a $508.6 million 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 bank failures in the first half of 2023. Compared to the second quarter 2023, average interest earning assets decreased by $549.2 million during the third quarter 2023. The decrease was primarily driven by a $951.8 million decline in average overnight interest bearing cash held as compared to the prior linked quarter, partially offset by a $561.5 million increase in average loan balances mainly due to continued growth in the commercial real estate loan portfolio. Average interest bearing liabilities increased $9.6 billion to $40.8 billion for the third quarter 2023 as compared to the third quarter 2022 mainly due to increases of $9.2 billion and $1.0 billion in average time deposits and long-term borrowings, respectively, partially offset by a decrease of $579.7 million in average short-term borrowings. The increases in average time deposits and long-term borrowings were largely due to the enhanced liquidity management efforts during the first nine months of 2023, including increased usage of fully FDIC-insured indirect customer CD and successful retail CD initiatives. As compared to the second quarter 2023, average interest bearing liabilities decreased by $96.7 million for the third quarter 2023 primarily due to the lower utilization of short-term FHLB advances, largely offset by higher average interest bearing deposit levels largely driven by successful retail CD generation and increased balances within our specialized national and digital products in savings, NOW and money market deposits. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Net interest margin on a tax equivalent basis of 2.91 percent for the third quarter 2023 decreased by 3 basis points and 69 basis points from 2.94 percent and 3.60 percent for the second quarter 2023 and third quarter 2022, respecti vely. The decrease as compared to the second quarter 2023 was largely driven by higher interest rates on interest bearing deposits, partially offset by a 23 basis point increase in the yield on average interest earning assets. The yield on average loans increased by 25 basis points to 6.03 percent for the third quarter 2023 as compared to the second quarter 2023 largely due to higher interest rates on new originations and adjustable rate loans. Our cost of total average deposits was 2.94 percent for the third quarter 2023 as compared to 2.45 percent and 0.59 percent for the second quarter 2023 and the third quarter 2022, respectively. The overall cost of average interest bearing liabilities also increased 33 basis points to 3.92 percent for the third quarter 2023 as compared to the second quarter 2023 primarily driven by the continued rise in the market interest rates on deposit s. We anticipate our net interest income for the fourth quarter 2023 to be relatively unchanged from the third quarter 2023. While we are optimistic regarding the signs of stabilization in our net interest income during the third quarter 2023 as compared to the first six months of 2023, we cannot provide any assurances with respect to the future impact of the market interest rate environment, and its uncertain trajectory on the cost of our funding sources or that our net interest income or margin will remain at the levels reported for the third quarter 2023. 60 The following table reflects the components of net interest income for the three months ended September 30, 2023, June 30, 2023 and September 30, 2022: Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2023 June 30, 2023 September 30, 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 50,019,414 $ 753,662 6.03 % $ 49,457,937 $ 715,195 5.78 % $ 44,341,894 $ 496,545 4.48 % Taxable investments (3) 4,915,778 37,682 3.07 5,065,812 39,436 3.11 4,815,181 31,002 2.58 Tax-exempt investments (1)(3) 620,439 5,800 3.74 629,342 7,062 4.49 635,795 6,501 4.09 Interest bearing deposits with banks 1,246,934 17,113 5.49 2,198,717 27,276 4.96 738,372 3,996 2.16 Total interest earning assets 56,802,565 814,257 5.73 57,351,808 788,969 5.50 50,531,242 538,044 4.26 Allowance for credit losses (447,045) (446,098) (486,747) Cash and due from banks 410,715 415,075 426,796 Other assets 4,802,711 4,709,061 4,499,739 Unrealized gains on securities available for sale, net (177,258) (152,382) (112,724) Total assets $ 61,391,688 $ 61,877,464 $ 54,858,306 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 23,016,737 $ 201,916 3.51 % $ 22,512,128 $ 164,843 2.93 % $ 23,541,694 $ 50,674 0.86 % Time deposits 14,880,311 164,336 4.42 12,195,479 125,764 4.12 5,192,896 15,174 1.17 Total interest bearing deposits 37,897,048 366,252 3.87 34,707,607 290,607 3.35 28,734,590 65,848 0.92 Short-term borrowings 436,518 5,189 4.75 3,878,457 50,207 5.18 1,016,240 5,160 2.03 Long-term borrowings (4) 2,495,512 29,159 4.67 2,339,727 26,880 4.60 1,477,909 11,728 3.17 Total interest bearing liabilities 40,829,078 400,600 3.92 40,925,791 367,694 3.59 31,228,739 82,736 1.06 Non-interest bearing deposits 11,951,398 12,756,862 16,035,778 Other liabilities 2,005,426 1,648,359 1,337,022 Shareholders’ equity 6,605,786 6,546,452 6,256,767 Total liabilities and shareholders’ equity $ 61,391,688 $ 61,877,464 $ 54,858,306 Net interest income/interest rate spread (5) $ 413,657 1.81 % $ 421,275 1.91 % $ 455,308 3.20 % Tax equivalent adjustment (1,239) (1,510) (1,316) Net interest income, as reported $ 412,418 $ 419,765 $ 453,992 Net interest margin (6) 2.90 % 2.93 % 3.59 % Tax equivalent effect 0.01 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 2.91 % 2.94 % 3.60 % 61 The following table reflects the components of net interest income for the nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, 2023 September 30, 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 49,120,153 $ 2,124,108 5.77 % $ 40,529,794 $ 1,229,536 4.04 % Taxable investments (3) 5,004,480 114,592 3.05 4,525,323 81,906 2.41 Tax-exempt investments (1)(3) 624,299 19,600 4.19 574,699 16,079 3.73 Interest bearing deposits with banks 1,762,065 66,594 5.04 975,601 6,026 0.82 Total interest earning assets 56,510,997 2,324,894 5.49 46,605,417 1,333,547 3.82 Allowance for credit losses (453,254) (428,078) Cash and due from banks 423,473 378,819 Other assets 4,738,418 4,078,903 Unrealized gains on securities available for sale, net (168,661) (47,051) Total assets $ 61,050,973 $ 50,588,010 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 22,971,446 $ 517,524 3.00 % $ 22,374,949 $ 77,423 0.46 % Time deposits 12,290,300 370,398 4.02 4,122,169 21,274 0.69 Total interest bearing deposits 35,261,746 887,922 3.36 26,497,118 98,697 0.50 Short-term borrowings 2,364,235 89,345 5.04 1,072,791 10,049 1.25 Long-term borrowings (4) 2,176,985 75,237 4.61 1,472,344 31,566 2.86 Total interest bearing liabilities 39,802,966 1,052,504 3.53 29,042,253 140,312 0.64 Non-interest bearing deposits 12,903,406 14,679,354 Other liabilities 1,813,177 996,667 Shareholders’ equity 6,531,424 5,869,736 Total liabilities and shareholders’ equity $ 61,050,973 $ 50,588,010 Net interest income/interest rate spread (5) $ 1,272,390 1.96 % $ 1,193,235 3.18 % Tax equivalent adjustment (4,187) (3,414) Net interest income, as reported $ 1,268,203 $ 1,189,821 Net interest margin (6) 2.99 % 3.40 % Tax equivalent effect 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 3.00 % 3.41 % _____________ (1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition. (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis. (6) Net interest income as a percentage of total average interest earning assets. 62 The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Change in Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2023 Compared to September 30, 2022 Nine Months Ended September 30, 2023 Compared to September 30, 2022 Change Due to Volume Change Due to Rate Total Change Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 69,517 $ 187,600 $ 257,117 $ 297,470 $ 597,102 $ 894,572 Taxable investments 660 6,020 6,680 9,329 23,357 32,686 Tax-exempt investments* (154) (547) (701) 1,458 2,063 3,521 Interest bearing deposits with banks 4,061 9,056 13,117 8,241 52,327 60,568 Total increase in interest income 74,084 202,129 276,213 316,498 674,849 991,347 Interest Expense: Savings, NOW and money market deposits (1,155) 152,397 151,242 2,119 437,982 440,101 Time deposits 59,906 89,256 149,162 101,420 247,704 349,124 Short-term borrowings (4,122) 4,151 29 22,523 56,773 79,296 Long-term borrowings and junior subordinated debentures 10,338 7,093 17,431 19,164 24,507 43,671 Total increase in interest expense 64,967 252,897 317,864 145,226 766,966 912,192 Total increase (decrease) in net interest income $ 9,117 $ (50,768) $ (41,651) $ 171,272 $ (92,117) $ 79,155 * Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate. 63 Non-Interest Income Non-interest income increased $2.5 million and $19.0 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022. The following table presents the components of non-interest income for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Wealth management and trust fees $ 11,417 $ 9,281 $ 32,180 $ 23,989 Insurance commissions 2,336 3,750 7,895 9,072 Capital markets 7,141 13,171 35,000 42,242 Service charges on deposit accounts 10,952 10,338 31,970 26,617 (Losses) gains on securities transactions, net (398) 323 197 (1,058) Fees from loan servicing 2,681 3,138 8,054 8,636 Gains on sales of loans, net 2,023 922 3,752 5,510 Gains (losses) on sales of assets, net 6,653 (106) 6,938 (372) Bank owned life insurance 2,709 1,681 7,736 5,840 Other 13,150 13,696 39,316 33,521 Total non-interest income $ 58,664 $ 56,194 $ 173,038 $ 153,997 Wealth management and trust fees income increased $2.1 million and $8.2 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increases in both periods were mainly driven by higher brokerage fees related to our broker dealer subsidiary, Valley Financial Management, Inc., acquired on April 1, 2022 in connection with the acquisition of Bank Leumi USA and to a lesser extent by higher revenues generated by our advisory firm, Dudley Ventures, LLC, which specializes in the investment and management of tax credit investments. Brokerage fees totaled $5.1 million and $14.8 million for the three and nine months ended September 30, 2023, respectively, and $3.9 million and $8.3 million for the same periods in 2022, respectively. Capital markets income decreased $6.0 million and $7.2 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022 mainly due to a decline in the volume of interest rate swap transactions executed for commercial loan customers. Service charges on deposit accounts increased $5.4 million for the nine months ended September 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 (losses) on sales of assets increased $6.8 million and $7.3 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022 largely due to the sale of non-branch offices located in Wayne, New Jersey in the third quarter 2023. Net gains on sales of loans increased $1.1 million and decreased $1.8 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The decrease for the nine months ended September 30, 2023 was mostly due to lower loan sale volumes as we continued to retain a higher percentage of new loan volumes during the first nine months of 2023. During the nine months ended September 30, 2023, we sold $152.6 million of residential mortgage loans as compared to $375.0 million for same period in 2022. Our ability to generate net gains on sales of loans could continue to be challenged by a number of factors, including higher market interest rates, lower customer demand for conforming loan products and our decision to originate certain residential mortgage loans for investment in our loan portfolio rather than sale. 64 Other non-interest income increased $5.8 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase for the nine months ended September 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 $5.5 million and $63.6 million for the three and nine months ended September 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 nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (in thousands) Salary and employee benefits expense $ 137,292 $ 134,572 $ 431,872 $ 397,103 Net occupancy expense 24,675 26,486 73,880 70,906 Technology, furniture and equipment expense 37,320 39,365 106,304 115,245 FDIC insurance assessment 7,946 6,500 27,527 16,009 Amortization of other intangible assets 9,741 11,088 30,072 26,925 Professional and legal fees 17,109 17,840 55,329 62,998 Amortization of tax credit investments 4,191 3,105 13,462 9,194 Other 28,859 22,683 83,824 60,329 Total non-interest expense $ 267,133 $ 261,639 $ 822,270 $ 758,709 Salary and employee benefits expense increased $2.7 million and $34.8 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. As compared to third quarter 2022, the increase was largely due to higher salary expense and insurance costs, partially offset by a decrease in commission expense mainly related to our home mortgage consultant teams. The increase for the nine months ended September 30, 2023 was primarily driven by (i) higher headcount from the Bank Leumi USA acquisition and organic growth in our operations, (ii) $10.5 million of restructuring charges, consisting of severance expense related to recent workforce reductions, and (iii) inflationary pressures on our overall labor costs. These increases were partially offset by lower cash incentive compensation expense and merger related costs. Merger related costs totaled $4.1 million and $29.3 million for the nine months ended September 30, 2023 and 2022, respectively. Net occupancy expense decreased $1.8 million and increased $3.0 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. As compared to third quarter 2022, the decrease was mainly due to a $1.5 million decline in merger expenses, as well as lower repair and maintenance costs. The increase for the nine months ended September 30, 2023 was primarily driven by higher lease expense. Technology, furniture and equipment expense decreased $2.0 million and $8.9 million for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The decrease for the nine months ended September 30, 2023 was largely a decline in merger related expense, partially offset by higher data processing expense. Within this category, merger related costs totaled $1.8 million and $17.1 million for the three and nine months ended September 30, 2022, respectively. FDIC insurance assessment expense increased $11.5 million for the nine months ended September 30, 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 2023. Amortization of other intangible assets increased $3.1 million for the nine months ended September 30, 2023 as compared to the same period in 2022 mostly due to higher amortization expense of core deposits and other 65 intangible assets resulting from the Bank Leumi USA acquisition. See Note 9 to the consolidated financial statements for additional information. Professional and legal fees decreased $7.7 million for the nine months ended September 30, 2023 as compared to the same period in 2022 mainly due to lower consulting and legal expenses. Within the category, merger related expenses (related to the Bank Leumi USA acquisition) totaled $11.5 million for the nine months ended September 30, 2022. Other non-interest expense increased $6.2 million and $23.5 million for the three and nine months ended September 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. 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 certain technology cost reductions (including those resulting from the completion of our core operating system conversion in October 2023). Benefits began to be realized in the third quarter of 2023, with the initiative expected to generate more than $40 million of annual pre-tax cost savings by mid-2024. Income Taxes Income tax expense totaled $53.5 million for the third quarter 2023 as compared to $51.8 million and $68.4 million for the second quarter 2023 and third quarter 2022, respectively. Our effective tax rate was 27.5 percent, 27.1 percent and 27.7 percent for the third quarter 2023, second quarter 2023 and third quarter 2022, respectively. The increase in the effective tax rate from the second quarter 2023 was primarily due to the release of certain state valuation allowances in the second quarter 2023. U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations and tax planning strategies. Operating Segments Valley manages its business operations under operating segments consisting of Consumer Banking and Commercial Banking. Activities not assigned to the operating segments are included in 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 operating segments and no changes to the operating segments were determined necessary during the nine months ended September 30, 2023. The accounting for each operating segment and Treasury and Corporate Other includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. 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. 66 The following tables present the financial data for Valley's operating segments and Treasury and Corporate Other for the three months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,941,112 $ 41,078,302 $ 6,783,151 $ 56,802,565 Income (loss) before income taxes 12,272 217,048 (34,488) 194,832 Annualized return on average interest earning assets (before tax) 0.55 % 2.11 % (2.03) % 1.37 % Three Months Ended September 30, 2022 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,307,993 $ 36,033,901 $ 6,189,348 $ 50,531,242 Income (loss) before income taxes 20,137 255,802 (29,415) 246,524 Annualized return on average interest earning assets (before tax) 0.97 % 2.84 % (1.90) % 1.95 % See Note 16 to the consolidated financial statements for additional details. Consumer Banking Segment The Consumer Banking segment represented 17.9 percent of our loan portfolio at September 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 September 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 3.2 percent of total loans at September 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 $633.1 million to $8.9 billion for the three months ended September 30, 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 home equity and secured personal lines of credit. Income before income taxes for Consumer Banking decreased $7.9 million to $12.3 million for the third quarter 2023 as compared to the third quarter 2022. The decrease was mainly driven by lower net interest income, partially offset by lower provision for credit losses and decrease in non-interest expense. Net interest income decreased $25.0 million in the third quarter 2023 as compared to the same period of 2022 due to additional interest expense generated from the higher cost of average deposit and other borrowing, as well as an increase in the average balance of these interest bearing liabilities . The provision for loan losses decreased $11.8 million for the three months ended September 30, 2023 due, in part, to a decline in reserves related to quarterly loan growth and 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. Non-interest expense decreased $4.4 million to $19.9 million f or the third quarter 2023 as compared to the third quarter 2022. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. 67 Net interest margin on the Consumer Banking portfolio decreased 131 basis points to 1.50 percent for the third quarter 2023 as compared to the third quarter 2022 mainly due to a 213 basis point increase in the costs associated with our funding sou rces, partially offset by an 82 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 third quarter 2023 . The 82 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 0.55 percent for the third quarter 2023 compared to 0.97 percent for the third quarter 2022. Commercial Banking Segment The Commercial Banking segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, Commercial Banking is Valley’s operating segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $9.3 billion and represented 18.5 percent of the total loan portfolio at September 30, 2023. Commercial real estate loans and construction loans totaled $31.9 billion and represented 63.6 percent of the total loan portfolio at September 30, 2023. Average interest earning assets in Commercial Banking increased $5.0 billion to $41.1 billion for the three months ended September 30, 2023 as compared to the third quarter 2022 primarily due to organic loan growth largely concentrated in the commercial real estate loan portfolio. Income before income taxes for Commercial Banking decreased $38.8 million to $217.0 million for the three months ended September 30, 2023 as compared to the same period of 2022 mainly due to increases in the provision for credit losses and internal transfer expense, as well as lower non-interest income. T he provision for credit losses increased $19.1 million to $13.7 million as compared to the same period in 2022 mainly driven by higher quantitative reserves and specific reserves related to certain commercial loan portfolios. See details in the "Allowance for Credit Losses for Loans" section of this MD&A. Internal transfer expense increased $13.3 million to $127.2 million for the three months ended September 30, 2023 as compared to the third quarter 2022. Non-interest income decreased $12.3 million to $11.2 million for the three months ended September 30, 2023 as compared to the third quarter 2022 mainly due to a decline in the volume of interest rate swap transactions executed for commercial loan customers. The negative impact of the above items was partially offset by higher net interest income. Net interest income for this segment increased $7.3 million to $379.9 million for the third quarter 2023 as compared to the same period in 2022 primarily due to both higher average commercial loan balances and interest rates on new and adjustable loans. The net interest margin for this segment decreased 44 basis poin ts to 3.70 percent for the third quarter 2023 as compared to the third quarter 2022 due to a 213 basis point increase in the cost of our funding sources, partially offset by a 169 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 2.11 percent for the three months ended September 30, 2023 compared to 2.84 percent for the same period in 2022. Treasury and Corporate Other Treasury and Corporate Other largely consists of the Treasury managed held to maturity and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are 68 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 operating 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 Treasury and Corporate Other 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 and restructuring expenses. Average interest earning assets within Treasury and Corporate Other increased $593.8 million to $6.8 billion for the three months ended September 30, 2023 largely due to a $508.6 million increase in average overnight interest bearing deposits with banks as compared to the same period in 2022. Our average overnight cash levels largely increased during the first half of 2023 as a cautionary liquidity manageme nt measure resulting from the bank failures in March and April 2023. During the third quarter 2023, we began to manage these excess cash levels down to more normalized overnight levels by September 30, 2023. For the three months ended September 30, 2023, loss before income taxes totaled $34.5 million compared to $29.4 million for the same period in 2022. The $5.1 million increase in the pre-tax loss during the third quarter 2023 was mainly due to lower net interest income and higher non-interest expense, partially offset by increases in the internal transfer income and non-interest income. The internal transfer income increased $15.3 million to $155.5 million for the three months ended September 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 increased $8.5 million to $214.0 million during the three months ended September 30, 2023 as compared to the same period in 2022 largely due to general increases in several categories caused by our acquired and organic growth in operations. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. The net interest margin for Treasury and Corporate Other decreased 123 basis points to 0.78 percent for the third quarter 2023 as compared to the third quarter 2022 due to a 213 basis point increase in cost of our funding sources, partially offset by a 90 basis point increase in the yield on average investments. The increase in the yield on average investments as compared to the same period a year ago was largely driven by new higher yielding investments and a reduction in premium amortization expense mostly caused by slower principal repayments in the rising interest rate environment. The following tables present the financial data for Valley's operating segments and Treasury and Corporate Other for the nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, 2023 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,871,992 $ 40,248,161 $ 7,390,844 $ 56,510,997 Income (loss) before income taxes 25,496 688,117 (124,246) 589,367 Annualized return on average interest earning assets (before tax) 0.38 % 2.28 % (2.24) % 1.39 % Nine Months Ended September 30, 2022 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,978,732 $ 32,551,062 $ 6,075,623 $ 46,605,417 Income (loss) before income taxes 56,796 519,640 (40,905) 535,531 Annualized return on average interest earning assets (before tax) 0.95 % 2.13 % (0.90) % 1.53 % 69 Consumer Banking Segment The Consumer Banking segment's average interest earning assets increased $893.3 million to $8.9 billion for the nine months ended September 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 $31.3 million to $25.5 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The decrease was mainly driven by lower net interest income. Net interest income decreased $61.9 million for the nine months ended September 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 negative impact of these items was partially offset by an $11.9 million increase in non-interest income coupled with a lower provision for loan losses and internal transfer expense. The increase in non-interest income was mainly driven by increases in wealth management and trust fees and service charges on deposit accounts. The provision for loan losses decreased $9.1 million for the nine months ended September 30, 2023 mainl y due to a decrease in non-economic qualitative factors within our CECL model as compared to the same period in 2022 . See further details in the “Allowance for Credit Losses” section of this MD&A. Net interest margin on the Consumer Banking portfolio decreased 122 basis points to 1.67 percent for the nine months ended September 30, 2023 as compared to the same period in 2022 mainly due to a 205 basis point increase in the costs associated with our funding sources, partially offset by an 83 basis point increase in the yield on average loans. The 83 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 0.38 percent for the nine months ended September 30, 2023 compared to 0.95 percent for the same period in 2022. Commercial Banking Segment Average interest earning assets in the Commercial Banking segment increased $7.7 billion to $40.2 billion for the nine months ended September 30, 2023 as compared to the same period in 2022. This increase was primarily due to organic loan growth, especially in the commercial real estate portfolio over the 12-month period ended September 30, 2023, as well as average balances related to loans acquired from Bank Leumi USA on April 1, 2022. For the nine months ended September 30, 2023, income before income taxes for Commercial Banking increased $168.5 million to $688.1 million as compared to the same period in 2022 mainly due to an increase in net interest income and lower provision for credit losses, partially offset by higher non-interest expense and lower non-interest income. Net interest income increased $179.9 million to $1.1 billion for the nine months ended September 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 $15.0 million to $19.6 million during the nine months ended September 30, 2023 as compared to $34.6 million for the same period in 2022 due, in part 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 $22.9 million to $104.2 million for the nine months ended September 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 decreased 15 basis point to 3.75 percent for the nine months ended September 30, 2023 as compared to the same period in 2022 due to a 205 basis point increase in the cost of our funding sources, partially offset by a 190 basis point increase in yield on average loans. 70 The return on average interest earning assets before income taxes for the commercial banking segment was 2.28 percent for the nine months ended September 30, 2023 compared to 2.13 percent for the same period in 2022. Treasury and Corporate Other Treasury and Corporate Other's average interest earning assets increased $1.3 billion during the nine months ended September 30, 2023 as compared to the same period in 2022 mainly due to higher excess liquidity, investment securities acquired from Bank Leumi USA, and, to a much lesser extent, purchases of new investment securities over the last 12-month period . Average interest bearing deposits with banks increased $786.5 million for the nine months ended September 30, 2023 as compared to the same period in 2022 due to additional cash held as a cautionary liquidity management measur e from March 2023 and through a portion of the third quarter 2023. The loss before income taxes totaled $124.2 million for the nine months ended September 30, 2023 as compared to $40.9 million for the same period in 2022. The $83.3 million increase in pre-tax loss was mainly due to decreases in both net interest income and internal transfer income combined with an increase in non-interest expense, partially offse t by higher non-interest income. Non-interest expense increased $38.9 million to $656.6 million for the nine months ended September 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 $21.3 million to $442.4 million for the nine months ended September 30, 2023 as compared to the same period in 2022 due to lower allocations of the overhead expense to the Consumer Banking and Commercial Banking segments over the same period. Non-interest income increased $20.7 million during t he nine months ended September 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 $4.1 million mainly due to a corporate bond issued by one failed 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 71 basis points to 1.16 percent for the nine months ended September 30, 2023 as compared to the same period in 2022 due to a 205 basis point increase in cost of our funding sources, partially offset by a 134 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 Interest Rate Risk Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities. 71 We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 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 September 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 September 30, 2023. Although the size of Valley’s balance sheet is forecasted to remain static as of September 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 third quarter 2023. The model also utilizes an immediate parallel shift in market interest rates at September 30, 2023. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet. Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income. The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below. Estimated Change in Future Net Interest Income Changes in Interest Rates Dollar Change Percentage Change (in basis points) ($ in thousands) +300 $ 173,440 10.11 % +200 115,296 6.72 +100 57,439 3.35 –100 (57,001) (3.32) –200 (114,091) (6.65) –300 (169,410) (9.88) 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 72 interest income over the next 12-month period by 3.35 percent. Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at September 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. Liquidity and Cash Requirements Bank Liquidity 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 September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Loans to deposits 100.4 % 98.5 % Wholesale funding to total funding 22.5 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) and other sources. The following table summarizes Valley's sources of liquid assets: September 30, 2023 December 31, 2022 (in thousands) Cash and due from banks $ 444,857 $ 444,325 Interest bearing deposits with banks 698,966 503,622 Trading debt securities 3,441 13,438 Held to maturity debt securities (1) 196,168 177,614 Available for sale debt securities (2) 1,186,524 1,261,397 Loans held for sale 33,834 18,118 Total liquid assets $ 2,563,790 $ 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. 73 (2) Includes a pproximately $803 million and $333 million of various investment securities that were pledged to counterparties to support our earning asset funding strategies at September 30, 2023 and December 31, 2022, respectively. Total liquid assets represented 4.6 percent of interest earning assets at both September 30, 2023 and December 31, 2022. Other sources of funds on the asset side are derived from scheduled loan payments of principal and interest, as well as prepayments received. At September 30, 2023, estimated cash inflows from total loans are projected to be approximately $14.8 billion over the next 12-month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtail ment of lending activities. We anticipate the receipt of approx imately $385.0 million in principal payments from securities in the total investment portfolio at September 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 $39.8 billion and $38.1 billion for the nine months ended September 30, 2023 and for the year ended December 31, 2022, respectively, representing 70.5 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 September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 (in thousands) FHLB advances $ — $ 24,035 Securities sold under agreements to repurchase 89,802 114,694 Total short-term borrowings $ 89,802 $ 138,729 The following table summarizes the Bank's estimated unused available non-deposit borrowing capacities at September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 (in thousands) FHLB borrowing capacity* $ 13,599,000 $ 6,891,000 Unused FRB discount window* 7,780,000 2,099,000 Unused federal funds lines available from commercial banks 2,150,000 1,940,000 Unencumbered investment securities 1,120,000 3,502,000 Total $ 24,649,000 $ 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 74 institution to sell those securities in times of stress. Advances under the Program can be requested until March 11, 2024. This Program is currently another short-term liquidity source for Valley. Valley had no outstanding borrowings under the Program at September 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 (including $125 million of 5.125 percent subordinated notes which matured on September 27, 2023). Valley's cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods of up to five years, but not beyond the stated maturity dates, and subject to other conditions. Investment Securities Portfolio As of September 30, 2023, we had $63.2 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: U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, which may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers. The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in partnerships that invest in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. We also had $3.4 million of trading debt securities at September 30, 2023 consisting of U.S. Treasury securities. We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments primarily made into the available for sale and held to maturity debt securities portfolios. Allowance for Credit Losses and Impairment Analysis Available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount 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, 75 such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 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 nine months ended September 30, 2023. There was no other impairment recognized within the available for sale debt securities portfolio during the three months ended September 30, 2023 and the three and nine months ended September 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 September 30, 2023 and there was no allowance for credit losses for available for sale debt securities at September 30, 2023 and December 31, 2022. Held to maturity debt securities. Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero-loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party . Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.3 million and $1.6 million at September 30, 2023 and December 31, 2022, respectively. Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. 76 The following table presents the available for sale and held to maturity debt investment securities portfolios by investment grades at September 30, 2023: September 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Available for sale investment grades: * AAA Rated $ 1,035,612 $ 27 $ (160,362) $ 875,277 AA Rated 150,090 — (40,723) 109,367 A Rated 22,106 — (3,991) 18,115 BBB Rated 105,725 — (8,711) 97,014 Non-investment grade 5,000 — (1,248) 3,752 Not rated 96,960 — (13,961) 82,999 Total $ 1,415,493 $ 27 $ (228,996) $ 1,186,524 Held to maturity investment grades: * AAA Rated $ 3,389,048 $ 38 $ (601,461) $ 2,787,625 AA Rated 221,059 — (28,103) 192,956 A Rated 3,963 — (276) 3,687 BBB Rated 6,000 — (714) 5,286 Non-investment grade 5,351 — (1,121) 4,230 Not rated 173,288 — (15,992) 157,296 Total $ 3,798,709 $ 38 $ (647,667) $ 3,151,080 Allowance for credit losses 1,321 — — 1,321 Total, net of allowance for credit losses $ 3,797,388 $ 38 $ (647,667) $ 3,149,759 * Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. The unrealized losses in the AAA and AA rated categories of both the 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 $97.0 million and $173.3 million, respectively, of investments not rated by the rating agencies with aggregate unrealized losses of $14.0 million and $16.0 million, respectively, at September 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 $36.1 million and several corporate and other debt securities. See Note 7 to the consolidated financial statements for additional information regarding our investment securities portfolio. 77 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: September 30, 2023 June 30, 2023 December 31, 2022 ($ in thousands) Loans Commercial and industrial $ 9,274,630 $ 9,287,309 $ 8,804,830 Commercial real estate: Commercial real estate 28,041,050 27,793,072 25,732,033 Construction 3,833,269 3,815,761 3,700,835 Total commercial real estate 31,874,319 31,608,833 29,432,868 Residential mortgage 5,562,665 5,560,356 5,364,550 Consumer: Home equity 548,918 535,493 503,884 Automobile 1,585,987 1,632,875 1,746,225 Other consumer 1,251,000 1,252,382 1,064,843 Total consumer loans 3,385,905 3,420,750 3,314,952 Total loans * $ 50,097,519 $ 49,877,248 $ 46,917,200 As a percent of total loans: Commercial and industrial 18.5 % 18.6 % 18.8 % Commercial real estate 63.6 63.4 62.7 Residential mortgage 11.1 11.1 11.4 Consumer loans 6.8 6.9 7.1 Total 100.0 % 100.0 % 100.0 % * Includes net unearned discount and deferred loan fees of $110.9 million, $119.1 million and $120.5 million at September 30, 2023, June 30, 2023 and December 31, 2022, respectively. Total loans increased $220.3 million, or 1.8 percent on an annualized basis to $50.1 billion at September 30, 2023 from June 30, 2023 mainly as a result of select new loan originations in the commercial real estate loan portfolio. Loans held for sale at fair value, presented separately from total loans on the consolidated statements of financial condition totaled $33.8 million and $33.0 million at September 30, 2023 and June 30, 2023, respect ively. Commercial real estate loans (excluding construction loans) increased $248.0 million to $28.0 billion at September 30, 2023 from June 30, 2023 reflecting new originations mainly within non-owner occupied and multi-family loans across our geographic market areas. At September 30, 2023, commercial real estate loans collateralized by office buildings were approximately $3.2 billion of the $28.0 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 53 percent and debt service coverage ratio of 1.63. The majority of the office space loans are multi-tenant with no recent charge-offs. Construction loans increased only $17.5 million to $3.8 billion at September 30, 2023 from June 30, 2023 due to minimal advances on pre-existing construction loan projects and highly selective underwriting of new projects during the third quarter 2023. Residential mortgage loans remained relatively unchanged at September 30, 2023 from June 30, 2023. New and refinanced residential mortgage loan originations totaled $150.2 million for the third quarter 2023 as compared to $188.0 million and $342.9 million for the second quarter 2023 and third quarter 2022, respectively. During the third quarter 2023, we retained approximately 45.7 percent of the total residential mortgage originations in our held for investment loan portfo lio. Additionally, the volume of primarily new loan applications has continued to be relatively low in the early stages of the fourth quarter 2023 largely due to the higher level of mortgage interest rates and this may continue to challenge our ability to grow this loan category. 78 Home equity loans increased by $13.4 million to $548.9 million at September 30, 2023 compared to June 30, 2023 largely due to moderate increases in pre-existing line utilization, while new home equity loan originations remain challenged due to the unfavorable high interest rate environment . Automobile loans decreased by $46.9 million, or 11.5 percent on an annualized basis, to $1.6 billion at September 30, 2023 as compared to June 30, 2023 as a moderate uptick in new indirect auto loan volumes from our dealership network did not keep pace with the portfolio repayment activity during the third quarter 2023. We anticipate that the impact of inflation on average new and used vehicle prices coupled with high market interest rates could deter consumer demand and continue to have a negative impact on our ability to grow this loan category during the fourth quarter 2023. Other consumer loans decreased $1.4 million to $1.3 billion at September 30, 2023 as compared to June 30, 2023 as demand and utilization of collateralized personal lines of credit slowed during the third quarter 2023. 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. Annualized loan growth slowed to 1.8 percent for the third quarter 2023 from 1 0.0 percent in the second quarter 2023 largely as expected mostly due to the impact of higher market interest rates. Annualized loan growth for the nine months ended September 30, 2023 totaled 9.0 percent. We remain selective on new loan originations and generally supportive of compelling projects led by our high quality and tenured customer base. Moving forward, we anticipate loan growth in the fourth quarter 2023 to approximate the linked quarter level experienced in the third quarter 2023 . Non-performing Assets Non-performing assets (NPAs) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consist of automobiles and taxi medallions) at September 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. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at lower of cost or fair value, less estimated cost to sell. Our NPAs increased $4.2 million to $260.3 million at September 30, 2023 as compared to June 30, 2023 mostly driven by an increase in non-accrual commercial and industrial loans. NPAs as a pe rcentage of total loans and NPAs totaled 0.52 percent and 0.51 percent at September 30, 2023 and June 30, 2023, respectively (as shown in the table below). Our total NPAs has remained relatively low as a percen tage of the total loan portfolio and the level of NPAs, which is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. During the nine months ended September 30, 2023, our overall credit trends have remained stable, and the majority of our borrowers continued to demonstrate resilience despite the impact of higher borrowing costs, slower economic growth, elevated inflation and the overall uncertain economy . However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at September 30, 2023 due to the aforementioned or other factors potentially impacting our lending customers. 79 The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: September 30, 2023 June 30, 2023 March 31, 2023 ($ in thousands) Accruing past due loans: 30 to 59 days past due: Commercial and industrial $ 10,687 $ 6,229 $ 20,716 Commercial real estate 8,053 3,612 13,580 Residential mortgage 13,159 15,565 12,599 Total consumer 15,509 8,431 7,845 Total 30 to 59 days past due 47,408 33,837 54,740 60 to 89 days past due: Commercial and industrial 5,720 7,468 24,118 Commercial real estate 2,620 — — Residential mortgage 9,710 1,348 2,133 Total consumer 1,720 4,126 1,519 Total 60 to 89 days past due 19,770 12,942 27,770 90 or more days past due: Commercial and industrial 6,629 6,599 8,927 Commercial real estate — 2,242 — Construction 3,990 3,990 6,450 Residential mortgage 1,348 1,165 1,668 Total consumer 391 1,006 747 Total 90 or more days past due 12,358 15,002 17,792 Total accruing past due loans $ 79,536 $ 61,781 $ 100,302 Non-accrual loans: Commercial and industrial $ 87,655 $ 84,449 $ 78,606 Commercial real estate 83,338 82,712 67,938 Construction 62,788 63,043 68,649 Residential mortgage 21,614 20,819 23,483 Total consumer 3,545 3,068 3,318 Total non-accrual loans 258,940 254,091 241,994 Other real estate owned (OREO) 71 824 1,189 Other repossessed assets 1,314 1,230 1,752 Total non-performing assets (NPAs) $ 260,325 $ 256,145 $ 244,935 Total non-accrual loans as a % of loans 0.52 % 0.51 % 0.50 % Total NPAs as a % of loans and NPAs 0.52 0.51 0.50 Total accruing past due and non-accrual loans as a % of loans 0.68 0.63 0.70 Allowance for loan losses as a % of non-accrual loans 170.76 171.76 180.54 Loans past due 30 to 59 days increased $13.6 million to $47.4 million at September 30, 2023 as compared to June 30, 2023. The increase within this early stage delinquency category was mainly due to one $7.0 million commercial real estate loan, as well as increases in commercial and industrial and secured consumer loan delinquencies. Loans past due 60 to 89 days increased $6.8 million to $19.8 million at September 30, 2023 as compared to June 30, 2023 largely due to higher residential mortgage delinquencies and a $2.3 million commercial real estate loan that migrated from the 30-59 days past due category at June 30, 2023, partially offset by a decline in commercial and industrial and consumer loan delinquencies. 80 Loans 90 days or more past due and still accruing interest decreased $2.6 million to $12.4 million at September 30, 2023 as compared to June 30, 2023 mainly due to a payoff of a $2.2 million commercial real estate loan. All loans 90 days or more past due and still accruing interest are well-secured and in the process of collection. Non-accrual loans increased $4.8 million to $258.9 million at September 30, 2023 as compared to $254.1 million at June 30, 2023 mostly driven by an increase in the commercial and industrial loan category. Non-accrual commercial and industrial loans increased $3.2 million to $87.7 million at September 30, 2023 mainly due to one new non-performing loan relationship totaling $4.2 million at September 30, 2023. Although the timing of collection is uncertain, management believes that the majority of the non-accrual loans at September 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 $65.1 million of the $87.7 million non-accrual commercial and industrial loans at September 30, 2023. At September 30, 2023, all taxi medallion loans in the loan portfolio were on non-accrual status and had related reserves of $37.9 million, or 58.7 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 $71 thousand at September 30, 2023 and decreased $753 thousand as compared to June 30, 2023 primarily due to sales of OREO p roperties. The sales of OREO properties resulted in gains of $256 thousand and $370 thousand for the three and nine months ended September 30, 2023, respectively, as compared to net losses of $69 thousand and $692 thousand for the three and nine months ended September 30, 2022, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totale d $970 thousand and $2.6 million at September 30, 2023 and December 31, 2022, respectively. Allowance for Credit Losses for Loans The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit. Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis, we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans 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. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent that they do not exist in the historical loss information, and (iii) net expected recoveries of charged-off loan balances. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses. The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors. The expected 81 credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and are governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. At September 30, 2023, Valley continued to maintain the majority of its probability weighting used in the economic forecast to the Moody’s Baseline scenario with slightly less emphasis on the S-3 downside and S-4 adverse scenarios as compared to June 30, 2023. The standalone Moody's Baseline forecast at September 30, 2023 contained, among other things, slower but positive GDP growth rates, a cooling labor market and a continued deceleration of inflation, and overall, it provided a moderately more pessimistic outlook as compared to June 30, 2023. At September 30, 2023, the Moody's Baseline forecast included the following specific assumptions: • GDP expansion of approximately 0.5 percent in the fourth quarter 2023; • Unemployment of 3.9 percent in the fourth quarter 2023 and 4.0 to 4.2 percent over the remainder of the forecast period ending in the third quarter 2025; • Continued concerns about increased debt burden pushed by rising interest rates, elevated inflation and 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 1.1 percent to growth; • The Federal Reserve opted to pause its rate hikes, keeping the federal funds rate at 5.25 - 5.50 percent with possible increases by the end of 2023; and • Inflation moderately cooled, but remained at 3.7 percent in the third quarter 2023. See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements. 82 The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 June 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 ($ in thousands) Allowance for credit losses for loans Beginning balance $ 458,676 $ 460,969 $ 490,963 $ 483,255 $ 375,702 Impact of the adoption of ASU No. 2022-02 (1) — — — (1,368) — Allowance for purchased credit deteriorated (PCD) loans, net (2) — — — — 70,319 Beginning balance, adjusted 458,676 460,969 490,963 481,887 446,021 Loans charged-off: Commercial and industrial (7,487) (3,865) (5,033) (37,399) (11,144) Commercial real estate (255) (2,065) (4,000) (2,320) (4,173) Construction — (4,208) — (9,906) — Residential mortgage (20) (149) — (169) (27) Total consumer (1,156) (1,040) (962) (3,024) (2,513) Total loans charge-offs (8,918) (11,327) (9,995) (52,818) (17,857) Charged-off loans recovered: Commercial and industrial 3,043 2,173 13,236 6,615 16,012 Commercial real estate 5 4 1,729 33 2,060 Residential mortgage 30 135 163 186 694 Total consumer 362 390 477 1,513 2,431 Total loans recovered 3,440 2,702 15,605 8,347 21,197 Total net loan (charge-offs) recoveries (5,478) (8,625) 5,610 (44,471) 3,340 Provision charged for credit losses 9,147 6,332 1,835 24,929 49,047 Ending balance $ 462,345 $ 458,676 $ 498,408 $ 462,345 $ 498,408 Components of allowance for credit losses for loans: Allowance for loan losses $ 442,175 $ 436,432 $ 475,744 $ 442,175 $ 475,744 Allowance for unfunded credit commitments 20,170 22,244 22,664 20,170 22,664 Allowance for credit losses for loans $ 462,345 $ 458,676 $ 498,408 $ 462,345 $ 498,408 Components of provision for credit losses for loans: Provision for credit losses for loans $ 11,221 $ 8,159 $ 1,315 $ 29,359 $ 42,883 (Credit) provision for unfunded credit commitments (2,074) (1,827) 520 (4,430) 6,164 Total provision for credit losses for loans $ 9,147 $ 6,332 $ 1,835 $ 24,929 $ 49,047 Allowance for credit losses for loans as a % of total loans 0.92 % 0.92 % 1.10 % 0.92 % 1.10 % (1) Represents the opening adjustment for the adoption of ASU No. 2022-02 effective January 1, 2023. (2) Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022. 83 The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the periods indicated: Three Months Ended Nine Months Ended September 30, 2023 June 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022 ($ in thousands) Net loan (charge-offs) recoveries Commercial and industrial $ (4,444) $ (1,692) $ 8,203 $ (30,784) $ 4,868 Commercial real estate (250) (2,061) (2,271) (2,287) (2,113) Construction — (4,208) — (9,906) — Residential mortgage 10 (14) 163 17 667 Total consumer (794) (650) (485) (1,511) (82) Total $ (5,478) $ (8,625) $ 5,610 $ (44,471) $ 3,340 Average loans outstanding Commercial and industrial $ 9,072,476 $ 9,043,832 $ 8,540,485 $ 8,989,877 $ 7,529,507 Commercial real estate 28,053,134 27,808,278 24,306,684 27,476,718 22,416,996 Construction 3,952,692 3,787,183 3,186,732 3,781,566 2,604,559 Residential mortgage 5,548,257 5,489,501 5,134,769 5,527,145 4,925,469 Total consumer 3,392,855 3,329,143 3,173,224 3,344,847 3,053,263 Total $ 50,019,414 $ 49,457,937 $ 44,341,894 $ 49,120,153 $ 40,529,794 Annualized net loan charge-offs (recoveries) to average loans outstanding Commercial and industrial 0.20% 0.07% (0.38)% 0.46% (0.09)% Commercial real estate 0.00 0.03 0.04 0.01 0.01 Construction 0.00 0.44 0.00 0.35 0.00 Residential mortgage 0.00 0.00 (0.01) 0.00 (0.02) Total consumer 0.09 0.08 0.06 0.06 0.00 Total loans 0.04 0.07 (0.05) 0.12 (0.01) Net loan charge-offs totaled $5.5 million for the third quarter 2023 as compared to $8.6 million for the second quarter 2023 and net recoveries of loan charge-offs of $5.6 million for the third quarter 2022. The decrease from the second quarter 2023 was largely due to slightly elevated net loan charges-offs during the second quarter 2023 partly resulting from the valuation/and partial write down of a non-performing construction loan transferred from the held for investment loan portfolio to loans held for sale at June 30, 2023. Gross charge-offs totaled $8.9 million for the third quarter 2023 and included a $4.0 million partial charge-off of one commercial and industrial loan relationship. The amount of net loan charge-offs (as presented in the above table) and the low level of individual loan charge-offs for the third quarter 2023 continued to trend within management's expectations for the credit quality of the loan portfolio at September 30, 2023. 84 The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: September 30, 2023 June 30, 2023 September 30, 2022 Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and industrial loans $ 133,988 1.44 % $ 128,245 1.38 % $ 154,051 1.77 % Commercial real estate loans: Commercial real estate 191,562 0.68 194,177 0.70 217,124 0.89 Construction 53,485 1.40 45,518 1.19 50,656 1.42 Total commercial real estate loans 245,047 0.77 239,695 0.76 267,780 0.95 Residential mortgage loans 44,621 0.80 44,153 0.79 36,157 0.70 Consumer loans: Home equity 3,689 0.67 4,020 0.75 4,083 0.87 Auto and other consumer 14,830 0.52 20,319 0.70 13,673 0.49 Total consumer loans 18,519 0.55 24,339 0.71 17,756 0.55 Allowance for loan losses 442,175 0.88 436,432 0.88 475,744 1.05 Allowance for unfunded credit commitments 20,170 22,244 22,664 Total allowance for credit losses for loans $ 462,345 $ 458,676 $ 498,408 Allowance for credit losses for loans as a % total loans 0.92 % 0.92 % 1.10 % 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 both September 30, 2023 and June 30, 2023, and 1.10 percent at September 30, 2022. During the third quarter 2023, t he provision for credit losses for loans totaled $9.1 million as compared to $6.3 million and $1.8 million for the second quarter 2023 and third quarter 2022, respectively. The provision for credit losses for the third quarter 2023 reflects, among other factors, higher quantitative reserves related to classified loans within the commercial portfolios and specific reserves associated with collateral dependent loans, partially offset by a negative (credit) provision for unfunded credit commitments driven by a decline in these obligations at September 30, 2023. Our economic forecast related reserves at September 30, 2023 remained relatively unchanged from June 30, 2023 . Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, 2023 and December 31, 2022, shareholders’ equity totaled approximately $6.6 billion and $6.4 billion, which represented 10.8 percent and 11.1 percent of total assets, respectively. During the nine months ended September 30, 2023, total shareholders’ equity increased by approximately $226.5 million primarily due to the following: • net income of $427.0 million, • a $16.2 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 $181.5 million, 85 • other comprehensive loss of $37.9 million, and • repurchases of $2.1 million of our common stock with these shares held in treasury stock. Valley and Valley National Bank are subject to the regulatory capital requirements administered by the FRB and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and 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 September 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 September 30, 2023, approximately $23.6 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk-based capital ratios by approximately 6 basis points. 86 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2023 and December 31, 2022: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of September 30, 2023 Total Risk-based Capital Valley $ 5,827,969 11.68 % $ 5,237,838 10.50 % N/A N/A Valley National Bank 5,779,646 11.59 5,235,883 10.50 $ 4,986,555 10.00 % Common Equity Tier 1 Capital Valley 4,593,883 9.21 3,491,892 7.00 N/A N/A Valley National Bank 5,404,401 10.84 3,490,589 7.00 3,241,261 6.50 Tier 1 Risk-based Capital Valley 4,808,724 9.64 4,240,155 8.50 N/A N/A Valley National Bank 5,404,401 10.84 4,238,572 8.50 3,989,244 8.00 Tier 1 Leverage Capital Valley 4,808,724 8.08 2,381,015 4.00 N/A N/A Valley National Bank 5,404,401 9.07 2,383,420 4.00 2,979,275 5.00 As of December 31, 2022 Total Risk-based Capital Valley $ 5,569,639 11.63 % $ 5,026,621 10.50 % N/A N/A Valley National Bank 5,659,511 11.84 5,018,129 10.50 $ 4,779,170 10.00 % Common Equity Tier 1 Capital Valley 4,315,659 9.01 3,351,080 7.00 N/A N/A Valley National Bank 5,284,372 11.06 3,345,419 7.00 3,106,461 6.50 Tier 1 Risk-based Capital Valley 4,530,500 9.46 4,069,169 8.50 N/A N/A Valley National Bank 5,284,372 11.06 4,062,295 8.50 3,823,336 8.00 Tier 1 Leverage Capital Valley 4,530,500 8.23 2,200,822 4.00 N/A N/A Valley National Bank 5,284,372 9.60 2,200,891 4.00 2,751,114 5.00 Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 59.3 percent for the nine months ended September 30, 2023 as compared to 61.4 percent for the year ended December 31, 2022. Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 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. Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2022 in the MD&A section - “Liquidity and Cash Requirements” and Notes 13 and 14 to the consolidated financial statements included in this report. 87 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See pa ge 71 for a discussion of interest rate risk.