What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 498 added, 360 removed, 611 unchanged (58% of the section changed)

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 elsewhere in this report.

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part 1, Item 1 of this report.

The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise.

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• the impact of COVID-19 on the U.S.

and the global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;

the impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 arise in various locations, including Florida and Alabama;

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

and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;

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

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

• the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;

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

A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A of this report.

Critical Accounting Policies and Estimates

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Accordingly, our actual credit loss experience may not be in line with our expectations.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at June 30, 2020 .

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

As a result, over 40 percent of the provision of credit losses for loans totaling $75.0 million for the six months ended June 30, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at September 30, 2020.

As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the nine months ended September 30, 2020 and the related increase in economic uncertainty, we increased our probability weighting for the most severe economic scenario as compared to those at January 1, 2020.

As a result, approximately 32 percent of the provision of credit losses for loans totaling $106.1 million for the nine months ended September 30, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

Details regarding our critical accounting policies for goodwill and other intangible assets, and income taxes are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019.

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Company Overview.

At June 30, 2020 , Valley had consolidated total assets of approximately $41.7 billion , total net loans of $32.0 billion , total deposits of $31.4 billion and total shareholders’ equity of $4.5 billion .

At September 30, 2020, Valley had consolidated total assets of approximately $40.7 billion, total net loans of $32.1 billion, total deposits of $31.2 billion and total shareholders’ equity of $4.5 billion.

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

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Impact of COVID-19.

The widespread outbreak of the novel Coronavirus Disease 2019 (COVID-19) has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity, including in the markets that we serve.

Our markets within Florida and Alabama have experienced a recent increase in COVID-19 infection rates and such negative trends could hamper reopening and economic recovery in these markets.

Uncertainties and disruptions from COVID-19 have slowed our traditional new commercial loan volumes and many consumer loan products, such as automobile loans during the second quarter 2020.

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

The $659 billion Paycheck Protection Program (PPP) provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as supplemented by the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), was designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks.

The outbreak of the disease caused by the novel coronavirus (COVID-19) and the resulting pandemic have greatly disrupted consumer, business and government activity during the nine months ended September 30, 2020, including within the markets we serve.

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

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

Uncertainties and disruptions resulting from the COVID-19 pandemic have slowed our traditional new commercial loan volumes and the loan balances for residential and many consumer loan products have seen moderate declines in the third quarter 2020, including the impact of a higher level of residential mortgage loans originated for sale due to our current interest rate risk management strategies.

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

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

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

Valley National Bank is a certified Small Business Administration (SBA) lender and during the second quarter of 2020 dedicated significant staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the program, obtain SBA approval and receive funding as quickly as possible.

To date, Valley has facilitated over 12,800 SBA-approved PPP loans and had over $2.2 billion of these loans outstanding as of June 30, 2020.

We expect the majority of these loans to be forgiven in accordance with rules, application and documentation requirements for this program, some of which have only recently been released.

The loan forgiveness rules may be subject to further revisions and additional SBA guidance in the coming months.

During the latter part of second quarter 2020, we have taken steps to reopen most branches in New Jersey and New York that had been either temporarily closed or had reduced lobby services due to COVID-19, while acting with an abundance of caution in order to safeguard the health and wellness of our customers and employees.

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

Our business continuity plan continues to remain in effect and a significant portion of our non-customer facing employees continue to work remotely as we work through our return to work plans and monitor the level of the health crisis in our primary markets.

In response to the COVID-19 pandemic and its economic impact on certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers.

Valley National Bank is a certified Small Business Administration (SBA) lender and facilitated approximately 13,000 SBA-approved PPP loans totaling $2.3 billion through the close of the program on August 8, 2020.

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

We have reopened all bank branches in our network that were either temporarily closed or had reduced lobby services due to COVID-19, however we continue to act with an abundance of caution in order to safeguard the health and wellness of our customers and employees and may limit capacity in our branch locations and/or require scheduled appointments.

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

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

In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the CARES Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers.

Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers.

Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.

Significant uncertainties as to future economic conditions exist, and we have taken purposeful actions in response, including continued heightened levels of balance sheet liquidity during the second quarter 2020.

Additionally, the economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to an increased provision for credit losses for the first half of 2020.

As of September 30, 2020, Valley had approximately 1,400 loans with total unpaid principal balances of $1.1 billion remaining in their payment deferral period under short-term modification.

The $1.1 billion of loans in deferral represented approximately 3.3 percent of our total loan portfolio at September 30, 2020, decreasing from approximately $2.7 billion, or 8.4 percent of total loans, near the start of the third quarter 2020.

Significant uncertainties as to future economic conditions exist with significant economic stress on our customers.

The severe adverse economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to a sharply increased provision for credit losses for the nine months ended September 30, 2020, following our initial adoption of CECL on January 1, 2020.

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

However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the fourth quarter 2020 and during 2021 is highly uncertain.

See the "Operating Environment" section and our risk factors under Part II, Item 1A below for more details.

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During the first quarter 2020, we permanently closed an additional 9 branches located in New Jersey, including the consolidation of 6 acquired Oritani branches into nearby legacy Valley branches.

We currently expect to permanently close 10 branches during the remainder of 2020.

We currently plan to permanently close 7 New Jersey branches and 2 Florida branches during fourth quarter 2020, and one additional New Jersey branch in first quarter 2021.

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

At this time, we plan to reopen branches temporarily closed due to the impact of the COVID-19 pandemic, although the timing of reopening these branches is uncertain.

Quarterly Results.

Net income for the second quarter 2020 was $95.6 million , or $0.23 per diluted common share, compared to $76.5 million , or $0.22 per diluted common share, for the second quarter 2019 .

Net income for the third quarter 2020 was $102.4 million, or $0.25 per diluted common share, compared to $81.9 million, or $0.24 per diluted common share, for the third quarter 2019.

The $20.5 million increase in quarterly net income as compared to the same quarter one year ago was largely due to:

(i) a $62.3 million increase in net interest income driven by organic and Oritani acquired loan growth over the last 12 months combined with our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment, (ii) a $17.2 million increase in non-interest income mainly caused by strong commercial loan customer swap fees, higher BOLI income and additional gains on the sales of residential mortgage loans, partially offset by (iii) a $39.1 million increase in our provision for credit losses for loans due to the adoption of CECL and the impact of the COVID-19 pandemic on the model results, (iv) a $15.4 million increase in non-interest expense due to our expanded franchise following the Oritani acquisition, higher technology consulting and certain additional expenses due to COVID-19, and (v) a $5.9 million increase in income tax expense.

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our second quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our second quarter 2020 results.

(i) a $62.5 million increase in net interest income driven by organic and Oritani acquired loan growth over the last 12 months combined with our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment, (ii) a $8.1 million increase in non-interest income mainly caused by strong commercial loan customer swap fees and additional gains on the sales of residential mortgage loans, partially offset by (iii) a $22.2 million increase in our provision for credit losses due to the adoption of CECL and the impact of the COVID-19 pandemic on the model results, (iv) a $14.3 million increase in non-interest expense due to the Oritani acquisition, higher cash incentive accruals, increased technology consulting expense, certain additional expenses due to COVID-19, and the charge incurred in third quarter 2020 on a debt extinguishment, and (v) a $13.6 million increase in income tax expense.

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our third quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our third quarter 2020 results.

Operating Environment.

During the second quarter 2020, real gross domestic product declined 32.9 percent.

COVID-19 and the measures taken to mitigate the health crisis have caused households and businesses to sharply reduce consumption and investment.

As a result, job losses have increased sharply while prices for goods and services have fallen.

The unemployment rate was 11.1 percent in June 2020 compared to 4.4 percent in March of this year.

The ongoing public health crisis will weigh heavily on economic activity, employment and inflation.

To support the flow of credit, the Federal Reserve reduced the target range for the federal funds rate earlier this year.

In addition, the Federal Reserve began purchasing Treasury securities and agency residential and commercial mortgage-backed securities.

Currently, the target range for the federal funds rate is between zero and 0.25 percent.

The 10-year U.S.

Treasury note yield ended the second quarter at 0.66 percent, 134 basis points lower compared with June 30, 2019.

The current economic environment has weakened traditional commercial loan demand, while residential mortgage loan volumes for both purchased and refinanced activity are relatively solid in the early stages of the third quarter 2020.

The low market interest rates for new loans will continue to put pressure on our overall loan yields and net interest margin.

In parts of the Bank’s footprint, particularly Florida, the number have COVID-19 cases have

recently increased, which may hinder attempts to resume normal business activity in those regions.

More broadly, the ongoing health crisis has caused household and business confidence to remain subdued which is likely to weigh on Valley’s financial results, as highlighted in the remaining MD&A discussion below.

Loans increased $1.9 billion to approximately $32.3 billion at June 30, 2020 from March 31, 2020 largely due to approximately $2.2 billion of SBA PPP loan originations within the commercial and industrial loan category during the second quarter 2020 .

Commercial real estate loans increased $181.6 million, or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our strong loan commitment pipeline at March 31, 2020 and slower repayment activity in the second quarter.

Residential mortgage and the consumer loan categories all experienced moderate declines in the second quarter due to the impact of COVID-19 and our normal mortgage banking sales activity.

During the second quarter 2020 , we originated $296 million of residential mortgage loans for sale rather than held for investment and sold approximately $237 million of these loans.

Residential mortgage loans held for sale at fair value totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020 , respectively.

During third quarter 2020, real GDP increased over 33 percent with lower rates of COVID-19 transmission and a gradual resumption of many personal, business, and government activities following the steep decline in GDP during the second quarter.

The unemployment rate also improved to 7.9 percent in September 2020 as compared to 11.1 percent in June 2020.

Government policy measures, including the CARES Act improved the flow of credit to households and businesses with employment increasing sharply and prices for goods and services stabilized.

In addition, the Federal Reserve maintained its low target range for the federal funds rate which was reduced earlier this year and began purchasing Treasury securities, as well as agency issued mortgage-backed securities.

The federal funds rate target rate remains between zero and 0.25 percent and the 10-year U.S.

Treasury note yield ended the third quarter at 0.69 percent, which was 99 basis points lower as compared with September 30, 2019.

The current economic environment is expected to mute our overall growth of our loan portfolio, however, the strength of our loan origination pipeline has remained fairly resilient in the early stages of the fourth quarter 2020.

The low market interest rates for new loans will continue to put pressure on our loan yields and net margin, as well as influence our decision to originate most residential mortgage loans for sale versus portfolio investment.

The COVID-19 pandemic and its recent resurgences across the U.S.

are expected to impact the level of economic

activity, employment and household and business confidence in the fourth quarter 2020 and beyond.

A prolonged COVID-19 pandemic and economic recovery are likely to weigh on the Bank’s financial results, as highlighted in the remaining MD&A discussion below.

Loans increased $101.0 million to approximately $32.4 billion at September 30, 2020 from June 30, 2020 largely due to controlled growth in our commercial real estate loan portfolio and a $63 million increase in SBA PPP loans classified as commercial and industrial loans during the third quarter.

Commercial real estate loans increased $243.7 million, or 5.9 percent on an annualized basis, to $16.8 billion at September 30, 2020 as compared to June 30, 2020 mainly due to our solid loan commitment pipeline at June 30, 2020 and slower repayment activity in the third quarter.

The residential mortgage and most consumer loan categories experienced moderate declines in the third quarter due to the impact of COVID-19, including a higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies.

During the third quarter 2020, we originated $385.6 million of residential mortgage loans for sale rather than held for investment and sold approximately $301.2 million of these loans.

Residential mortgage loans held for sale at fair value totaled $209.3 million and $120.6 million at September 30, 2020 and June 30, 2020, respectively.

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

Asset Quality.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt securities increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020 .

Non-accrual loans increase d $4.7 million to $210.6 million at June 30, 2020 as compared to March 31, 2020 partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020 .

Non-accrual loans represented 0.65 percent of total loans at June 30, 2020 , as compared to 0.68 percent at March 31, 2020 .

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $66.3 million to $93.1 million , or 0.29 percent of total loans, at June 30, 2020 as compared to $159.4 million , or 0.52 percent of total loans, at March 31, 2020 due to a decline in early stage delinquencies for all loan categories.

Commercial real estate loans past due 30 to 59 days and 60 to 89 days decreased by $27.8 million and $14.4 million, respectively, as compared to March 31, 2020 .

The improved performance within the 30 to 59 day category was mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020.

Commercial real estate loans past due 60 to 90 days at June 30, 2020 declined primarily due to the normal renewal of a $13.8 million performing matured loan reported in this category at March 31, 2020 .

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt security decreased $20.5 million to $203.6 million at September 30, 2020 as compared to June 30, 2020.

Non-accrual loans decreased $19.5 million to $191.1 million at September 30, 2020 as compared to June 30, 2020 mainly due to charge-offs within the commercial and industrial loan category, including charge-offs from our taxi medallion loan portfolio caused by a decline in collateral valuations at September 30, 2020.

Non-accrual loans represented 0.59 percent of total loans at September 30, 2020, as compared to 0.65 percent at June 30, 2020.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $9.2 million to $83.9 million, or 0.26 percent of total loans, at September 30, 2020 as compared to $93.1 million, or 0.29 percent of total loans, at June 30, 2020 mainly due to declines in residential mortgage and consumer loans in all delinquency categories.

This decrease was largely due to improved customer performance, including CARES Act qualifying forbearance loans that resumed their scheduled monthly payments during the third quarter 2020.

Commercial real estate loans past due 30 to 59 days increased $12.1 million as compared to June 30, 2020 mainly due to three loan relationships included in this delinquency category at September 30, 2020.

See further details in the "Non-performing Assets" section below.

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savings, NOW and money market deposits;

and time deposits represented approximately 27 percent , 45 percent and 28 percent of total deposits as of June 30, 2020 , respectively.

Overall, average deposits increased by $2.0 billion to $30.8 billion for the second quarter 2020 as compared to the first quarter 2020 .

Our mix of the deposit categories of total average deposits for the second quarter 2020 as compared to the first quarter 2020 experienced a shift to non-interest bearing deposits largely due to new deposits resulting from the funding of customer PPP loans, as well as a continued migration of maturing retail CD customers into more flexible and lower-cost transaction account types.

Actual ending balances for deposits increased $2.4 billion to approximately $31.4 billion at June 30, 2020 from March 31, 2020 largely due to increases of $2.0 billion and $666.6 million in non-interest bearing deposits and interest-bearing deposits without stated maturities, respectively.

The increases were mostly driven by the aforementioned deposits from PPP loan customers, higher depositor balances due to the uncertain financial markets, as well as a partial shift to more liquid account types for maturing retail CD customers.

As a result, time deposits decreased $294.3 million at June 30, 2020 as compared to March 31, 2020 .

Total brokered deposits (consisting of both time and money market deposit accounts) were $3.6 billion at June 30, 2020 as compared to $3.4 billion at March 31, 2020 .

While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2020.

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

The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in the second half of 2020.

Average short-term borrowings increased $1.0 billion to $2.3 billion for the second quarter 2020 as compared to the first quarter 2020 driven by our prudent steps to increase our liquidity levels starting in the end of the first quarter 2020 in the face of the escalating economic crisis created by the COVID-19 pandemic.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $111.0 million to $2.9 billion for the second quarter 2020 as compared to the first quarter 2020 mostly due to $100 million of new long-term FHLB advances executed in March 2020 as part of our overall liquidity strategy.

Actual ending balances for short-term borrowings moderately decreased by $12.8 million to $2.1 billion at June 30, 2020 as compared to March 31, 2020 .

Long-term borrowings increased $101.9 million to $2.9 billion at June 30, 2020 as compared to March 31, 2020 mainly due to our $115.0 million issuance of 5.25 percent fixed-to-floating rate subordinated notes on June 5, 2020.

and time deposits represented approximately 28 percent, 46 percent and 26 percent of total deposits as of September 30, 2020, respectively.

Overall, average deposits increased by $552.7 million to $31.4 billion for the third quarter 2020 as compared to the second quarter 2020.

Our mix of the deposit categories of total average deposits for the third quarter 2020 as compared to the second quarter 2020 experienced a partial migration from time deposits to non-interest bearing and lower-cost transaction account types.

Actual ending balances for deposits decreased $240.0 million to approximately $31.2 billion at September 30, 2020 from June 30, 2020 largely due to decreases of $735.2 million and $232.9 million in time deposits and non-interest bearing deposits, respectively, which were mostly offset by an increase of $728.1 million in the money market, now and savings account category.

The decrease in time deposits was driven by maturing high cost retail CDs and partial migration to more liquid deposit product categories, while the decline in non-interest bearing balances was partially caused by normal period end fluctuations and lower deposit balances with PPP loan customers.

Total brokered deposits (consisting of both time and money market deposit accounts) were $3.3 billion at September 30, 2020 as compared to $3.6 billion at June 30, 2020.

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

The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in the fourth quarter 2020.

Average short-term borrowings decreased $784.7 million to $1.5 billion for the third quarter 2020 as compared to the second quarter 2020 due to a decline in overnight borrowings, comprised mainly of federal funds purchased, and corresponding reductions in our excess liquidity levels which were prudently elevated by management in the first half of 2020 due to the COVID-19 pandemic.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $73.7 million to $3.0 billion for the third quarter 2020 as compared to the second quarter 2020 mainly due to the $115 million subordinated note issuance in June 2020, which was outstanding for the entire third quarter.

Actual ending balances for short-term borrowings decreased by $652.2 million to $1.4 billion at September 30, 2020 from the second quarter 2020 due to the decline in overnight borrowings.

Long-term borrowings decreased by $55.0 million to $2.9 billion at September 30, 2020 as compared to June 30, 2020 mainly due to the prepayment of a $50 million institutional repo borrowing with a stated interest rate of 3.7 percent.

The prepayment resulted in a $2.4 million prepayment penalty charge recognized in non-interest expense during the third quarter 2020.

Selected Performance Indicators.

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Return on average assets 0.99 % 0.98 % 0.94 % 1.10 %

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

(in thousands)

Net income, as reported $ 102,374 $ 81,891 $ 285,243 $ 271,689

Loss on extinguishment of debt (net of tax) 1,691 — 1,691 —

Net impairment losses on securities (net of tax) — — — 2,078

Losses (gains) on securities transactions (net of tax)

Losses on securities transactions (net of tax) 33 67 91 82

Severance expense (net of tax) (1)

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Merger related expenses (net of tax) (3)

76 1,043 1,275 1,068

Income tax expense (4)

— 133 — 12,456

Gain on sale-leaseback transaction (net of tax) (5)

— — — (55,707)

Net income, as adjusted $ 104,174 $ 83,134 $ 288,300 $ 236,856

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

($ in thousands)

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

($ in thousands)

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Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

($ in thousands)

Net income $ 102,374 $ 81,891 $ 285,243 $ 271,689

Net income, as adjusted $ 104,174 $ 83,134 $ 288,300 $ 236,856

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Average goodwill and other intangible assets

1,451,889 1,154,462 1,456,536 1,157,203

Average tangible shareholders’ equity $ 3,078,782 $ 2,382,066 $ 3,015,911 $ 2,314,229

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Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley.

Net interest income on a tax equivalent basis totaling $283.5 million for the second quarter 2020 increased $62.1 million as compared to the second quarter 2019 and increased $17.2 million as compared to the first quarter 2020 .

The increase as compared to the first quarter 2020 was largely driven by our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment and a $2.0 billion increase in average loan balances largely resulting from PPP loan originations.

Interest expense of $66.0 million for the second quarter 2020 decreased $32.5 million as compared to the first quarter 2020 largely due to the overall lower cost of funds, partially offset by the interest cost associated with higher average interest-bearing deposits without stated maturities and other borrowings.

However, interest income on a tax equivalent basis decreased $15.3 million to $349.5 million for the second quarter 2020 as compared to the first quarter 2020 .

The decrease was mainly due to overall lower loan yields caused, in part, by normal repayments of higher yielding loans, variable rate loan resets and a $3.1 million decline in loan discount accretion in second quarter 2020 due to lower prepayments for certain loans.

Average interest earning assets increased $7.9 billion to $37.8 billion for the second quarter 2020 as compared to the second quarter 2019 primarily due to $3.8 billion of interest earning assets acquired from Oritani and organic loan growth over the 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020 .

As compared to the first quarter 2020 , average interest earning assets increased by $3.1 billion from $34.7 billion largely due to the PPP loan originations and higher overnight funds resulting from our increased liquidity levels in response to the COVID-19 pandemic.

Average interest bearing liabilities increased $5.3 billion to $27.6 billion for the second quarter 2020 as compared to the second quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth of retail deposits and additional long-term borrowings caused by the funding of loan growth and our increased liquidity in response to COVID-19.

As compared to the first quarter 2020 , average interest bearing liabilities increased by $1.4 billion in the second quarter 2020 primarily due to increased levels of short-term borrowings and growth in deposits driven by PPP loan customers and organic growth from higher depositor balances partly caused by the uncertain financial markets.

Net interest income on a tax equivalent basis totaling $284.1 million for the third quarter 2020 increased $62.4 million as compared to the third quarter 2019 and increased $579 thousand as compared to the second quarter 2020.

Our third quarter 2020 net interest income results benefited from the prudent management of the level of interest rates offered on our deposits products, as well as a shift in customer preference towards deposits without stated maturities.

Interest expense of $54.3 million for the third quarter 2020 decreased $11.7 million as compared to the second quarter 2020 largely due to the maturity and run-off of higher cost time deposits, reduced interest rates on all deposit products and a reduction in average short-term borrowings within our funding mix during the third quarter.

Interest income for the third quarter 2020 decreased by $11.1 million as compared to the second quarter 2020 driven by (i) a $6.0 million decrease in interest income from our loan portfolio largely caused by new and refinanced loan originations at lower current interest rates and a moderate decline in discount accretion related to purchased credit deteriorated loans, and (ii) a $5.1 million decrease in interest and dividends from investment securities due to normal repayments of higher yielding securities and the acceleration of premium amortization expense related to the increased prepayment of mortgage-backed securities.

Average interest earning assets increased $7.3 billion to $37.8 billion for the third quarter 2020 as compared to the third quarter 2019 primarily due to $3.8 billion of interest earning assets acquired from Oritani and organic loan growth over the 12-month period, including $2.3 billion of PPP loans.

As compared to the second quarter 2020, average interest earning assets decreased by $10.7 million from $37.8 billion driven by lower excess liquidity held in overnight interest-bearing deposits with banks and normal repayments of investment securities, mostly offset by a $474.1 million increase in average loan balances during the third quarter 2020.

Average interest bearing liabilities increased $4.2 billion to $27.1 billion for the third quarter 2020 as compared to the third quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth of retail deposits and additional long-term borrowings caused by the funding of loan growth and our increased liquidity in response to COVID-19.

As compared to the second quarter 2020, average interest bearing liabilities decreased by $516.0 million in the third quarter 2020 primarily due to a decline in overnight borrowings, partially offset by higher average deposit levels caused by general increases in customer

balances, as well as funded PPP loans which were placed into customer deposit accounts.

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

Our net interest margin on a tax equivalent basis of 3.00 percent for the second quarter 2020 increased by 4 basis points from 2.96 percent in second quarter 2019 and decreased by 7 basis points from 3.07 percent for the first quarter 2020 .

Our net interest margin on a tax equivalent basis of 3.01 percent for the third quarter 2020 increased by 1 basis point and 10 basis points from 3.00 percent and 2.91 percent for the second quarter 2020 and third quarter 2019, respectively.

The yield on average interest earning assets decreased by 12 basis points on a linked quarter basis, mostly due to the impact of the lower interest rate environment.

The yield on average loans decreased by 42 basis points to 4.02 percent for the second quarter 2020 as compared to the first quarter 2020 largely due to the repayment of higher yielding loans, lower yielding variable and new loans, including the origination of $2.2 billion of PPP loans in second quarter 2020 , and an increase in excess liquidity held in low yield overnight investments.

The overall cost of average interest bearing liabilities decreased 54 basis points to 0.96 percent for the second quarter 2020 as compared to the linked first quarter 2020 due to the significantly lower interest rates paid on deposits and borrowings.

During the first half of 2020, we also benefited from the prepayment of $635 million high cost FHLB advances in December 2019.

Our cost of total average deposits was 0.60 percent for the second quarter 2020 as compared to 1.07 percent for the first quarter 2020 .

The following table reflects the components of net interest income for the three months ended June 30, 2020 , March 31, 2020 and June 30, 2019 :

The yield on average loans decreased by 13 basis points to 3.89 percent for the third quarter 2020 as compared to the second quarter 2020 largely due to the continued repayment of higher yield loans and the lower yield on new loans.

The overall cost of average interest bearing liabilities decreased 16 basis points to 0.80 percent for the third quarter 2020 as compared to the linked second quarter 2020 primarily due to the lower rates offered on deposit products, maturing time deposits and a decrease in average short-term borrowings.

Our cost of total average deposits was 0.41 percent for the third quarter 2020 as compared to 0.60 percent for the second quarter 2020.

As previously noted, the Federal Reserve has signaled that it expects to hold interest rates near zero for several years to support the economic recovery.

While our net interest income and margin was positively impacted by the repricing of deposits which outpaced the decline in yield on interest earning assets during the third quarter 2020, we expect continued pressure on our margin as this positive spread could potentially narrow in future periods.

The following table reflects the components of net interest income for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019:

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

1 unchanged sentence

Three Months Ended

June 30, 2020

March 31, 2020

June 30, 2019

September 30, 2020 June 30, 2020 September 30, 2019

Balance Interest Average

($ in thousands)

Interest earning assets:

$ 32,515,264 $ 315,863 3.89 % $ 32,041,200 $ 321,883 4.02 % $ 26,136,745 $ 298,384 4.57 %

Taxable investments (3)

3,354,373 17,529 2.09 3,673,090 22,539 2.45 3,411,330 24,972 2.93

Tax-exempt investments (1)(3)

542,450 4,564 3.37 562,172 4,673 3.32 632,709 5,341 3.38

Interest bearing deposits with banks 1,355,623 420 0.12 1,501,925 411 0.11 313,785 1,686 2.15

2 unchanged sentences

Cash and due from banks 291,803 424,625 267,331

Unrealized gains (losses) on securities available for sale, net

Other assets 3,558,927 3,540,513 2,812,665

Unrealized gains on securities available for sale, net 47,679 44,173 1,748

Total assets $ 41,356,737 $ 41,503,514 $ 33,419,137

Liabilities and shareholders’ equity

5 unchanged sentences

Long-term borrowings (4)

2,959,728 19,318 2.61 2,886,016 17,502 2.43 2,143,432 16,891 3.15

Total interest bearing liabilities 27,062,790 54,257 0.80 27,578,741 65,966 0.96 22,858,121 108,636 1.90

4 unchanged sentences

Net interest income/interest rate spread (5)

$ 284,119 2.78 % $ 283,540 2.74 % $ 221,747 2.43 %

Tax equivalent adjustment (1,033) (981) (1,122)

1 unchanged sentence

Net interest margin (6)

3.00 % 2.99 % 2.89 %

Tax equivalent effect 0.01 % 0.01 % 0.02 %

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

The following table reflects the components of net interest income for the six months ended June 30, 2020 and 2019 :

Six Months Ended

June 30, 2020

June 30, 2019

3.01 % 3.00 % 2.91 %

The following table reflects the components of net interest income for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30, 2020 September 30, 2019

Balance Interest Average

($ in thousands)

Interest earning assets:

$ 31,522,268 $ 970,814 4.11 % $ 25,651,195 $ 883,595 4.59 %

Taxable investments (3)

3,527,823 65,402 2.47 3,418,614 76,306 2.98

Tax-exempt investments (1)(3)

563,459 14,207 3.36 660,162 16,936 3.42

Interest bearing deposits with banks 1,130,257 2,296 0.27 251,728 3,947 2.09

2 unchanged sentences

Cash and due from banks 318,370 273,191

Other assets 3,492,846 2,734,304

Unrealized gains (losses) on securities available for sale, net 33,441 (21,986)

Total assets $ 40,304,956 $ 32,811,565

Liabilities and shareholders’ equity

5 unchanged sentences

Long-term borrowings (4)

2,873,912 53,240 2.47 1,807,503 45,761 3.38

Total interest bearing liabilities 26,934,738 218,677 1.08 22,512,114 317,720 1.88

4 unchanged sentences

Net interest income/interest rate spread (5)

$ 834,042 2.74 % $ 663,064 2.48 %

Tax equivalent adjustment (3,058) (3,557)

1 unchanged sentence

Net interest margin (6)

3.02 % 2.93 %

Tax equivalent effect 0.01 % 0.02 %

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

3.03 % 2.95 %

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

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Change in Net Interest Income on a Tax Equivalent Basis

Three Months Ended June 30, 2020 Compared to June 30, 2019

Six Months Ended June 30, 2020 Compared to June 30, 2019

Three Months Ended September 30, 2020 Compared to September 30, 2019 Nine Months Ended September 30, 2020 Compared to September 30, 2019

Volume Change

Change Change

Volume Change

(in thousands)

Interest Income:

Loans* $ 66,080 $ (48,601) $ 17,479 $ 187,593 $ (100,374) $ 87,219

Taxable investments (410) (7,033) (7,443) 2,372 (13,276) (10,904)

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Long-term borrowings and junior subordinated debentures

5,671 (3,244) 2,427 22,020 (14,541) 7,479

Total increase (decrease) in interest expense 14,691 (69,070) (54,379) 54,706 (153,749) (99,043)

Total increase in net interest income

$ 51,709 $ 10,663 $ 62,372 $ 136,994 $ 33,984 $ 170,978

* Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate.

Non-Interest Income

Non-interest income increased $17.2 million and $49.0 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019 .

The following table presents the components of non-interest income for the three and six months ended June 30, 2020 and 2019 :

Non-interest income increased $8.1 million and decreased $40.9 million for the three and nine months ended September 30, 2020 as compared to the same periods of 2019.

The following table presents the components of non-interest income for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

(in thousands)

2 unchanged sentences

Service charges on deposit accounts 3,952 5,904 13,189 17,634

(Losses) gains on securities transactions, net

Losses on securities transactions, net (46) (93) (127) (114)

Net impairment losses on securities recognized in earnings

— — — (2,928)

Fees from loan servicing 2,551 2,463 7,526 7,260

Gains on sales of loans, net 13,366 5,194 26,253 13,700

(Losses) gains on sales of assets, net

Gains (losses) on sales of assets, net 894 (159) 716 76,997

Bank owned life insurance (1,304) 2,687 7,661 6,779

Other 24,975 19,110 65,548 39,880

Total non-interest income $ 49,272 $ 41,150 $ 135,499 $ 176,426

Insurance commissions declined $1.0 million and $1.6 million for the three and six months ended June 30, 2020 as compared to the corresponding periods in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased by $2.3 million and $2.5 million for the three and six months ended June 30, 2020 , respectively, as compared to the corresponding periods in 2019 mostly due to waived fees related to COVID-19 customer relief efforts in the second quarter 2020.

The other-than-temporary impairment losses on securities for the three and six months ended June 30, 2019 related to one special revenue bond in default of its contractual payments starting in the second quarter 2019.

Insurance commissions declined $932 thousand and $2.5 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased by $2.0 million and $4.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 mostly due to waived fees related to COVID-19 customer relief efforts during the second and third quarters of 2020.

The other-than-temporary impairment losses on securities for the nine months ended September 30, 2019 related to one special revenue bond in default of its contractual payments starting in the second quarter 2019.

Gains on sales of loans, net increased $8.2 million and $12.6 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in 2019.

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

The net gains from the change in the fair value of loans held for sale totaled $3.2 million and $4.0 million for the three and six months ended June 30, 2020 , respectively, as compared to $225 thousand and $549 thousand for the three and six months ended June 30, 2019 .

During the second quarter 2020 , we sold approximately $237 million of residential mortgage loans as compared to $223 million during the second quarter 2019 .

The net gains from the change in the fair value of loans held for sale totaled $4.3 million and $8.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the $1 .4 million increase and $4.4 million decrease for the three and nine months ended September 30, 2019, respectively.

During the third quarter 2020, we sold approximately $301.2 million of residential mortgage loans as compared to $219.6 million during the third quarter 2019.

See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Net gains on sales of assets decreased $77.3 million for the six months ended June 30, 2020 , primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income increased $3.6 million and $4.9 million for the three and six months ended June 30, 2020 , respectively as compared to the same periods in 2019 due to income from bank owned life insurance acquired from Oritani during the fourth quarter 2019 and death benefits received in the 2020 periods.

Other non-interest income increased $9.7 million and $19.8 million for the three and six months ended June 30, 2020 as compared to the same periods in 2019 .

The increase was primarily due to swap fee income related to

derivative interest rate swaps executed with commercial loan customers totaling $14.7 million and $5.4 million for the three months ended June 30, 2020 and June 30, 2019, respectively and $28.9 million and $9.5 million for the six months ended June 30, 2020 and June 30, 2019 , respectively.

Net gains on sales of assets decreased $76.3 million for the nine months ended September 30, 2020 as compared to the same period of 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income decreased $4.0 million for the third quarter 2020 as compared to the same period in 2019 largely due to several periodic death benefits claims received in the second quarter 2020 and a related credit

adjustment of $3.3 million to the mortality contingency reserves component of our BOLI assets recognized during the third quarter 2020 with a corresponding reduction in BOLI income.

Other non-interest income increased $5.9 million and $25.7 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019 primarily due to increased swap fee income related to derivative interest rate swaps executed with commercial loan customers.

Swap fees totaled $19.2 million and $13.9 million for the three months ended September 30, 2020 and 2019 , respectively, and $48.1 million and $23.4 million for the nine months ended September 30, 2020 and 2019 , respectively.

Non-Interest Expense

Non-interest expense increased $15.4 million and $23.3 million for the three and six months ended June 30, 2020 as compared to the same periods of 2019 .

The following table presents the components of non-interest expense for the three and six months ended June 30, 2020 and 2019 :

Non-interest expense increased $14.3 million and $37.6 million for the three and nine months ended September 30, 2020 as compared to the same periods of 2019.

The following table presents the components of non-interest expense for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

(in thousands)

4 unchanged sentences

Professional and legal fees 8,762 5,870 22,646 15,286

Loss on extinguishment of debt 2,353 — 2,353 —

Amortization of tax credit investments 2,759 4,385 9,403 16,421

Telecommunications expense 2,094 2,698 7,247 7,317

Other 18,251 16,658 53,312 43,712

Total non-interest expense $ 160,185 $ 145,877 $ 473,007 $ 435,409

Salary and employee benefits expense increased $2.3 million and $5.0 million for the three and six months ended June 30, 2020 , respectively.

As compared to second quarter 2019 , the increase was largely due to additional salaries related to bank branch and other operational staff retained from the Oritani acquisition and higher accrued cash incentive compensation.

Salary and employee benefits expense increased $6.4 million and $11.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019.

The increases in both periods were largely due to additional salaries related to bank branch and other operational staff retained from the Oritani acquisition, as well as higher accrued cash incentive compensation and increased medical expenses.

These additional expenses were partially offset by cost reductions from our ongoing branch transformation efforts and other operational improvements over the last 12 months.

The increase for the six months ended June 30, 2020 as compared to the same period in 2019 was also partly driven by a $1.8 million special bonus paid to hourly employees impacted by COVID-19 that was incurred in the first quarter of 2020.

Net occupancy and equipment expense increased $3.5 million and $8.1 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

The increase for the nine months ended September 30, 2020 as compared to the same period in 2019 was also partly driven by a $1.8 million special bonus paid to hourly employees impacted by COVID-19 that was incurred in the first quarter 2020.

Net occupancy and equipment expense increased $1.9 million and $10.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019.

These increases were mostly due to additional costs associated with branches and other facilities acquired from Oritani, which were partially offset by costs savings from branch closures over the last 12 months.

During the three and six months ended June 30, 2020 , we incurred higher expenses for equipment and certain other COVID-19 related expenses which included additional cleaning services for facilities to maintain employee and customer safety.

In addition, the increase for the six months June 30, 2020 was driven by rental expenses resulting from a sale leaseback transaction completed towards the end of the first quarter of 2019.

Amortization of other intangibles increased $2.5 million and $3.7 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible amortization acquired in the recent Oritani acquisition.

See Note 9 to the consolidated financial statements for more details.

Professional and legal fees increased $3.7 million and $4.5 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 , largely due to higher costs from technology transformation consulting services and remote work readiness costs incurred in the second quarter 2020.

Amortization of tax credit investments decreased $1.4 million and $5.4 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

The first half of 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar.

The remainder of the variances from the prior periods were mainly due to normal differences in the timing and

amount of such investments and recognition of the related tax credits.

During the three and nine months ended September 30, 2020, we incurred higher equipment and certain other COVID-19 related expenses which included additional cleaning services for facilities to maintain employee and customer safety.

In addition, the increase for the nine months September 30, 2020 was driven by higher rental expenses resulting from a sale leaseback transaction completed near the end of the first quarter 201 9 and higher depreciation expense related to computer equipment and new data centers placed into service in fourth quarter 2019.

Loss on extinguishment of debt totaling $2.4 million for the three and nine months ended September 30, 2020 related to the prepayment of $50 million of long-term institutional repo borrowings during September 2020.

debt prepayment was funded by excess cash liquidity.

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

Amortization of other intangibles increased $1.7 million and $5.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible amortization acquired in the recent Oritani acquisition, as well as $966 thousand of net impairment of loan servicing rights for the nine months ended September 30, 2020.

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

Professional and legal fees increased $2.9 million and $7.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019, largely due to higher costs from technology transformation consulting services, as well as remote work readiness costs largely incurred in the second quarter 2020 impacting the nine month period.

Amortization of tax credit investments decreased $1.6 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 largely due to a decline in impairment.

The nine months ended September 30, 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar.

The remainder of the variances from the prior periods were mainly due to normal differences in the timing and amount of such investments and recognition of the related tax credits.

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

See Note 14 to the consolidated financial statements for more details on our tax credit investments.

Other non-interest expense increased $3.1 million and $8.0 million for the three and six months ended June 30, 2020 , respectively, as compared to the same periods of 2019 .

The increases were primarily due to incrementally higher operating expenses in several categories due to the expansion of our operations both organically and through the acquisition of Oritani in the fourth quarter 2020, certain PPP loan costs, such as advertising, and other COVID-19 related costs.

Net gains on the sales of OREO properties also declined $583 thousand and $1.3 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods of 2019.

Other non-interest expense increased $1.6 million and $9.6 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019.

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

Within the category, net gains on the sale of OREO properties decreased $782 thousand for the nine months ended September 30, 2020 as compared to the same period in 2019.

Efficiency Ratio

1 unchanged sentence

We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry.

Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense.

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and six months ended June 30, 2020 and 2019 :

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

($ in thousands)

Total non-interest expense $ 160,185 $ 145,877 $ 473,007 $ 435,409

Loss on extinguishment of debt (pre-tax) 2,353 — 2,353 —

Severance expense (pre-tax) — — — 4,838

1 unchanged sentence

Merger related expenses (pre-tax)

106 1,434 1,774 1,469

Total non-interest expense, adjusted $ 154,967 $ 140,058 $ 459,477 $ 412,681

2 unchanged sentences

Gain on sale-leaseback transaction (pre-tax) — — — 78,505

Losses (gains) on securities transactions, net (pre-tax)

Losses on securities transactions, net (pre-tax) 46 93 127 114

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

2 unchanged sentences

Efficiency ratio, adjusted 46.62 % 53.48 % 47.53 % 54.27 %

Income tax expense totaled $33.5 million for the second quarter 2020 as compared to $29.1 million and $27.5 million for the first quarter 2020 and second quarter 2019 , respectively.

Our effective tax rate was 25.9 percent , 25.0 percent and 26.5 percent for the second quarter 2020 , first quarter 2020 and second quarter 2019 , respectively.

The slightly higher effective tax rate in the second quarter 2020 as compared to the first quarter 2020 was primarily attributable to higher pre-tax income in second quarter 2020 .

The CARES Act did not have a material impact on our reported income tax expense for the six months ended June 30, 2020.

Income tax expense totaled $38.9 million for the third quarter 2020 as compared to $33.5 million and $25.3 million for the second quarter 2020 and third quarter 2019, respectively.

Our effective tax rate was 27.5 percent, 25.9 percent and 23.6 percent for the third quarter 2020, second quarter 2020 and third quarter 2019, respectively.

The increase in the third quarter 2020 effective tax rate was mainly due to higher pre-tax income and the retroactive increase in New Jersey’s corporate business income tax surtax from 1.5 percent to 2.5 percent caused by a change in state tax laws which went into effect in the third quarter 2020.

The change in the New Jersey surtax resulted in an additional $1.1 million, net of federal tax benefit, charge to income tax expense for the third quarter 2020.

The CARES Act did not have a material impact on our reported income tax expense for the nine months ended September 30, 2020.

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

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Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount).

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

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

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

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

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

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

1 unchanged sentence

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

The following tables present the financial data for each business segment for the three months ended June 30, 2020 and 2019 :

Three Months Ended June 30, 2020

The following tables present the financial data for each business segment for the three months ended September 30, 2020 and 2019:

Three Months Ended September 30, 2020

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

2 unchanged sentences

Annualized return on average interest earning assets (before tax)

Three Months Ended June 30, 2019

1.94 % 1.91 % 0.08 % N/A 1.50 %

Three Months Ended September 30, 2019

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

2 unchanged sentences

Annualized return on average interest earning assets (before tax)

1.07 % 1.90 % 0.62 % N/A 1.41 %

See Note 15 to the consolidated financial statements for additional information.

Consumer Lending

This segment, representing approximately 22.1 percent of our loan portfolio at June 30, 2020 , is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan

portfolio (which represented 13.6 percent of our loan portfolio at June 30, 2020 ) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.2 percent of total loans at June 30, 2020 ) is relatively unaffected by movements in the market level of interest rates.

This segment, representing approximately 21.5 percent of our loan portfolio at September 30, 2020, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 13.2 percent of our loan portfolio at September 30, 2020) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.1 percent of total loans at September 30, 2020) is relatively unaffected by movements in the market level of interest rates.

However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles.

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

Average interest earning assets in this segment increased $458.0 million to $7.2 billion for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the second quarter 2020 economic slowdown due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $10.9 million to $29.6 million for the second quarter 2020 as compared to the second quarter 2019 largely due to an $11.1 million increase in net interest income mainly driven by lower funding costs and the increase in average loans.

The increase in net interest income was partially offset by increases of $2.2 million and $2.0 million in the provision for loan losses and non-interest expense, respectively.

The increase in non-interest expense was partly due to higher amortization expense of loan servicing rights for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase in the provision for loan losses for the second quarter 2020 as compared to the second quarter 2019 was mainly due to the impact of the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

Average interest earning assets in this segment increased $267.9 million to $7.1 billion for the three months ended September 30, 2020 as compared to the third quarter 2019.

The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the economic slowdown starting in the second quarter 2020 due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $16.3 million to $34.6 million for the third quarter 2020 as compared to the third quarter 2019 largely due to increases in both net interest income and non-interest income totaling $10.2 million and $8.4 million, respectively.

The increase in net interest income was mainly driven by lower funding costs and the increase in average loans.

The increase in non-interest income was mostly driven by an $8.2 million increase in the net gains on sales of loans caused by the higher level of residential mortgage sales during the third quarter 2020.

The positive impact of the aforementioned items was partially offset by a $3.4 million increase in the provision for loan losses for the third quarter 2020 as compared to the third quarter 2019 mainly due to the impact of the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

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

The net interest margin on the consumer lending portfolio increased 44 basis points to 3.05 percent for the second quarter 2020 as compared to the second quarter 2019 mainly due to a 74 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans.

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

The net interest margin on the consumer lending portfolio increased 47 basis points to 3.08 percent for the third quarter 2020 as compared to the third quarter 2019 mainly due to a 86 basis point decrease in the costs associated with our funding sources, partially offset by a 39 basis point decrease in the yield on average loans.

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

The 39 basis point decrease in loan yield was largely due to lower yielding new loan volumes.

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

Commercial and industrial loans totaled approximately $6.9 billion and represented 21.3 percent of the total loan portfolio at June 30, 2020 .

Commercial real estate loans and construction loans totaled $18.3 billion and represented 56.6 percent of the total loan portfolio at June 30, 2020 .

Average interest earning assets in this segment increased approximately $6.0 billion to $24.8 billion for the three months ended June 30, 2020 as compared to the second quarter 2019 .

The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over most of the last 12-month period, including $2.2 billion of PPP loans originated in the second quarter 2020 , as well as loans acquired from Oritani during the fourth quarter 2019.

For the three months ended June 30, 2020 , income before income taxes for the commercial lending segment increased $11.9 million to $102.6 million as compared to the same quarter 2019 mainly due to increases in both net interest income and non-interest income.

Net interest income increased $50.3 million to $214.5 million for the second quarter 2020 as compared to the same period in 2019 largely due to higher average loan balances.

Non-interest income increased $8.5 million to $16.2 million during the three months ended June 30, 2020 as compared to

the second quarter 2019 mainly due to a $9.3 million increase in swap fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $36.8 million increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses, higher specific reserves associated with our tax medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers.

Internal transfer expense also increase d $13.1 million for the second quarter 2020 as compared to the second quarter 2019 partly due to acquired and organic growth in our business since June 30, 2019.

The net interest margin for this segment decreased 3 basis points to 3.46 percent for the second quarter 2020 as compared to the first quarter 2019 largely due to a 77 basis point decrease in the yield on average loans, partially offset by a 74 basis point decrease in the cost of our funding sources.

Commercial and industrial loans totaled approximately $6.9 billion and represented 21.3 percent of the total loan portfolio at September 30, 2020.

Commercial real estate loans and construction loans totaled $18.5 billion and represented 57.2 percent of the total loan portfolio at September 30, 2020.

Average interest earning assets in this segment increased approximately $6.1 billion to $25.4 billion for the three months ended September 30, 2020 as compared to the third quarter 2019.

The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over most of the last 12-month period, including $2.3 billion of PPP loans originated in the second and third quarters of 2020, as well as $3.4 billion of loans acquired from Oritani during the fourth quarter 2019.

For the three months ended September 30, 2020, income before income taxes for the commercial lending segment increased $29.7 million to $121.4 million as compared to the third quarter 2019 mainly due to increases in both net interest income and non-interest income.

Net interest income increased $54.6 million to $218.6 million for the third quarter 2020 as compared to the same period in 2019 mostly driven by lower funding costs and the increase in average loans.

Non-interest income increased $5.4 million to $20.4 million during the three months ended September 30, 2020 as compared to the third quarter 2019 mainly due to a $5.3 million increase in swap fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $18.9 million increase in the provision for credit losses caused by several factors, including the adverse economic forecast for lifetime expected credit losses, additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers impacted by COVID-19, and the impact of lower valuations of collateral securing our non-performing taxi medallion loan portfolio.

Internal transfer expense also increased $10.8 million for the third quarter 2020 as compared to the third quarter 2019 partly due to general increases related to acquired and organic growth in our business.

The net interest margin for this segment increased 3 basis points to 3.44 percent for the third quarter 2020 as compared to the third quarter 2019 largely due to a 84 basis point decrease in the cost of our funding sources, partially offset by a 81 basis point decrease in the yield on average loans.

I nvestment Management

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See the “Asset/Liability Management” section below for further analysis.

Average interest earning assets in this segment increased $1.4 billion during the second quarter 2020 as compared to the second quarter 2019 primarily due to a $1.3 billion increase in average interest bearing deposits with banks and, to a lesser extent, an increase in the investment securities portfolio.

The increase in average overnight interest bearing deposits with banks was primarily caused by our prudent strategy to increase our excess liquidity during second quarter 2020 , as well as the normal timing of loan and investment activity, including SBA PPP loan originations within the commercial lending segment.

For the quarter ended June 30, 2020 , income before income taxes for the investment management segment increased $613 thousand to $7.5 million as compared to the second quarter 2019 mainly due to a $923 thousand increase in net interest income.

The net interest margin for this segment decreased 29 basis points to 1.28 percent for the second quarter 2020 as compared to the same quarter 2019 largely due to a 103 basis point decrease in the yield on average investments, partially offset by a 74 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the second quarter 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and higher levels of average overnight investments at a yield of 11 basis points during the second quarter 2020.

Average interest earning assets in this segment increased $894.6 million during the third quarter 2020 as compared to the third quarter 2019 primarily due to a $1.0 billion increase in average interest bearing deposits with banks.

The increase in average overnight interest bearing deposits with banks was mostly caused by our prudent maintenance of higher excess liquidity levels due to the COVID-19 pandemic during third quarter 2020, as well as the normal timing of loan and investment activity, including sales of residential mortgage loans.

For the third quarter 2020, income before income taxes for the investment management segment decreased $5.7 million to $1.1 million as compared to the third quarter 2019 mostly due to decreases in non-interest income and net interest income totaling $4.0 million and $1.2 million, respectively.

The decrease in non-interest income was primarily due to lower BOLI income due to a periodic adjustment to the BOLI assets recognized in the three months ended September 30, 2020.

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

The net interest margin for this segment decreased 37 basis points to 1.20 percent for the third quarter 2020 as compared to the same quarter 2019 largely due to a 123 basis point decrease in the yield on average investments, partially offset by a 86 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the third quarter 2019 was largely driven by repayment and prepayment of higher yield residential mortgage-backed securities, acceleration of premium amortization expense related to the increased prepayment of mortgage-backed securities and purchases of lower yielding investment securities over the last 12 months.

Corporate and other adjustments

The amounts disclosed as “corporate and other adjustments” represent income and expense items not directly attributable to a specific segment, including net securities gains and losses not reported in the investment management segment above, interest expense related to subordinated notes, amortization and impairment of tax credit investments, as well as non-core items, including merger expenses.

The corporate segment recognized a $10.6 million and $12.2 million pre-tax loss for the three months ended June 30, 2020 and 2019 , respectively.

Lower pre-tax loss for the second quarter 2020 was mainly due to a $1.3 million increase in non-interest income.

Non-interest expense increased $16.0 million and was more than offset by a $16.4 million increase in internal transfer income for the three months ended June 30, 2020 from the second quarter 2019 .

The corporate segment recognized a $15.7 million and $9.5 million pre-tax loss for the three months ended September 30, 2020 and 2019, respectively.

Higher pre-tax loss for the third quarter 2020 was mainly due to a $14.3 million increase in non-interest expense, partially offset by a $10.9 million increase in internal transfer income.

The increase in non-interest expense was largely driven by increases in salaries and employee benefits expenses, net occupancy and equipment expense, professional and legal fees, and a $2.4 million loss on extinguishment of debt recognized in the third quarter 2020.

Non-interest income also decreased $1.7 million for the three months ended September 30, 2020 from the third quarter 2019.

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

The following tables present the financial data for each business segment for the six months ended June 30, 2020 and 2019 :

Six Months Ended June 30, 2020

The following tables present the financial data for each business segment for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30, 2020

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

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Annualized return on average interest earning assets (before tax)

Six Months Ended June 30, 2019

1.49 % 1.79 % 0.42 % N/A 1.40 %

Nine Months Ended September 30, 2019

Lending Commercial

Lending Investment

Management Corporate

Adjustments Total

($ in thousands)

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Annualized return on average interest earning assets (before tax)

1.10 % 1.87 % 0.69 % N/A 1.70 %

Consumer Lending

Average interest earning assets in this segment increased $427.2 million to $7.2 billion for the six months ended June 30, 2020 as compared to the same period in 2019 .

Income before income taxes generated by the consumer lending segment increased $8.1 million to $45.8 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $14.2 million and $5.0 million in net interest income and non-interest income, respectively.

Average interest earning assets in this segment increased $375.8 million to $7.2 billion for the nine months ended September 30, 2020 as compared to the same period in 2019.

The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the economic slowdown in the second quarter 2020 due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $24.4 million to $80.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases of $24.4 million and $13.5 million in net interest income and non-interest income, respectively.

The increase in net interest income was mainly driven by lower funding costs and the increase in average loans.

The increase in non-interest income was largely attributable to higher net gains on sales of loans for the six months ended June 30, 2020 as compared to the same period in 2019 .

The positive impact of the aforementioned items was partially offset by increases of $6.9 million and $3.2 million in provision for loan losses and non-interest expense, respectively.

The increase in the provision for loan losses for the first half of 2020 as compared to the same period of 2019 was mainly due to the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment.

The increase in non-interest income was largely attributable to higher net gains on sales of loans for the nine months ended September 30, 2020 as compared to the same period in 2019.

The positive impact of the aforementioned items was partially offset by increases of $10.3 million and $3.3 million in the provision for loan losses and non-interest expense, respectively.

The increase in the provision for loan losses for the nine months ended September 30, 2020 as compared to the same period of 2019 was mainly due to the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment as well as additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to COVID-19 impacted borrowers.

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

The net interest margin on the consumer lending portfolio increased 23 basis points to 2.88 percent for the six months ended June 30, 2020 as compared to the same period one year ago mainly due to a 49 basis point decrease in the costs associated with our funding sources, partially offset by a 26 basis point decrease in the yield on average loans.

The net interest margin on the consumer lending portfolio increased 31 basis points to 2.94 percent for the nine months ended September 30, 2020 as compared to the same period one year ago mainly due to a 61 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans.

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Commercial Lending

Average interest earning assets in this segment increased $5.2 billion to $23.8 billion for the six months ended June 30, 2020 as compared to the same period in 2019 .

This increase was primarily due to organic loan growth over most of the last 12-month period, including SBA PPP loans originations of $2.2 billion in the second quarter 2020 , and loans acquired from Oritani.

For the six months ended June 30, 2020 , income before income taxes for the commercial lending segment increased $32.2 million to $205.4 million as compared to the same period in 2019 .

Net interest income increased $93.6 million to $417.2 million for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to the higher average loan balances.

Non-interest income also increased $17.3 million for the six months ended June 30, 2020 as compared to the same period in 2019 due, in part, to a $19.4 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $58.0 million increase in the provision for credit losses to $65.1 million during the six months ended June 30, 2020 as compared to $7.1 million for the same period in 2019 .

The increase in the provision for credit losses mainly due to the adverse economic forecast for lifetime expected credit losses during the first half of 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to COVID-19 impacted borrowers.

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

The net interest margin for this segment increased 3 basis points to 3.51 percent for the six months ended June 30, 2020 as compared to the same period in 2019 due to a 49 basis point decrease in the cost of our funding sources, partially offset by a 46 basis point decrease in yield on average loans.

Average interest earning assets in this segment increased $5.5 billion to $24.3 billion for the nine months ended September 30, 2020 as compared to the same period in 2019.

This increase was primarily due to organic loan growth over the last 12-month period, including PPP loans originations of $2.3 billion during the second and the third quarters 2020, and loans acquired from Oritani on December 1, 2019.

For the nine months ended September 30, 2020, income before income taxes for the commercial lending segment increased $61.9 million to $326.7 million as compared to the same period in 2019.

Net interest income increased $148.2 million to $635.8 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to the higher average loan balances.

Non-interest income also increased $22.7 million for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to a $24.7 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers.

The positive impact of the aforementioned items was partially offset by a $77.0 million increase in the provision for credit losses to $90.8 million during the nine months ended September 30, 2020 as compared to $13.8 million for the same period in 2019.

The increase in the provision for credit losses was mainly due to the adverse economic forecast for lifetime expected credit losses during the first half of 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to borrowers impacted by the COVID-19 pandemic.

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

Internal transfer expense increased $35.6 million to $197.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019.

The net interest margin for this segment increased 3 basis points to 3.48 percent for the nine months ended September 30, 2020 as compared to the same period in 2019 due to a 61 basis point decrease in the cost of our funding sources, partially offset by a 58 basis point decrease in yield on average loans.

I nvestment Management

Average interest earning assets in this segment increased $889.3 million during the six months ended June 30, 2020 as compared to the same period in 2019 largely due to increases of $796.2 million and $93.1 million in average interest bearing deposits with banks and average investments, respectively.

The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the second quarter 2020.

For the six months ended June 30, 2020 , income before income taxes for the investment management segment moderately decreased $299 thousand to $15.4 million as compared to the same period in 2019 .

Net interest income increase d $934 thousand during the six months ended June 30, 2020 as compared to the same period of 2019 but was partially offset by a $800 thousand provision for credit losses for debt securities held to maturity during the first half of 2020 under the new CECL standard.

Non-interest income increased $4.3 million to $9.0 million for the six months ended June 30, 2020 as compared to the same period of 2019 partly due to higher bank owned life insurance income.

However, internal transfer expense increase d $4.0 million for the six months ended June 30, 2020 as compared to the same period of 2019.

The net interest margin for this segment decreased 25 basis points to 1.42 percent for the six months ended June 30, 2020 as compared to the same period in 2019 largely due to a 74 basis point decrease in the yield on average investments, partially offset by a 49 basis point decrease in costs associated with our funding sources.

Average interest earning assets in this segment increased $891.0 million during the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases of $878.5 million in average interest bearing deposits with banks and, to a much lesser extent, an increase in the investment securities portfolio.

The increase in average overnight interest bearing deposits with banks was mainly due to our higher levels of excess liquidity levels that were maintained in the 2020 period in response to the uncertainties created by the COVID-19 pandemic.

For the nine months ended September 30, 2020, income before income taxes for the investment management segment decreased $6.0 million to $16.4 million as compared to the same period in 2019 mainly due to increases in internal transfer expense and provision for credit losses for debt securities held to maturity totaling $5.1 million and $688 thousand, respectively.

The net interest margin for this segment decreased 29 basis points to 1.34 percent for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to a 90 basis point decrease in the yield on average investments, partially offset by a 61 basis point decrease in costs associated with our funding sources.

The decrease in the yield on average investments as compared to the same period of 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and low yielding excess liquidity held in overnight investments.

Corporate and other adjustments

The pre-tax net loss for the corporate segment totaled $21.1 million for the six months ended June 30, 2020 as compared to the net income of $48.0 million for the same period in 2019 .

The pre-tax net loss for the corporate segment totaled $36.8 million for the nine months ended September 30, 2020 as compared to the net income of $38.5 million for the same period in 2019.

The negative change of $75.3 million was mainly due to a decrease in non-interest income coupled with an increase in non-interest expense.

The non-interest

income decreased $75.7 million to $13.6 million for the six months ended June 30, 2020 as compared to the same period in 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of several bank locations recognized during the first half of 2019.

Non-interest expense increased $23.5 million to $224.1 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 largely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses and professional and legal fees.

The non-interest income decreased $77.3 million to $20.3 million for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of several

bank locations recognized during the nine months ended September 30, 2019.

Non-interest expense increased $37.8 million to $338.9 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses and professional and legal fees.

See further details in the "Non-Interest Expense" section above.

Internal transfer income increased $29.8 million to $199.5 million for the six months ended June 30, 2020 as compared to the same period in 2019 .

Internal transfer income increased $40.7 million to $298.2 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to general increases related to our growth.

ASSET/LIABILITY MANAGEMENT

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

The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of June 30, 2020 .

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

In the model, the forecasted shape of the yield curve remains static as of June 30, 2020 .

In the model, the forecasted shape of the yield curve remains static as of September 30, 2020.

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 June 30, 2020 .

Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2020 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the second quarter 2020 .

The model also utilizes an immediate parallel shift in market interest rates at June 30, 2020 .

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2020.

Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2020 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 2020.

The model also utilizes an immediate parallel shift in market interest rates at September 30, 2020.

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

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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.

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.

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Future Net Interest Income

Changes in Interest Rates

(in basis points)

($ in thousands)

Changes in Interest Rates Dollar

Change Percentage

(in basis points) ($ in thousands)

+200 $ 53,334 4.82 %

+100 32,868 2.97

–100 (23,054) (2.08)

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 months by 2.97 percent.

Valley's sensitivity to changes in market rates as compared to March 31, 2020 is mostly due to the significant changes in items included in interest income and Valley's slightly asset sensitive profile.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at June 30, 2020 and sees the likelihood of rates decreasing further as a minimal risk whereas an increase in rates longer term has a higher probability of occurrence.

However, the level of net interest income sensitivity may increase or decrease in the future as a result of changes in deposit and borrowings strategies, the slope of the yield curve and projected cash flows.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at September 30, 2020.

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 deposit and borrowings strategies, the slope of the yield curve and projected cash flows.

Bank Liquidity

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The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding.

The Bank was in compliance with the foregoing policies at June 30, 2020 .

During March 2020, Valley activated a contingent funding plan to prudently increase our liquidity position in response to the financial and public health crisis caused by the COVID-19 pandemic.

At June 30, 2020 , our cash

and cash equivalents totaled $1.9 billion, an increase from $1.0 billion at March 31, 2020.

In the early stage of the third quarter 2020, we continue to believe that holding excess liquidity is prudent given the uncertain environment that we currently face.

Going forward, we will closely monitor external events and adjust our mix and levels of funding accordingly.

The Bank was in compliance with the foregoing policies at September 30, 2020.

At September 30, 2020, our cash and cash equivalents totaled $930.7 million as compared to $1.9 billion and $434.7 million at June 30, 2020 and December 31, 2019, respectively.

The decrease from June 30, 2020 was largely attributable to our managed reduction of elevated excess liquidity levels that were maintained in the first half of 2020 in response to the uncertainties created by COVID-19.

We continue to closely monitor external events and adjust our mix and levels of various funding sources accordingly.

See the "Deposits and Other Borrowings" section and Note 10 to the consolidated financial statements for more information.

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

Total liquid assets were approximately $3.8 billion , representing 10.1 percent of earning assets at June 30, 2020 and $2.2 billion , representing 6.4 percent of earning assets at December 31, 2019 .

Of the $3.8 billion of liquid assets at June 30, 2020 , approximately $1.1 billion of various investment securities were pledged to counterparties to support our earning asset funding strategies.

Total liquid assets were approximate ly $2.7 billion, representing 7.4 percent of earning assets at September 30, 2020 and $2.2 billion, representing 6.4 percent of earning assets at December 31, 2019.

Of the $2.7 billion of liquid assets at September 30, 2020, approximately $868.9 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approximately $1.2 billion in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

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

Loan principal payments (including loans held for sale at June 30, 2020 ) are projected in accordance with their scheduled contractual terms to be approximately $8.8 billion over the next 12 months.

Loan principal payments (including loans held for sale at September 30, 2020) are projected in accordance with their scheduled contractual terms to be approximately $9.6 billion over the next 12 months.

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

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

Average core deposits totaled approximately $24.8 billion and $20.4 billion for the six months ended June 30, 2020 and for the year ended December 31, 2019 , respectively, representing 68.3 percent and 66.8 percent of average earning assets for the respective periods.

Average core deposits totaled approximately $25.7 billion and $20.4 billion for the nine months ended September 30, 2020 and for the year ended December 31, 2019, respectively, representing 70.0 percent and 66.8 percent of average earning assets for the respective periods.

The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous correspondent banks.

While there are no firm lending commitments currently in place, management believes that we could borrow approximately $1.2 billion for a short term from these banks on a collective basis.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous banks.

While these lending lines are uncommitted, management believes that the Bank could borrow approximately $1.4 billion from these banks on a collective basis.

The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S.

government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans.

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

At September 30, 2020, Valley had $700 million of MULOCs outstanding for this purpose.

Furthermore, we can obtain overnight borrowings from the FRB via the discount window as a contingency for additional liquidity.

At June 30, 2020 , our traditional borrowing capacity, excluding PPP loans, under the Federal Reserve's discount window was $1.6 billion .

At September 30, 2020, our traditional borrowing capacity, excluding PPP loans, under the Federal Reserve's discount window was $1.6 billion.

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

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $1.0 billion to $2.1 billion at June 30, 2020 , as compared to December 31, 2019 .

The increase in both short-term borrowings was primarily driven by our goal to increase liquidity levels in response to the COVID-19 crisis, as well as funding of SBA PPP loan originations in the second quarter 2020.

As of June 30, 2020 , the short-term borrowings mainly consisted of FHLB advances totaling $1.2 billion with a weighted interest rate of 0.55 percent and federal funds purchased totaling $678.9 million.

Average short-term FHLB advances exceeded 30 percent of total shareholders' equity at June 30, 2020 and December 31, 2019 , respectively.

The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended June 30, 2020 and December 31, 2019 :

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $337.4 million to $1.4 billion at September 30, 2020 as compared to December 31, 2019.

The increase in short-term borrowings, mainly consisting of FHLB advances at September 30, 2020, was primarily driven by increase liquidity levels in response to the COVID-19 pandemic, as well as funding of PPP loan originations primarily in the second quarter 2020.

The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended September 30, 2020 and December 31, 2019:

September 30,

2020 December 31,

($ in thousands)

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Investment Securities Portfolios

As of June 30, 2020 , we had $54.4 million , $1.7 billion and $2.1 billion in equities, available for sale debt securities and held to maturity debt securities, respectively.

Our equity securities portfolio was comprised of a money market mutual fund and, to a lesser extent, investments in public and private Community Reinvestment Act funds.

As of September 30, 2020, we had $29.0 million, $1.5 billion and $2.2 billion in equities, available for sale debt securities and held to maturity debt securities, respectively.

Our equity securities portfolio is mainly comprised of a money market mutual fund and investments in public and private Community Reinvestment Act funds.

Our held to maturity and available for sale debt securities portfolios were comprised of U.S.

Treasury securities, U.S.

government agency securities, tax-exempt and taxable issuances of states and political subdivisions (including special revenue bonds), residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds issued by banks at June 30, 2020 .

There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae.

4 unchanged sentences

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

Measurement of Credit Losses on Financial Instruments", which requires an estimate of lifetime expected credit

losses for held to maturity debt securities established as an allowance for credit losses and replaces the other-than-temporarily impaired model for available for sale debt securities.

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

Available for sale debt securities.

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

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and six months ended June 30, 2020 and, as a result, no allowance for credit losses for available for sale debt securities at June 30, 2020 .

We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and nine months ended September 30, 2020 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2020.

Held to maturity debt securities.

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

At June 30, 2020 , held to maturity debt securities were carried net of allowance for credit losses totaling $1.6 million .

We recorded a provision of $41 thousand and $800 thousand during three and six months ended June 30, 2020 , respectively, and no net charge-offs of debt securities in the respective periods.

See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities.

At September 30, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.5 million.

We recorded a negative (credit) provision of $112 thousand during the third quarter 2020 mostly due to modest improvement in expected default rates for certain securities as compared to June 30, 2020.

The provision totaled $688 thousand for the nine months ended September 30, 2020 driven mainly by our negative economic forecast incorporated within the allowance model since the onset of the COVID-19 pandemic.

There were no net charge-offs of debt securities in the respective periods.

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.

1 unchanged sentence

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

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at June 30, 2020 :

June 30, 2020

The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at September 30, 2020:

September 30, 2020

Losses Fair Value

(in thousands)

Held to maturity investment grades:

AAA Rated $ 1,836,858 $ 54,293 $ (924) $ 1,890,227

AA Rated 190,266 7,067 — 197,333

A Rated 14,557 441 — 14,998

BBB Rated 5,000 463 — 5,463

Non-investment grade 5,669 — (176) 5,493

Not rated 118,126 730 (7,399) 111,457

Total investment securities held to maturity $ 2,170,476 $ 62,994 $ (8,499) $ 2,224,971

Available for sale investment grades:

AAA Rated $ 1,319,492 $ 45,008 $ (960) $ 1,363,540

AA Rated 45,422 916 (24) 46,314

A Rated 14,264 416 — 14,680

BBB Rated 24,379 594 (6) 24,967

Non-investment grade 11,833 — (179) 11,654

Not rated 64,576 1,065 (232) 65,409

Total investment securities available for sale $ 1,479,966 $ 47,999 $ (1,401) $ 1,526,564

3 unchanged sentences

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

The investment securities held to maturity portfolio includes $104.3 million in investments not rated by the rating agencies with aggregate unrealized losses of $7.8 million at June 30, 2020 .

The unrealized losses for this category included $7.5 million of unrealized losses related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million .

The investment securities held to maturity portfolio included $118.1 million of investments not rated by the rating agencies with aggregate unrealized losses of $7.4 million at September 30, 2020 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities.

Loan Portfolio

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September 30,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30,

($ in thousands)

2 unchanged sentences

Commercial real estate 16,815,587 16,571,877 16,390,236 15,996,741 13,365,454

Construction 1,720,775 1,721,352 1,727,046 1,647,018 1,537,590

Total commercial real estate 18,536,362 18,293,229 18,117,282 17,643,759 14,903,044

Residential mortgage 4,284,595 4,405,147 4,478,982 4,377,111 4,133,331

Home equity 457,083 471,115 481,751 487,272 489,808

Automobile 1,341,659 1,369,489 1,436,734 1,451,623 1,436,608

Other consumer 892,542 890,942 914,587 913,446 908,760

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Total loans *

$ 32,415,586 $ 32,314,611 $ 30,428,067 $ 29,699,208 $ 26,567,159

As a percent of total loans:

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Consumer loans 8.3 8.5 9.4 9.6 10.7

Includes net unearned discount and deferred loan fees of $131.3 million and $76.4 million at June 30, 2020 and March 31, 2020 , respectively, and net unearned premiums and deferred loan fees of $12.6 million , $18.3 million and $19.6 million at December 31, 2019 , September 30, 2019 and June 30, 2019, respectively.

Net unearned discounts and deferred loan fees at June 30, 2020 and March 31, 2020 include the non-credit discount on PCD loans as well as $62.1 million of net unearned fees related to SBA PPP loans at June 30, 2020 .

During the second quarter 2020 , we originated $296 million of residential mortgage loans for sale (rather than held for investment) and sold approximately $237 million .

Residential mortgage loans held for sale totaled $120.6 million and $58.9 million at June 30, 2020 and March 31, 2020 , respectively.

Total commercial and industrial loans increased $1.9 billion from March 31, 2020 to approximately $6.9 billion at June 30, 2020 largely due to the $2.2 billion of SBA PPP loan originations in the second quarter.

Excluding the SBA PPP loans, commercial and industrial loans decreased $328.4 million, or 26.3 percent on an annualized basis, at June 30, 2020 compared to March 31, 2020 as the lack of economic activity has weighed on loan demand in our markets.

Additionally, commercial and industrial line utilization moderately declined from March 31, 2020 .

Commercial real estate loans (excluding construction loans) increased $181.6 million , or 4.4 percent on an annualized basis, to $16.6 billion at June 30, 2020 from March 31, 2020 mainly due to a strong refinance market driven by historic low interest rates and slower repayment activity in the second quarter 2020.

Construction loans decreased $5.7 million to $1.7 billion at June 30, 2020 from March 31, 2020 mainly due to migration of completed existing construction projects to permanent financing during the second quarter 2020.

Total residential mortgage loans decreased $73.8 million to approximately $4.4 billion at June 30, 2020 from March 31, 2020 largely due to higher mortgage banking sales activity.

New and refinanced residential mortgage loan originations totaled approximately $494.2 million for the second quarter 2020 , as compared to $358.9 million and $347.1 million for the first quarter 2020 and second quarter 2019 , respectively.

Of the total originations for the second quarter 2020 , $296 million of residential mortgage loans were originated for sale rather than held for investment and sold approximately $237 million of these loans.

We expect to continue to sell a large portion of our new fixed rate residential mortgage loan originations during the remainder of 2020 assuming the low level of market interest rates continues and we are able to maintain an appropriate mix of residential mortgage loans on our balance sheet.

Home equity loans totaled $471.1 million at June 30, 2020 , and decreased $10.6 million from March 31, 2020 largely due to normal repayments that outpaced new loan origination and line activity.

Automobile loans decreased by $67.2 million to $1.4 billion at June 30, 2020 as compared to March 31, 2020 .

The second quarter annualized decline was 18.7 percent due to lower application volumes as compared to the first quarter 2020 largely due to the COVID-19 impact.

During the second quarter 2020, auto dealerships in our primary market areas were largely shut down as a result of shelter-in-place restrictions in connection with the pandemic.

Our Florida dealership network contributed $14.3 million in auto loan originations, representing approximately 20 percent of Valley's total new auto loan production during the second quarter 2020 , as compared to $28.3 million, representing approximately 21 percent, during the first quarter 2020 .

Other consumer loans decreased $23.6 million to $890.9 million at June 30, 2020 , as compared to $914.6 million at March 31, 2020 mostly due to lower volumes of new collateralized personal lines of credit as compared to the first quarter 2020 .

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

Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

* Includes net unearned discount and deferred loan fees of $116.2 million, $131.3 million, and $76.4 million at September 30, 2020, June 30, 2020, and March 31, 2020, respectively, and net unearned premiums and deferred loan fees of $12.6 million and $18.3 million at December 31, 2019 and September 30, 2019, respectively.

Net unearned discounts and deferred loan fees at September 30, 2020, June 30, 2020, and March 31, 2020 include the non-credit discount on purchased credit deteriorated (PCD) loans, and $54.4 million and $62.1 million of net unearned fees related to PPP loans at September 30, 2020 and June 30, 2020, respectively.

Loans increased $101.0 million to approximately $32.4 billion at September 30, 2020 from June 30, 2020 largely due to controlled commercial real estate loan growth and a $63 million increase in PPP loans within the commercial and industrial loan category during the third quarter 2020.

The residential mortgage and most consumer loan categories experienced moderate declines in loan balances in the third quarter largely due to loan principal repayment and refinance activity, as well as higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies.

Residential mortgage loans held for sale totaled $209.3 million and $120.6 million at September 30, 2020 and June 30, 2020, respectively.

See additional information regarding our residential mortgage loan activities below.

Total commercial and industrial loans increased only $18.7 million from June 30, 2020 to approximately $6.9 billion at September 30, 2020 largely due to the $55.4 million of PPP loan originations in the third quarter.

Excluding the PPP loans, commercial and industrial loans decreas ed $44.5 million, or 4 percent on an annualized basis, at September 30, 2020 compared to June 30, 2020 as the continued weak economic environment caused by the COVID-19 pandemic has weighed on loan demand particularly in the New Jersey and New York markets, and our existing small to middle market lending relationships have become more strategic with new capital expenditures.

Commercial and industrial loans included PPP loans of approximately $2.3 billion and $2.2 billion at September 30, 2020 and June 30, 2020, respectively, net of unearned net deferred fees totaling $54.4 million and $62.1 million, respectively.

Commercial real estate loans (excluding construction loans) increased $243.7 million, or 5.9 percent on an annualized basis, to $16.8 billion at September 30, 2020 from June 30, 2020 mainly due to strong underwriting within our loan commitment pipeline at June 30, 2020, including many pre-existing, longstanding borrowers, as well as slower repayment activity during the third quarter.

However, construction loans decreased $577 thousand to $1.7 billion at September 30, 2020 from June 30, 2020 mainly due to run-off of completed existing projects, and to a lesser extent, migration of such completed projects to permanent financing during the third quarter 2020.

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

Total residential mortgage loans decreased $120.6 million to approximately $4.3 billion at September 30, 2020 from June 30, 2020 largely due to loan principal repayment and refinance activity and higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies.

New and refinanced residential mortgage loan originations totaled approximately $540.2 million for the third quarter 2020, as compared to $494.2 million and $477.2 million for the second quarter 2020 and third quarter 2019, respectively.

Of the total originations for the third quarter 2020, $385.6 million of residential mortgage loans were originated for sale rather than held for investment and sold approximately $301.2 million of these loans.

We may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the remainder of 2020 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.

Home equity loans totaled $457.1 million at September 30, 2020, and moderately decreased $14.0 million from June 30, 2020.

New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest, despite the favorable low interest rate environment caused by the COVID-19 pandemic.

Automobile loans decreased by $27.8 million to $1.3 billion at September 30, 2020 as compared to June 30, 2020.

The third quarter annualized decline was 8.1 percent as our new indirect auto loan volumes did not keep pace with the normal portfolio repayment and refinance activity .

However, the volume of indirect loans and application activity was higher during the third quarter 2020 as compared to the second quarter 2020.

Our Florida dealership network remained relatively unchanged from the second q uarter totaling $14.4 million in auto loan originations, representing approximately 11 percent of new loans, during the third quarter 2020, as compared to $14.3 million, representing approximately 20 percent of new loans, during the second quarter 2020.

Other consumer loans increased $1.6 million to $892.5 million at September 30, 2020 as compared to $890.9 million at June 30, 2020.

The modest increase was mainly due to lower usage and demand within our collateralized personal lines of credit portfolio.

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

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

During the second quarter COVID-related economic shutdowns in our markets have slowed both new loan originations and contractual principal and interest payments.

As traditional commercial origination activity has slowed, we focused additional resources on assisting our clients through the economic crisis and managing the demands of the SBA PPP loan forgiveness.

As of mid-July 2020, we had originated approximately 12,800 PPP loans with an aggregate balance of $2.3 billion before unearned loan fees and costs.

Our expectation is that approximately 75 percent of loans made under this program will be either fully or partially forgiven and are expected to come off our balance sheet over the next 12 months.

During the early stages of the third quarter 2020, we have seen some improved levels of commercial loan activity, solid new and refinanced residential mortgage loan volumes, as well as better auto loan applications activity from borrowers with strong credit scores.

Non-performing Assets

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Under previous U.S.

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

Under the CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at June 30, 2020 and March 31, 2020 .

Non-performing assets include non-accrual loans, other real estate owned (OREO), other repossessed assets (which primarily consists of automobiles and taxi medallions) and non-accrual debt securities at June 30, 2020 .

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

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.

2 unchanged sentences

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

Our non-performing assets increased $3.7 million to $224.2 million at June 30, 2020 as compared to March 31, 2020 , mainly due to a $4.7 million increase in non-accrual loans, partially offset by a decline in OREO during the second quarter 2020.

Non-performing assets as a percentage of total loans and non-performing assets totaled 0.69 percent and 0.72 percent at June 30, 2020 and March 31, 2020 , respectively (as shown in the table below).

Our non-performing assets decreased $20.5 million to $203.6 million at September 30, 2020 as compared to June 30, 2020, mainly due to a $19.5 million decrease in non-accrual loans in the third quarter 2020.

Non-performing assets as a percentage of total loans and non-performing assets totaled 0.62 percent and 0.69 percent at September 30, 2020 and June 30, 2020, respectively (as shown in the table below).

For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

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

However, due to the potential for future credit deterioration caused by the recent downturn in economic conditions impacted by the COVID-19 pandemic and a number of our borrowers performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at June 30, 2020 .

The following table sets forth by loan category accruing past due and non-performing assets on the dates indicated in conjunction with our asset quality ratios:

However, due to the potential for future credit deterioration caused by the uncertain economic recovery from the pandemic recession, lack of additional federal stimulus and a number of our borrowers that are performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at September 30, 2020.

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,

2020 June 30,

2020 March 31,

2020 December 31,

2019 September 30,

($ in thousands)

3 unchanged sentences

Commercial real estate 26,038 13,912 41,664 2,560 20,851

Construction 142 — 7,119 1,486 11,523

Residential mortgage 22,528 35,263 38,965 17,143 12,945

4 unchanged sentences

Commercial real estate 610 1,543 15,963 4,026 735

Construction — — 49 1,343 7,129

Residential mortgage 3,760 4,169 9,307 4,192 4,417

11 unchanged sentences

Commercial real estate 41,627 43,678 41,616 9,004 9,560

Construction 2,497 3,308 2,972 356 356

Residential mortgage 23,877 25,776 24,625 12,858 13,772

6 unchanged sentences

Performing troubled debt restructured loans

$ 58,090 $ 53,936 $ 48,024 $ 73,012 $ 79,364

Total non-accrual loans as a % of loans 0.59 % 0.65 % 0.68 % 0.31 % 0.38 %

1 unchanged sentence

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

0.85 0.94 1.20 0.54 0.71

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

Past due loans and non-accrual loans presented in periods prior to March 31, 2020 exclude PCI loans.

PCI loans were accounted for on a pool basis and are were not subject to delinquency classification.

Loans past due 30 to 59 days decreased $48.7 million to $68.3 million at June 30, 2020 as compared to March 31, 2020 due to improved performance across most categories.

Commercial real estate loan delinquencies within this category decreased by $27.8 million as compared to March 31, 2020 mainly due to restored customer payments delayed by business disruptions caused by COVID-19 related factors at the end of the first quarter 2020.

In addition, commercial real estate and construction loans decreased mainly due to matured performing commercial real estate and

construction loans totaling $4.3 million and $5.0 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020 .

Loans past due 60 to 89 days decreased $21.6 million to $13.7 million at June 30, 2020 as compared to March 31, 2020 mainly due to matured performing commercial real estate and commercial and industrial loans totaling $13.8 million and $4.5 million, respectively, that were in the normal process of renewal reported in this category at March 31, 2020 .

Loans past due 90 days or more and still accruing interest increased $4.0 million to $11.1 million at June 30, 2020 as compared to $7.1 million at March 31, 2020 .

170.08 147.03 137.59 173.83 160.17

* Past due loans and non-accrual loans presented at December 31, 2019 and September 30, 2019 exclude PCI loans.

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

GAAP and were not subject to delinquency classification.

Loans past due 30 to 59 days decreased $4.1 million to $64.3 million at September 30, 2020 as compared to June 30, 2020 largely due to improved performance in the residential mortgage and consumer loan categories, including CARES Act qualifying forbearance loans that resumed their scheduled monthly payments during the third quarter 2020.

Commercial real estate loans increased by $12.1 million as compared to June 30, 2020 mainly due to three loan relationships with a combined total of $20.3 million reported in this delinquency category at September 30, 2020.

While the three loan relationships are internally classified as substandard, management believes they are well secured and in the process of collection.

Loans past due 60 to 89 days decreased $4.0 million to $9.7 million at September 30, 2020 as compared to June 30, 2020 partly due to improved residential and consumer loan performance and collection effort results during the third quarter 2020.

Loans past due 90 days or more and still accruing interest decreased $1.2 million to $9.9 million at September 30, 2020 as compared to $11.1 million at June 30, 2020 mainly due to lower residential and consumer delinquencies, partially offset by higher commercial and industrial and commercial real estate delinquencies during the third quarter 2020.

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

Non-accrual loans increased $4.7 million to $210.6 million at June 30, 2020 as compared to $205.9 million at March 31, 2020 .

The increase in non-accrual loans was partially due to one commercial real estate loan which moved to non-accrual status during the second quarter 2020, as well as a moderately higher level of non-accrual consumer loans at June 30, 2020 .

Non-accrual loans represented 0.65 percent of total loans at June 30, 2020 compared to 0.68 percent at March 31, 2020 .

During the second quarter 2020 , we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $99.8 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at June 30, 2020 .

Due to continued negative trends in market valuations of the underlying taxi medallion collateral, a weak operating environment and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020.

At June 30, 2020 , non-accrual taxi medallion loans totaling $106.8 million had related reserves of $61.6 million within the allowance for loan losses as compared to $109.8 million with related reserves of $56.8 million at March 31, 2020 .

Non-accrual loans decreased $19.5 million to $191.1 million at September 30, 2020 as compared to $210.6 million at June 30, 2020 largely due to a $15.2 million decrease in commercial and industrial loan category.

The third quarter 2020 loan charge-offs were mostly comprised of the full charge-off of a $6.0 million loan relationship, as well as partial taxi medallion loan charge-offs totaling $6.1 million caused by lower estimated collateral valuations at September 30, 2020.

Non-accrual loans represented 0.59 percent of total loans at September 30, 2020 compared to 0.65 percent at June 30, 2020.

During the third quarter 2020, we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $93.1 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at September 30, 2020.

Due to continued negative trends in estimated fair valuations of the underlying taxi medallion collateral, a weak operating environment for ride services and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020.

At September 30, 2020, non-accrual taxi medallion loans totaling $100.1 million had related reserves of $60.4 million withi n the allowance for loan losses as compared to $106.8 million with related reserves of $61.6 million at June 30, 2020.

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

However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, increased the level of our allowance for loan losses at June 30, 2020 (See the "Allowance for Credit Losses" section below).

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

For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $16.0 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at June 30, 2020 .

OREO properties decreased $1.9 million to $8.3 million at June 30, 2020 from $10.2 million at March 31, 2020 due to sales of several properties.

Sales of OREO properties resulted in net gains of $274 thousand and $431 thousand for the three and six months ended June 30, 2020 , respectively, as compared to net gains of $857 thousand and $1.7 million for the three and six months ended June 30, 2019 , respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $1.8 million at June 30, 2020 .

However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, we increased the level of our allowance for loan losses at September 30, 2020.

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

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

For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $14.2 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at September 30, 2020.

OREO properties decreased $537 thousand to $7.7 million at September 30, 2020 from $8.3 million at June 30, 2020 due to normal sales activity in the third quarter.

Sales of OREO properties resulted in net gains of $109 thousand and $540 thousand for the three and nine months ended September 30, 2020, respectively, as compared to net losses of $417 thousand and net gains of $1.3 million for the three and nine months ended September 30, 2019, respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0 million at September 30, 2020.

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

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $5.9 million to $53.9 million at June 30, 2020 as compared to $48.0 million at March 31, 2020 .

Performing TDRs consisted of 87 loans at June 30, 2020 .

On an aggregate basis, the $53.9 million in performing TDRs at June 30, 2020 had a modified weighted average interest rate of approximately 4.92 percent as compared to a pre-modification weighted average interest rate of 4.72 percent .

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $4.2 million to $58.1 million at September 30, 2020 as compared to $53.9 million at June 30, 2020.

Performing TDRs consisted of 81 loans at September 30, 2020.

On an aggregate basis, the $58.1 million in performing TDRs at September 30, 2020 had a modified weighted average interest rate of approximately 4.81 percent as compared to a pre-modification weighted average interest rate of 4.10 percent.

Loan Forbearance.

In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers.

Generally, the modification terms allow for a

deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis.

To date, Valley has granted over 10,000 loan forbearances totaling approximately $4.6 billion in support of our customers.

Of these, approximately 5,000 loans totaling $1.9 billion have completed the contractual deferral period and returned to regularly scheduled payments.

As of September 30, 2020, Valley had approximately 1,400 loans with total outstanding balances of $1.1 billion remaining in their payment deferral period under short-term modifications.

Higher Risk COVID-19 Credit Exposures .

Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to COVID-19.

Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to the COVID-19 pandemic.

These industries include doctor and surgery centers, retail trade, hotels and hospitality, restaurants and food service, and entertainment and recreation.

As of June 30, 2020, Valley had outstanding loans of approximately $2.1 billion to borrowers in these industries representing approximately 7 percent of total outstanding loans.

Industries that may have secondary exposure to the COVID-19 pandemic include nursing and residential care, wholesale trade, manufacturing, and child care and education.

As of June 30, 2020, Valley had outstanding loans of approximately $2.4 billion to borrowers in these industries representing approximately 7.8 percent of total outstanding loans.

The large majority of loans to the aforementioned industries were pass-rated under Valley’s internal risk rating system as of June 30, 2020.

As of July 10, 2020, Valley had loans in forbearance representing approximately 12 percent of our loans in the aforementioned industries.

As of September 30, 2020, Valley had outstanding loans of approximately $2.2 billion to borrowers in these industries representing approximately 7.4 percent of total outstanding loans.

Active deferrals in this category totaled $158 million, or 7.1 percent of total loans at September 30, 2020.

A large majority of loans within the higher risk industries were pass-rated under Valley’s internal risk rating system as of September 30, 2020.

Allowance for Credit Losses for Loans

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Among other things, these adjustments include and account for differences in:

(i) lending policies and procedures, (ii) current business conditions and economic developments that affect the loan collectability;

(iii) concentration risks by size, type, and geography (iv) the potential volume and migration of of loan forbearances to non-performing s tatus , and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

(i) lending policies and procedures;

(ii) current business conditions and economic developments that affect the loan collectability;

(iii) concentration risks by size, type, and geography;

(iv) the potential volume and migration of loan forbearances to non-performing s tatus;

and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

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.

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

For the second quarter 2020, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios.

For the third quarter 2020, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios.

During the third quarter 2020, Valley placed increased weightings on S-3 and S-4 alternative downside scenarios as compared to the second quarter due to many factors, including, but not limited to the uncertainty related to additional federal economic stimulus, the results of the presidential election, loan customers in deferral of payments, the timing of a COVID-19 vaccine and the severity of future COVID-19

outbreaks and resulting business disruptions.

The S-4 forecast is the most severe economic scenario and includes the following assumptions:

Assumes that the COVID-19 crisis will persist and continue to meaningfully impact the economy;

National unemployment rate will remain elevated throughout the remainder of the year and peak at 13.2 percent in the fourth quarter 2021;

Federal funds interest rates will remain at or near zero for foreseeable future;

A prolonged downturn in the economy until the fourth quarter 2021.

• Assumes that the COVID-19 crisis will persist and meaningfully impact the economy;

• National unemployment rate will remain elevated throughout 2020 to 2022, with a peak at 12.3 percent in the second quarter 2022;

• Federal funds interest rates will remain at or near zero for the foreseeable future;

• A prolonged economic downturn until the fourth quarter 2021.

The allowance for credit losses for loans methodology and accounting policy are fully described in Note 8 to the consolidated financial statements.

The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated.

Three Months Ended

Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2020 June 30,

2020 September 30,

2019 September 30,

2020 September 30,

($ in thousands)

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Beginning balance - Allowance for credit losses for loans

319,723 293,361 158,079 164,604 156,295

Impact of ASU No.

2016-13 adoption on January 1, 2020 (1)

— — — 37,989 —

Allowance for purchased credit deteriorated (PCD) loans (1)

— — — 61,643 —

Beginning balance, adjusted 319,723 293,361 158,079 264,236 156,295

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Commercial real estate 60 31 28 164 71

Construction 40 20 — 80 —

Residential mortgage 31 545 3 626 13

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Ending balance - Allowance for credit for losses

$ 335,328 $ 319,723 $ 164,770 $ 335,328 $ 164,770

Components of allowance for credit losses for loans:

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Allowance for unfunded credit commitments

10,296 10,109 2,917 10,296 2,917

Allowance for credit losses for loans $ 335,328 $ 319,723 $ 164,770 $ 335,328 $ 164,770

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Provision for unfunded credit commitments (3)

187 90 (57) 350 (1,519)

Total provision for credit losses for loans $ 31,020 $ 41,115 $ 8,700 $ 106,059 $ 18,800

Annualized ratio of net charge-offs to average loans outstanding

0.19 % 0.18 % 0.03 % 0.15 % 0.05 %

(1) The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.

Charge-offs and recoveries presented for periods prior to March 31, 2020 exclude loans formerly accounting for as PCI loans.

Periods prior to March 31, 2020 represent the allowance and provision for unfunded letters of credit only .

Net loan charge-offs totaled $14.8 million for the second quarter 2020 as compared to $4.8 million and $3.0 million for the first quarter 2020 and second quarter 2019 , respectively.

The increase in net loan charge-offs was largely due to the partial charge-off of one commercial and industrial loan totaling $7.8 million for the second quarter 2020 .

Additionally, gross loan charge-offs related to taxi medallion loans totaled $3.2 million, $1.3 million and $2.3 million for the second quarter 2020 , first quarter 2020 and second quarter 2019 , respectively.

(2) Charge-offs and recoveries presented for periods prior to January 1, 2020 exclude loans formerly accounting for as PCI loans.

(3) Periods prior to January 1, 2020 represent the allowance and provision for unfunded letters of credit only .

Net loan charge-offs totaled $15.4 million for the third quarter 2020 as compared to $14.8 million and $2.0 million for the second quarter 2020 and third quarter 2019, respectively.

The increase in net loan charge-offs for the third quarter 2020 was mostly driven by the full charge-off of one commercial and industrial loan totaling $6.0 million, which was fully reserved for in our allowance for loan losses at June 30, 2020.

The commercial and industrial loan category also included partial charge-offs of taxi medallion loans totaling $6.1 million for the third quarter 2020 as compared to $3.2 million for the second quarter 2020.

There were no taxi medallion loan charge-offs during the third quarter 2019.

The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.

During the second quarter 2020 , we recorded a $41.1 million provision for credit losses as compared to $33.9 million and $2.1 million for the first quarter 2020 and the second quarter 2019 , respectively.

The second quarter 2020 provision mainly reflects the reserve build caused by deterioration in Valley's view of the macroeconomic outlook since the end of the first quarter, higher specific reserves associated with our taxi medallion loan portfolio and additional qualitative management adjustments to reflect the potential for higher levels of credit stress for COVID-19 impacted borrowers.

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:

June 30, 2020

March 31, 2020

June 30, 2019

September 30, 2020 June 30, 2020 September 30, 2019

Allocation * Allocation

Category Allowance

Allocation* Allocation

Category Allowance

Allocation* Allocation

($ in thousands)

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Commercial real estate 128,699 0.77 % 117,743 0.71 % 23,044 0.17 %

Construction 15,951 0.93 % 13,959 0.81 % 25,727 1.67 %

Total commercial real estate loans 144,650 0.78 % 131,702 0.72 % 48,771 0.33 %

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Consumer loans:

Home equity 5,972 1.31 % 4,766 1.01 % 487 0.10 %

Auto and other consumer 15,387 0.69 % 11,477 0.51 % 6,291 0.27 %

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Allowance for unfunded credit commitments

10,296 10,109 2,917

Total allowance for credit losses for loans

$ 335,328 $ 319,723 $ 164,770

Allowance for credit losses for loans as a % loans

1.03 % 0.99 % 0.62 %

* CECL was adopted January 1, 2020.

Prior periods reflect the allowance for credit losses for loans under the incurred loss model.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.99 percent , 0.96 percent and 0.61 percent at June 30, 2020 , March 31, 2020 and June 30, 2019 , respectively.

At June 30, 2020 , the allowance allocations for credit losses as a percentage of total loans increased for most loan categories as compared to March 31, 2020 .

However, the allocated reserves as a percentage of commercial and industrial loans declined by 0.63 percent due to $2.2 billion of SBA PPP loans with no related allowance at June 30, 2020 .

PPP loans originated in the second quarter 2020 are 100 percent guaranteed by the SBA and totaled approximately $2.2 billion at June 30, 2020 .

Our allowance of credit losses for loans as a percentage of non-PPP loans was 1.06 percent at June 30, 2020 .

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 1.03 percent, 0.99 percent and 0.62 percent at September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

During the third quarter 2020, we recorded a $31.0 million provision for credit losses as compared to $41.1 million and $8.7 million for the second quarter 2020 and the third quarter 2019, respectively.

The reserve build in the third quarter 2020 reflects several factors, including deterioration in Valley's macroeconomic outlook since the end of the second quarter, additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers impacted by the COVID-19 pandemic, and the impact of lower valuations of collateral securing our non-performing taxi medallion loan portfolio.

At September 30, 2020, the allowance allocations for credit losses as a percentage of total loans increased for most loan categories as compared to June 30, 2020.

However, the allocated reserves as a percentage of commercial and industrial loans declined by 0.03 percent largely due to the aforementioned net loan charge-offs in the third quarter

2020, as well as moderate growth within the PPP loan portfolio which had no related allowance at September 30, 2020 and June 30, 2020.

The allowance for credit losses for loans as a percentage of non-PPP loans was 1.11 percent and 1.06 percent at September 30, 2020 and June 30, 2020, respectively.

Capital Adequacy

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

At June 30, 2020 and December 31, 2019 , shareholders’ equity totaled approximately $4.5 billion and $4.4 billion , which represented 10.7 percent and 11.7 percent of total assets, respectively.

During the six months ended June 30, 2020 , total shareholders’ equity increased by $90.3 million primarily due to (i) net income of $182.9 million , (ii) an increase in other comprehensive income of $27.3 million , and (iii) a $4.4 million increase attributable to the effect of our stock incentive plan.

At September 30, 2020 and December 31, 2019, shareholders’ equity totaled approximately $4.5 billion and $4.4 billion, which represented 11.1 percent and 11.7 percent of total assets, respectively.

During the nine months ended September 30, 2020, total shareholders’ equity increased by $149.6 million primarily due to (i) net income of $285.2 million, (ii) an increase in other comprehensive income of $27.4 million, and (iii) a $9.2 million increase attributable to the effect of our stock incentive plan.

These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $144.0 million and (ii) a $28.2 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2020.

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We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and 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 June 30, 2020 and December 31, 2019 , Valley and Valley National Bank exceeded all capital adequacy requirements (see tables below).

As of September 30, 2020 and December 31, 2019, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025.

Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) net of taxes for the six months ended June 30, 2020 will be phased in over the same time frame.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2020 and December 31, 2019 :

Minimum Capital

To Be Well Capitalized

Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for the nine months ended September 30, 2020 will be phased in over the same time frame.

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, 2020 and December 31, 2019:

Actual Minimum Capital

Requirements To Be Well Capitalized

Under Prompt Corrective

Action Provision

Amount Ratio Amount Ratio Amount Ratio

($ in thousands)

As of June 30, 2020

As of September 30, 2020

Total Risk-based Capital

Valley $ 3,733,338 12.37 % $ 3,169,791 10.50 % N/A N/A

Valley National Bank 3,772,443 12.50 3,168,912 10.50 $ 3,018,011 10.00 %

Common Equity Tier 1 Capital

Valley 2,930,220 9.71 2,113,194 7.00 N/A N/A

Valley National Bank 3,448,166 11.43 2,112,608 7.00 1,961,707 6.50

Tier 1 Risk-based Capital

Valley 3,145,061 10.42 2,566,022 8.50 N/A N/A

Valley National Bank 3,448,166 11.43 2,565,310 8.50 2,414,409 8.00

Tier 1 Leverage Capital

Valley 3,145,061 7.89 1,593,845 4.00 N/A N/A

Valley National Bank 3,448,166 8.66 1,593,506 4.00 1,991,882 5.00

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Total Risk-based Capital

Valley $ 3,427,134 11.72 % $ 3,070,687 10.50 % N/A N/A

Valley National Bank 3,416,674 11.69 3,069,894 10.50 $ 2,923,709 10.00 %

Common Equity Tier 1 Capital

Valley 2,754,524 9.42 2,047,125 7.00 N/A N/A

Valley National Bank 3,152,070 10.78 2,046,596 7.00 1,900,411 6.50

Tier 1 Risk-based Capital

Valley 2,968,530 10.15 2,485,795 8.50 N/A N/A

Valley National Bank 3,152,070 10.78 2,485,153 8.50 2,338,967 8.00

Tier 1 Leverage Capital

Valley 2,968,530 8.76 1,355,378 4.00 N/A N/A

Valley National Bank 3,152,070 9.31 1,354,693 4.00 1,693,366 5.00

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows:

September 30,

2020 December 31,

($ in thousands, except for share data)

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Book value per common share $ 10.71 $ 10.35

Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and facilitates comparisons with the performance of others in the financial services industry.

facilitates comparisons with the performance of others in the financial services industry.

This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S.

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

Our retention ratio was approximately 50.0 percent for the six months ended June 30, 2020 as compared to 49.4 percent for the year ended December 31, 2019 .

Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2020 and 2019 .

Our retention ratio was approximately 51.5 percent for the nine months ended September 30, 2020 as compared to 49.4 percent for the year ended December 31, 2019.

Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2020 and 2019.

The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis