VALLEY NATIONAL BANCORP 10-Q

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part 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. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A. The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “would,” “could,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, include, but are not limited to: • the impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients; 51 • 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; • damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters; • a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas; • higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; • the inability to grow customer deposits to keep pace with loan growth; • a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios; • the need to supplement debt or equity capital to maintain or exceed internal capital thresholds; • greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations; • the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy; • cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems; • results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; • our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; • unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; • unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and • 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 Part II, Item 1A of this report. 52 Critical Accounting Policies and Estimates We identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Determining the allowance for loan losses has historically been identified as a critical accounting estimate. On January 1, 2020, we adopted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans, unfunded credit commitments and held to maturity debt securities measured at amortized cost. Previously, an allowance for credit losses on loans was recognized based on probable incurred losses. See Notes 5, 7 and 8 to the consolidated financial statements for further discussion of our accounting policies and methodologies for establishing the allowance for credit losses. The accounting estimates relating to the allowance for credit losses remains a "critical accounting estimate" for the following reasons: • Changes in the provision for credit losses can materially affect our financial results; • Estimates relating to the allowance for credit losses require us to project future borrower performance, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; • The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, gross domestic product (GDP), inflation, energy prices and unemployment; and • Judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses. Our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Changes in such estimates could significantly impact our allowance and provision for credit losses. 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 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. New Authoritative Accounting Guidance See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. 53 Executive Summary Company Overview. 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. Of our current 236 branch network, 59 percent, 16 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions, including our acquisition of Oritani Financial Corp. (Oritani) on December 1, 2019. See Note 2 to the consolidated financial statements for more information regarding the Oritani acquisition. Impact of COVID-19. 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 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. 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. 54 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 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. Branch Transformation. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. Over one year ago, we established the foundation of what the transformation of our branch network would look like in coming years. At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline. 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 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. Quarterly Results. 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 $62.5 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 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 55 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 . 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 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. Deposits and Other Borrowings . Average non-interest bearing deposits; savings, NOW and money market deposits; 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. 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 September 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. 56 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. The following table presents our annualized performance ratios for the periods indicated: Three 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 % Return on average assets, as adjusted 1.01 1.00 0.95 0.96 Return on average shareholders’ equity 9.04 9.26 8.50 10.44 Return on average shareholders’ equity, as adjusted 9.20 9.40 8.59 9.10 Return on average tangible shareholders’ equity (ROATE) 13.30 13.75 12.61 15.65 ROATE, as adjusted 13.53 13.96 12.75 13.65 Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are presented below. 57 Adjusted net income is computed as follows: Three 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 Add: Loss on extinguishment of debt (net of tax) 1,691 — 1,691 — Add: Net impairment losses on securities (net of tax) — — — 2,078 Add: Losses on securities transactions (net of tax) 33 67 91 82 Add: Severance expense (net of tax) (1) — — — 3,433 Add: Tax credit investment impairment (net of tax) (2) — — — 1,757 Add: Merger related expenses (net of tax) (3) 76 1,043 1,275 1,068 Add: Income tax expense (4) — 133 — 12,456 Less: Gain on sale-leaseback transaction (net of tax) (5) — — — (55,707) Net income, as adjusted $ 104,174 $ 83,134 $ 288,300 $ 236,856 (1) Severance expense is included in salary and employee benefits expense. (2) Impairment is included in the amortization of tax credit investments. (3) Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other non-interest expenses. (4) Income tax expense related to reserves for uncertain tax positions. (5) The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income. Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 ($ in thousands) Net income, as adjusted $ 104,174 $ 83,134 $ 288,300 $ 236,856 Average assets $ 41,356,737 $ 33,419,137 $ 40,304,956 $ 32,811,565 Annualized return on average assets, as adjusted 1.01 % 1.00 % 0.95 % 0.96 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 ($ in thousands) Net income, as adjusted $ 104,174 $ 83,134 $ 288,300 $ 236,856 Average shareholders' equity $ 4,530,671 $ 3,536,528 $ 4,472,447 $ 3,471,432 Annualized return on average shareholders' equity, as adjusted 9.20 % 9.40 % 8.59 % 9.10 % 58 ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows: Three Months Ended September 30, Nine Months Ended September 30, 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 Average shareholders’ equity $ 4,530,671 $ 3,536,528 $ 4,472,447 $ 3,471,432 Less: 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 Annualized ROATE 13.30 % 13.75 % 12.61 % 15.65 % Annualized ROATE, as adjusted 13.53 % 13.96 % 12.75 % 13.65 % In addition to the items used to calculate net income, as adjusted, in the tables above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, bulk loan portfolio sales and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details. Net Interest Income Net interest income consists of interest income and dividends earned on interest earning assets, less interest expense on interest bearing liabilities, and represents the main source of income for Valley. 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 59 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 3.01 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 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. 60 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 Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2020 June 30, 2020 September 30, 2019 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 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 Total interest earning assets 37,767,710 338,376 3.58 37,778,387 349,506 3.70 30,494,569 330,383 4.33 Allowance for loan losses (309,382) (284,184) (157,176) Cash and due from banks 291,803 424,625 267,331 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 Interest bearing liabilities: Savings, NOW and money market deposits $ 14,542,470 $ 13,323 0.37 % $ 13,788,951 $ 16,627 0.48 % $ 11,065,959 $ 35,944 1.30 % Time deposits 8,027,346 19,028 0.95 8,585,782 29,857 1.39 7,383,202 42,848 2.32 Total interest bearing deposits 22,569,816 32,351 0.57 22,374,733 46,484 0.83 18,449,161 78,792 1.71 Short-term borrowings 1,533,246 2,588 0.68 2,317,992 1,980 0.34 2,265,528 12,953 2.29 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 Non-interest bearing deposits 8,820,877 8,463,230 6,387,188 Other liabilities 942,399 984,097 637,300 Shareholders’ equity 4,530,671 4,477,446 3,536,528 Total liabilities and shareholders’ equity $ 41,356,737 $ 41,503,514 $ 33,419,137 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) Net interest income, as reported $ 283,086 $ 282,559 $ 220,625 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) 3.01 % 3.00 % 2.91 % 61 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 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 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 Total interest earning assets 36,743,807 1,052,719 3.82 29,981,699 980,784 4.36 Allowance for loan losses (283,508) (155,643) 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 Interest bearing liabilities: Savings, NOW and money market deposits $ 13,834,930 $ 64,463 0.62 % $ 11,268,852 $ 110,247 1.30 % Time deposits 8,501,949 91,699 1.44 7,215,745 121,350 2.24 Total interest bearing deposits 22,336,879 156,162 0.93 18,484,597 231,597 1.67 Short-term borrowings 1,723,947 9,275 0.72 2,220,014 40,362 2.42 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 Non-interest bearing deposits 7,995,759 6,288,382 Other liabilities 902,012 539,637 Shareholders’ equity 4,472,447 3,471,432 Total liabilities and shareholders’ equity $ 40,304,956 $ 32,811,565 Net interest income/interest rate spread (5) $ 834,042 2.74 % $ 663,064 2.48 % Tax equivalent adjustment (3,058) (3,557) Net interest income, as reported $ 830,984 $ 659,507 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. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition. (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis. (6) Net interest income as a percentage of total average interest earning assets. 62 The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Change in Net Interest Income on a Tax Equivalent Basis Three Months Ended September 30, 2020 Compared to September 30, 2019 Nine Months Ended September 30, 2020 Compared to September 30, 2019 Change Due to Volume Change Due to Rate Total Change Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 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) Tax-exempt investments* (759) (18) (777) (2,443) (286) (2,729) Interest bearing deposits with banks 1,489 (2,755) (1,266) 4,178 (5,829) (1,651) Total increase (decrease) in interest income 66,400 (58,407) 7,993 191,700 (119,765) 71,935 Interest Expense: Savings, NOW and money market deposits 8,825 (31,446) (22,621) 21,120 (66,904) (45,784) Time deposits 3,454 (27,274) (23,820) 19,055 (48,706) (29,651) Short-term borrowings (3,259) (7,106) (10,365) (7,489) (23,598) (31,087) 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. 63 Non-Interest Income 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Trust and investment services $ 3,068 $ 3,296 $ 9,307 $ 9,296 Insurance commissions 1,816 2,748 5,426 7,922 Service charges on deposit accounts 3,952 5,904 13,189 17,634 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 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 $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 $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 $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 64 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 $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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in thousands) Salary and employee benefits expense $ 83,626 $ 77,271 $ 247,886 $ 236,559 Net occupancy and equipment expense 31,116 29,203 96,774 86,789 FDIC insurance assessment 4,847 5,098 14,858 16,150 Amortization of other intangible assets 6,377 4,694 18,528 13,175 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 $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 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 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. The 65 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 $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 $782 thousand for the nine months ended September 30, 2020 as compared to the same period in 2019. Efficiency Ratio The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, such as the loss on extinguishment of debt and merger expenses. 66 The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 ($ in thousands) Total non-interest expense $ 160,185 $ 145,877 $ 473,007 $ 435,409 Less: Loss on extinguishment of debt (pre-tax) 2,353 — 2,353 — Less: Severance expense (pre-tax) — — — 4,838 Less: Amortization of tax credit investments (pre-tax) 2,759 4,385 9,403 16,421 Less: 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 Net interest income $ 283,086 $ 220,625 $ 830,984 $ 659,507 Total non-interest income 49,272 41,150 135,499 176,426 Less: Gain on sale-leaseback transaction (pre-tax) — — — 78,505 Add: Losses on securities transactions, net (pre-tax) 46 93 127 114 Add: Net impairment losses on securities (pre-tax) — — — 2,928 Total net interest income and non-interest income $ 332,404 $ 261,868 $ 966,610 $ 760,470 Efficiency ratio 48.20 % 55.73 % 48.94 % 52.09 % Efficiency ratio, adjusted 46.62 % 53.48 % 47.53 % 54.27 % Income Taxes 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. U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies. Business Segments We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. 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 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 67 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. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The 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 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,126,157 $ 25,389,107 $ 5,252,446 $ — $ 37,767,710 Income (loss) before income taxes 34,565 121,351 1,066 (15,717) 141,265 Annualized return on average interest earning assets (before tax) 1.94 % 1.91 % 0.08 % N/A 1.50 % Three Months Ended September 30, 2019 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 6,858,216 $ 19,278,529 $ 4,357,824 $ — $ 30,494,569 Income (loss) before income taxes 18,300 91,629 6,781 (9,512) 107,198 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 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 $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. 68 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 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. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources. Commercial Lending The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial 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 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. 69 I nvestment Management The investment management segment generates a large portion of our income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and, depending on our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed rate investments are one of Valley’s least sensitive assets to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of our balance sheet. See the “Asset/Liability Management” section below for further analysis. 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 the loss on extinguishment of debt and merger expenses. 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 $1.7 million for the three months ended September 30, 2020 from the third quarter 2019. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. 70 The following tables present the financial data for each business segment for the nine months ended September 30, 2020 and 2019: Nine Months Ended September 30, 2020 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 7,187,839 $ 24,334,429 $ 5,221,538 $ — $ 36,743,806 Income (loss) before income taxes 80,367 326,713 16,426 (36,777) 386,729 Annualized return on average interest earning assets (before tax) 1.49 % 1.79 % 0.42 % N/A 1.40 % Nine Months Ended September 30, 2019 Consumer Lending Commercial Lending Investment Management Corporate and Other Adjustments Total ($ in thousands) Average interest earning assets $ 6,812,001 $ 18,839,194 $ 4,330,504 $ — $ 29,981,699 Income before income taxes 56,013 264,793 22,440 38,478 381,724 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 $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 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 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. 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 30 basis point decrease in loan yield was largely due to lower yielding new loan volumes. 71 Commercial Lending 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 $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 $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 $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 72 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 $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 Interest Rate Sensitivity Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities. We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 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 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 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. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet. 73 Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income. The following table reflects management’s expectations of the change in our net interest income over the next 12- month period in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below. Estimated Change in Future Net Interest Income Changes in Interest Rates Dollar Change Percentage Change (in basis points) ($ in thousands) +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. 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. Liquidity Bank Liquidity Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to the Investment Committee established by the Board of Directors and also to the Asset and Liability Committee. Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements. The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in 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 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. 74 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 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 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. On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $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 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 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 $337.4 million to $1.4 billion at September 30, 2020 as compared to December 31, 2019. The increase in short-term borrowings, mainly consisting of FHLB advances at September 30, 2020, was primarily driven by increase liquidity levels in response to the COVID-19 pandemic, as well as funding of PPP loan originations primarily in the second quarter 2020. 75 The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended September 30, 2020 and December 31, 2019: September 30, 2020 December 31, 2019 ($ in thousands) FHLB advances: Average balance outstanding $ 1,322,226 $ 1,681,844 Maximum outstanding at any month-end during the period 1,930,000 2,510,000 Balance outstanding at end of period 1,275,000 940,000 Weighted average interest rate during the period 0.37 % 1.88 % Weighted average interest rate at the end of the period 0.46 1.85 Corporation Liquidity Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures. These cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions. Valley's ability to maintain quarterly dividends to its preferred and common shareholders is heavily dependent on the ability of its principal subsidiary, the Bank, to pay dividends to Valley. However, we cannot accurately predict the extent of the economic decline due to COVID-19 or other factors that may result in inadequate earnings (primarily by the Bank), regulatory restrictions and limitations, changes in our capital requirements, or a decision to increase capital by retention of earnings, that may result in Valley's inability or determination by its Board not to pay dividends at current levels, or at all. Investment Securities Portfolios 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 September 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. Additionally, certain securities with limited marketability and/or restrictions, such as FHLB and FRB stocks, are carried at cost and are included in other assets. See Note 7 to the consolidated financial statements for additional information. 76 Allowance for Credit Losses and Impairment Analysis Effective January 1, 2020, Valley adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires an estimate of lifetime expected credit losses for held to maturity debt securities established as an allowance for credit losses and replaces the other-than-temporarily impaired model for available for sale debt securities. Available for sale debt securities. The new guidance in ASC Topic 326-30 requires credit losses to be presented as an allowance, rather than as a write-down if management does not intend to sell an available for sale debt security before recovery of its amortized cost basis. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 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. As discussed in Note 7 to the consolidated financial statements, Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including, U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. 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. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. 77 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 Amortized Cost Gross Unrealized Gains Gross Unrealized 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 * Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. The 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 $36.0 million. See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities. 78 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 ($ in thousands) Loans Commercial and industrial $ 6,903,345 $ 6,884,689 $ 4,998,731 $ 4,825,997 $ 4,695,608 Commercial real estate: 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 Consumer: 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 Total consumer loans 2,691,284 2,731,546 2,833,072 2,852,341 2,835,176 Total loans * $ 32,415,586 $ 32,314,611 $ 30,428,067 $ 29,699,208 $ 26,567,159 As a percent of total loans: Commercial and industrial 21.3 % 21.3 % 16.5 % 16.2 % 17.7 % Commercial real estate 57.2 56.6 59.5 59.5 56.1 Residential mortgage 13.2 13.6 14.6 14.7 15.5 Consumer loans 8.3 8.5 9.4 9.6 10.7 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. 79 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. economy. 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. 80 Non-performing Assets Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded those loans which were classified as purchased credit impaired (PCI) loans. Under previous U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and were not subject to delinquency classification in the same manner as loans originated by Valley. Under the CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at September 30, 2020, 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 September 30, 2020. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell. Our 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 $19.5 million decrease in non-accrual loans in the third quarter 2020. Non-performing assets as a percentage of total loans and non-performing assets totaled 0.62 percent and 0.69 percent at September 30, 2020 and June 30, 2020, respectively (as shown in the table below). For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the uncertain economic recovery from the pandemic recession, lack of additional federal stimulus and a number of our borrowers that are performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at September 30, 2020. 81 The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 ($ in thousands) Accruing past due loans: * 30 to 59 days past due: Commercial and industrial $ 6,587 $ 6,206 $ 9,780 $ 11,700 $ 5,702 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 Total Consumer 8,979 12,962 19,508 13,704 13,079 Total 30 to 59 days past due 64,274 68,343 117,036 46,593 64,100 60 to 89 days past due: Commercial and industrial 3,954 4,178 7,624 2,227 3,158 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 Total Consumer 1,352 3,786 2,309 2,527 1,577 Total 60 to 89 days past due 9,676 13,676 35,252 14,315 17,016 90 or more days past due: Commercial and industrial 6,759 5,220 4,049 3,986 4,133 Commercial real estate 1,538 — 161 579 1,125 Residential mortgage 891 3,812 1,798 2,042 1,347 Total Consumer 753 2,082 1,092 711 756 Total 90 or more days past due 9,941 11,114 7,100 7,318 7,361 Total accruing past due loans $ 83,891 $ 93,133 $ 159,388 $ 68,226 $ 88,477 Non-accrual loans: * Commercial and industrial $ 115,667 $ 130,876 $ 132,622 $ 68,636 $ 75,311 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 Total Consumer 7,441 6,947 4,095 2,204 2,050 Total non-accrual loans 191,109 210,585 205,930 93,058 101,049 Other real estate owned (OREO) 7,746 8,283 10,198 9,414 6,415 Other repossessed assets 3,988 3,920 3,842 1,276 2,568 Non-accrual debt securities 783 1,365 531 680 680 Total non-performing assets (NPAs) $ 203,626 $ 224,153 $ 220,501 $ 104,428 $ 110,712 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 % Total NPAs as a % of loans and NPAs 0.62 0.69 0.72 0.35 0.41 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 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. 82 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 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, 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 $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. 83 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. 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 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 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 The allowance for credit losses for loans consists of the allowance for loan losses and the reserve for unfunded credit commitments. Effective January 1, 2020, we adopted the new CECL standard, which is based on lifetime expected credit losses rather than incurred losses. At adoption, Valley recorded a $99.6 million increase to its allowance for credit losses for loans, including reserves of $61.6 million related to PCD loans. See Note 5 to the consolidated financial statements for further details on the Day 1 CECL adoption. Our methodology to establish the allowance for loan losses has two basic components: (1) a collective (pooled) reserve component for estimated expected credit losses for pools of loans that share similar risk characteristics and (2) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit. In estimating the component of the allowance on a collective basis we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses incurred. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) 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. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. For the third quarter 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 84 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 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; and • 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. 85 The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated. Three Months Ended Nine Months Ended September 30, 2020 June 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 ($ in thousands) Average loans outstanding $ 32,515,264 $ 32,041,200 $ 26,136,745 $ 31,522,268 $ 25,651,195 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 Loans charged-off: (2) Commercial and industrial (13,965) (14,024) (527) (31,349) (7,882) Commercial real estate (695) (27) (158) (766) (158) Residential mortgage (7) (5) (111) (348) (126) Total Consumer (2,458) (2,601) (2,191) (7,624) (5,971) Total charge-offs (17,125) (16,657) (2,987) (40,087) (14,137) Charged-off loans recovered: Commercial and industrial 428 799 330 1,796 2,008 Commercial real estate 60 31 28 164 71 Construction 40 20 — 80 — Residential mortgage 31 545 3 626 13 Total Consumer 1,151 509 617 2,454 1,720 Total recoveries 1,710 1,904 978 5,120 3,812 Net charge-offs (15,415) (14,753) (2,009) (34,967) (10,325) Provision charged for credit losses 31,020 41,115 8,700 106,059 18,800 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: Allowance for loan losses $ 325,032 $ 309,614 $ 161,853 $ 325,032 $ 161,853 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 Components of provision for credit losses for loans: Provision for credit losses for loans $ 30,833 $ 41,025 $ 8,757 $ 105,709 $ 20,319 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. (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 . 86 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 $3.2 million for the second quarter 2020. There were no taxi medallion loan charge-offs during the third quarter 2019. The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio. The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: September 30, 2020 June 30, 2020 September 30, 2019 Allowance Allocation * Allocation as a % of Loan Category Allowance Allocation* Allocation as a % of Loan Category Allowance Allocation* Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and Industrial loans $ 130,409 1.89 % $ 132,039 1.92 % $ 101,002 2.15 % Commercial real estate loans: 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 % Residential mortgage loans 28,614 0.67 % 29,630 0.67 % 5,302 0.13 % 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 % Total consumer loans 21,359 0.79 % 16,243 0.59 % 6,778 0.24 % Total allowance for loan losses 325,032 1.00 % 309,614 0.96 % 161,853 0.61 % 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 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 87 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 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. Valley and Valley National Bank are subject to the regulatory capital requirements administered by the FRB and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations. We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of September 30, 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 $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for the nine months ended September 30, 2020 will be phased in over the same time frame. 88 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2020 and December 31, 2019: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of 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 As of December 31, 2019 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, 2019 ($ in thousands, except for share data) Common shares outstanding 403,878,744 403,278,390 Shareholders’ equity $ 4,533,763 $ 4,384,188 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 1,449,282 1,460,397 Tangible common shareholders’ equity $ 2,874,790 $ 2,714,100 Tangible book value per common share $ 7.12 $ 6.73 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 89 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. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies. Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common stockholders) per common share. 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. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend. However, the FRB recently reiterated its long-standing guidance that banking organizations should consult them before declaring dividends in excess of earnings for the corresponding quarter. The renewed guidance was largely due to the increased risk of the COVID-19 pandemic negatively impacting the future level of bank earnings. See the risk factors at Part II, Item 1A of this report for additional information. Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 in the MD&A section - “Contractual Obligations and Off-Balance Sheet Arrangements” and Notes 12 and 13 to the consolidated financial statements included in this report. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 73 for a discussion of interest rate sensitivity.