What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 379 added, 352 removed, 707 unchanged (51% of the section changed)

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Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, 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:

• failure to obtain shareholder or regulatory approval for the acquisition of Bank Leumi USA (Bank Leumi) on the anticipated terms and within the anticipated timeframe;

• the inability to realize expected cost savings and synergies from the Westchester and Bank Leumi acquisitions in amounts or in the timeframe anticipated;

• costs or difficulties relating to Westchester and Bank Leumi integration matters might be greater than expected;

• the inability to retain customers and qualified employees of the Westchester and Bank Leumi;

• changes in estimates of non-recurring charges related to Westchester and Bank Leumi acquisitions;

• the continued impact of COVID-19 on the U.S.

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• the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases 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;

• the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies;

• failure to obtain shareholder or regulatory approval for the acquisition of The Westchester Bank Holding Corporation (Westchester) on the anticipated terms and within the anticipated timeframe;

• the inability to realize expected cost savings and synergies from the Westchester acquisition in amounts or in the timeframe anticipated;

• costs or difficulties relating to Westchester integration matters might be greater than expected;

• the inability to retain customers and qualified employees of Westchester;

• 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;

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• 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.

• 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, 2020 and Item 1A of this Quarterly Report.

Critical Accounting Policies and Estimates

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

At June 30, 2021, 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.

At September 30, 2021, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors.

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Company Overview.

At June 30, 2021, Valley had consolidated total assets of approximately $41.3 billion, total net loans of $32.1 billion, total deposits of $33.2 billion and total shareholders’ equity of $4.7 billion.

At September 30, 2021, Valley had consolidated total assets of approximately $41.3 billion, total net loans of $32.3 billion, total deposits of $33.6 billion and total shareholders’ equity of $4.8 billion.

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

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On June 29, 2021, Valley announced that it will acquire The Westchester Bank Holding Corporation (“Westchester”) and its principal subsidiary, The Westchester Bank which is headquartered in White Plains, New York.

Westchester has approximately $1.3 billion in assets, $908 million in loans, $1.1 billion in deposits, and maintains a seven branch network that will provide Valley with a physical footprint and additional commercial lending expertise in the demographically attractive Westchester County, New York market.

The acquisition is expected to close in the fourth quarter 2021, subject to standard regulatory approvals, approval of Westchester stockholders, as well as other customary conditions.

See Note 1 to the consolidated financial statements for additional information.

As of June 30, 2021 , Westchester had total assets of $1.3 billion, total loans of $908 million, and total deposits of $1.1 billion.

Westchester maintains a seven branch network in Westchester County, New York.

The common shareholders of Westchester will receive 229.645 shares of Valley

common stock for each Westchester share they own.

Based on Valley’s closing stock price on June 28, 2021, Westchester’s stockholders will receive approximately $210 million in Valley common stock.

Existing Westchester options will be cashed out for approximately $10 million in cash.

The acquisition is anticipated to close on December 1, 2021, pending the satisfaction of customary closing conditions .

Bank Leumi Le-Israel Corporation Merger.

On September 23, 2021, Valley announced a merger with Bank Leumi Le-Israel Corporation (Leumi) whereby Valley will acquire Leumi, the U.S.

subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA (Bank Leumi).

The merger will enable Valley to greatly expand its commercial banking and venture capital banking businesses, as well as help Valley increase its revenue diversity and expand into new geographies.

Bank Leumi has its headquarters in New York City and also operates commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Fl.

As of June 30, 2021, Bank Leumi had total assets of $8.4 billion, total deposits of $7.1 billion, and gross loans of $5.4 billion.

The acquisition is expected to close in the first half of 2022, subject to standard regulatory approvals, approval of Valley shareholders, as well as other customary closing conditions.

Dudley Venture s Acquisition .

On October 8, 2021, Valley acquired Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits.

The transaction includes the acquisition of DV's community development entity, DV Community Investment, as well as DV Fund Advisors and DV Advisory Services.

The transaction price included $11.3 million of cash at the closing date, fixed future stock consideration totaling $3.8 million, and contingent cash earn-out payments based upon revenue growth of the acquired entities over a five-year period.

The acquisition of Dudley Ventures is expected to support our efforts to build differentiated sources of non-interest income.

Impact of COVID-19.

Broad based public vaccination rollouts, government stimulus, continued business re-openings and increased consumer activity (as social restrictions have eased) led to a sharp rebound in economic activity during the second quarter 2021.

However, there are substantial variations in the pace of recovery across and within corporate sectors, and certain industries remain vulnerable to a loss of the economic momentum due to labor shortages and other factors.

In addition, the potential rise of Delta variant cases may threaten to undermine the economic recovery.

Economic activity and businesses continued to rebound in the third quarter 2021.

However, the U.S.

is experiencing significant global supply chain disruptions and labor shortages which have also increased inflation.

W e continue to monitor the impact of COVID-19 closely, including its impact on our employees, customers, communities and results of operations and other government stimulus or Federal Reserve actions.

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

We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant and will follow proper protocols designed to ensure safety of our employees and customers.

See the "Operating Environment" section of MD&A for more details.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program.

Valley extended a total of $3.2 billion PPP loans under the program, of which $1.8 billion of these loans have received forgiveness from the SBA, including $1.0 billion during the second quarter 2021.

As of June 30, 2021, we had approximately $1.4 billion of PPP loans still outstanding.

Valley extended a total of $3.2 billion PPP loans under the program, of which $2.3 billion of these loans have received forgiveness from the SBA, including $476.7 million during the third quarter 2021 .

As of September 30, 2021 , we had $874.0 million of PPP loans still outstanding.

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.

As of June 30, 2021 , Vall ey had $142 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.4 percent of our total loan portfolio at June 30, 2021 as compared to $361 million, or 1.1 percent of total loans at December 31, 2020.

We continue to monitor the impact of COVID-19 closely, including its impact on our employees, customers, communities and results of operations, as well as any effects that may result from the CARES Act, Appropriations 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 second half of 2021 and beyond is highly uncertain.

See the "Operating Environment" section of MD&A for more details.

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

The majority of our non-customer facing employees have returned to our offices in July 2021 with flexible hybrid work schedules.

We continue to follow proper protocols designed to ensure safety of our employees and customers.

As of September 30, 2021 , Vall ey had $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.3 percent of our total loan portfolio at September 30, 2021 as compared to $361 million, or 1.1 percent of total loans at December 31, 2020.

Quarterly Results.

Net income for the second quarter 2021 was $120.5 million, or $0.29 per diluted common share, compared to $95.6 million, or $0.23 per diluted common share, for the second quarter 2020.

Net income for the third quarter 2021 was $122.6 million, or $0.29 per diluted common share, compared to $102.4 million, or $0.25 per diluted common share, for the third quarter 2020.

The $20.2 million increase in quarterly net income as compared to the same quarter one year ago was largely due to:

• an $18.3 million increase in net interest income mainly due to (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) continued run-off of higher cost time deposits, (iii) the prepayment of $534 million of long-term FHLB advances with a combined weighted average interest rate of 2.48 percent in December 2020, and (iv) interest and fee income from PPP loans and other organic loan growth;

• a $32.4 million decrease in our provision for credit losses mainly due to the improved economic forecast component of the reserve as compared to June 30, 2020,

• a $17.9 million increase in net interest income mainly due to (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) run-off of higher cost time deposits, (iii) lower average other borrowings and related costs driven by normal maturities of FHLB

advances and long-term repos, as well as our prepayments of $534 million and $248 million of long-term FHLB borrowings in December 2020 and June 2021, respectively;

• a $27.4 million decrease in our provision for credit losses mainly due to the improved economic forecast component of the reserve as compared to September 30, 2020,

partially offset by:

• a $1.7 million decrease in non-interest income due to the combination of lower commercial loan customer swap fees and BOLI income, partially offset by moderate increases in other fee categories;

• a $14.7 million increase in non-interest expense due to higher salary and employee benefits expenses and an $8.4 million loss on the early extinguishment of debt in June 2021;

• a $9.4 million increase in income tax expense mainly due to the increase in income before income taxes.

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our second quarter 2021 results.

• a $6.8 million decrease in non-interest income mainly due to the combination of lower gains on sales of residential mortgage loans and lower fee income related to derivative interest rate swaps executed with commercial lending customers, partially offset by moderate increases in other fee categories;

• a $14.7 million increase in non-interest expense primarily due to higher salary and employee benefits expenses, and increased professional and legal fees, including an accrual of $2.1 million for general litigation reserves, partially offset by a $2.4 million decrease in the loss on the early extinguishment as compared to the third quarter 2020;

• a $3.5 million increase in income tax expense mainly due to higher income before income taxes.

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 2021 results.

Operating Environment.

Duri ng the second quarter 2021, real gross domestic product expan ded 6.5 percent as compared to 6.3 percent growth in the first quarter of the year.

The acceleration in growth was driven primarily by personal consumption, particularly for services.

Residential investment was lower and inventory restocking continued to drag on overall activity, driven in part by supply chain constraints.

Although economic activity has rebounded from the sharp recession in the first half of 2020, the pace of growth is likely to moderate through the remainder of 2021.

The Federal Reserve continued to maintain its stance on monetary policy.

At the July meeting, the Federal Open Market Committee maintained the target range for the federal funds rate between zero and 0.25 percent.

Additionally, the Committee maintained several programs, including purchasing Treasury and mortgage-backed securities to support the flow of credit to households and businesses in order to promote its maximum employment and price stability goals.

During the third quarter 2021, real gross domestic product expanded 0.5 percent, compared to 6.7 percent growth in the second quarter 2021.

The deceleration in growth was driven by personal consumption and business fixed investment as inflation remained elevated, partly offset by inventory restocking and government spending.

The Federal Reserve continued to maintain an accommodative stance on monetary policy to keep interest rates low and promote liquidity.

At their meeting in September 2021, the Federal Open Market Committee (the "Committee") maintained the target range for the federal funds rate between 0.00 and 0.25 percent.

Additionally, the Committee decided to maintain several programs, including purchasing U.S.

Treasury and mortgage backed securities to support the flow of credit to households and businesses in order to promote its maximum employment and price stability goals.

Notwithstanding this, the Committee indicated that a moderation in the pace of asset purchases may soon be warranted.

The 10-year U.S.

Treasury note yield ended the second quarter at 1.45 percent, 29 basis points lower as compared with March 31, 2021.

Treasury note yield ended the third quarter at 1.52 percent, 7 basis points higher, as compared with June 30, 2021.

The spread between the 2- and 10-year U.S.

Treasury note yields ended the second quarter 2021 at 1.20 percent, 38 basis points narrower as compared to the end of the first quarter 2021 and 70 basis points wider as compared to June 30, 2020.

For all commercial banks in the U.S., loans and leases increased approximately 0.1 percent in the second quarter 2021 as compared to the previous quarter.

For the industry, the trend for loans secured by multifamily residential structures persisted and banks continued to relax lending standards which drove demand to its highest level in over a year.

However, the picture for other types of commercial lending remained mixed.

During the quarter, lending standards in the industry were relaxed for these products, but this did not influence increased demand.

In the second quarter 2021, Valley's originations increased from commercial real estate loans, residential mortgage and automobile lending.

We witnessed stronger origination pipeline for commercial real estate loans across our market areas.

However, should loan demand weaken or the expected recovery from the COVID-19 pandemic in Valley's primary markets be prolonged, our business operations and results could be adversely impacted, as highlighted elsewhere in this MD&A.

Total loans decreased $229.0 million to $32.5 billion at June 30, 2021 from March 31, 2021 due to a $1.0 billion decrease in PPP loans within the commercial and industrial loan category.

Offsetting this impact, our non-PPP loan portfolio increased $785.0 million, or 10.4 percent on an annualized basis, to $31.1 billion at June 30, 2021 from $30.3 billion at March 31, 2021.

The increase in non-PPP loans was largely driven by increases of $588.5 million, $166.5 million and $86.4 million in the commercial real estate, residential mortgage and auto loan categories, respectively.

Additionally, our second quarter 2021 new and refinanced loan originations included approximately $254 million of residential mortgage loans originated for sale.

Net gains on sales of residential loans were $10.1 million and $3.5 million in the second quarter 2021 and first quarter 2021, respectively.

Treasury note yields ended the third quarter 2021 at 1.24 percent, 4 basis points higher, as compared to the end of the second quarter 2021 and 68 basis points higher, as compared to June 30, 2020.

For all commercial banks in the U.S., loans and leases increased approximately 0.9 percent in the third quarter 2021, as compared to the previous quarter.

For the industry, banks reported more relaxed credit standards for most loan types.

Additionally, banks reported that demand had firmed or increased during the third quarter which finally translated into stronger loan growth.

In the third quarter 2021, Valley continued to see strong organic growth demand for commercial real estate loans and several other loan types across its geographic footprint.

Inflation has been elevated, which could adversely impact companies if they cannot pass along higher input costs to their customers.

Should inflation pressures persist, this dynamic, among other external factors, could challenge our business operations as highlighted throughout the remaining MD&A discussion below.

Total loans increased $149.4 million to $32.6 billion at September 30, 2021 from June 30, 2021 in spite of a $476.7 million decrease in PPP loans within the commercial and industrial loan category.

Our non-PPP loan portfolio increased $626.0 million, or 8.0 percent on an annualized basis, to $31.7 billion at September 30, 2021 from $31.1 billion at June 30, 2021.

The increase in non-PPP loans was largely driven by increases of $399.9 million, $51.7 million and $105.4 million in the commercial real estate, construction and residential mortgage categories, respectively.

Additionally, our third quarter 2021 new and refinanced loan originations included

approximately $233 million of residential mortgage loans originated for sale.

Net gains on sales of residential loans were $6.4 million and $10.1 million in the third quarter 2021 and second quarter 2021, 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), and other repossessed assets increased $16.1 million to $226.6 million at June 30, 2021 as compared to

March 31, 2021.

Non-accrual loans increased $16.0 million to $220.0 million at June 30, 2021 as compared to March 31, 2021 mainly due to a $17.6 million increase in non-accrual construction loans almost entirely related to one borrower relationship with $3.0 million of related allowance reserves as of June 30, 2021.

Non-accrual loans represented 0.68 percent of total loans at June 30, 2021, as compared to 0.62 percent at March 31, 2021.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) increased $27.5 million to $80.2 million, or 0.25 percent of total loans, at June 30, 2021 as compared to $52.8 million, or 0.16 percent of total loans, at March 31, 2021 driven by a $36.8 million increase in the commercial real estate loan delinquencies, partially offset by an improvement in the early stage delinquencies in the residential mortgage loan category.

Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), and other repossessed assets increased $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021.

Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to June 30, 2021 mainly due to the $33.1 million increase in non-accrual commercial real estate loans from three loan relationships which have $3.7 million of related allowance reserves as of September 30, 2021.

Non-accrual loans represented 0.77 percent of total loans at September 30, 2021, as compared to 0.68 percent at June 30, 2021.

Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $25.0 million to $55.2 million, or 0.17 percent of total loans, at September 30, 2021 as compared to $80.2 million, or 0.25 percent of total loans, at June 30, 2021.

The decrease was driven by the transition of the aforementioned three commercial real estate loan delinquencies from accruing past due loans to non-accrual loan status.

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

Deposits and Other Borrowings .

Overall, average deposits increased by $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021 due to continued growth in both commercial and retail customer balances.

Av erage non-interest bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 32 percent, 54 percent and 14 percent of total deposits as of June 30, 2021, respectively.

Overall, average deposits increased by $887.9 million to $32.7 billion for the second quarter 2021 as compared to the first quarter 2021.

Our mix of the deposit categories within total average deposits for the second quarter 2021 as compared to the first quarter 2021 experienced a continued shift of maturing time deposits and a consumer preference to non-maturity deposit accounts due to the low level of interest rates.

Actual ending balances for deposits increased $609.6 million to approximately $33.2 billion at June 30, 2021 from March 31, 2021 largely due to increases of $1.3 billion and $475.9 million in the non-maturity interest bearing deposit and non-interest bearing deposit categories, respectively, partially offset by a $1.1 billion decrease in time deposits.

The decrease in time deposits was driven by normal run-off of maturing retail and brokered CDs with some continued migration of retail balances to more liquid deposit product categories.

Total brokered deposits (consisting of both time and money market deposit accounts) decreased approximately $321 million to $2.0 billion at June 30, 2021 as compared to $2.3 billion at March 31, 2021.

and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 2021, respectively.

Our mix of average deposits for the third quarter 2021 also continued to shift away from time deposits into the non-maturity deposit categories as compared to the second quarter 2021, as some funding from maturing retail CDs migrate to the more liquid deposit products and normal growth in such categories.

Actual ending balances for deposits increased $437.8 million to approximately $33.6 billion at September 30, 2021 from June 30, 2021 largely due to increases of $524.8 million and $260.3 million in the non-maturity interest bearing deposit and non-interest bearing deposit categories, respectively, partially offset by a $347.3 million decrease in time deposits.

The decrease of $347.3 million in time deposits was driven by normal run-off of maturing retail CDs with the aforementioned migration of some retail balances to more liquid, lower cost deposit product categories.

Total brokered deposits (within money market deposit accounts) decreased approximately $315 million to $1.7 billion at September 30, 2021 as compared to $2.0 billion at June 30, 2021, as our funding profile has benefited from the surge in commercial and retail deposit balances.

Non-interest bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 32 percent, 55 percent and 13 percent of total deposits as of June 30, 2021, respectively.

While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2021.

Average short-term borrowings decreased $294.7 million to $873.9 million for the second quarter 2021 as compared to the first quarter 2021 due to debt maturities funded with excess cash liquidity from increased deposits.

Actual ending balances for short-term borrowings decreased by $230.3 million to $854.4 million at June 30, 2021 as compared to March 31, 2021 due to repayments of FHLB borrowings.

Long-term borrowings decreased by $357.2 million to $1.9 billion at June 30, 2021 as compared to March 31, 2021 mainly due to the combination the prepayment of approximately $248 million of long-term FHLB advances in June 2021, the aforementioned redemption of $60 million in subordinated notes and other normal repayments of maturing FHLB advances, partially offset by the issuance of $300 million of 3.00 percent subordinated notes.

and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 2021, respectively.

Average short-term borrowings decreased $13.5 million to $860.5 million for the third quarter 2021 as compared to the second quarter 2021 due to normal debt maturities funded with excess cash liquidity.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased by $605.0 million to $1.6 billion for the third quarter 2021 as compared to the second quarter 2021 largely due to combination of (i) the $248 million of FHLB advances which were prepaid in late June 2021, (ii) repayments upon maturities of FHLB advances and (iii) $300 million of long-term repurchase agreements which matured during the third quarter 2021, with these decreases partially offset by (iv) the $300 million subordinated notes issued in late May 2021 which were outstanding for the full quarter in third quarter 2021.

Actual ending balances for short-term borrowings decreased by $71.0 million to $783.3 million at September 30, 2021 as compared to June 30, 2021 largely due to repayments of FHLB advances.

Long-term borrowings decreased by $458.2 million to $1.4 billion at September 30, 2021 as compared to June 30, 2021 mainly due to the maturity of $300 million of long-term repurchase agreements and $158 million of FHLB advances which were repaid with excess liquidity during the third quarter 2021.

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

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Loss on extinguishment of debt (net of tax) — 1,691 6,024 1,691

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

(Gains) losses on available for sale and held to maturity securities transactions (net of tax) (a)

(565) 33 (399) 91

Merger related expenses (net of tax) (b)

1,207 76 1,207 1,275

Litigation reserves (net of tax) (b)

1,505 — 1,505 —

Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300

(a) Included in gains on securities transactions, net within other non-interest income.

(b) Merger related expenses are primarily within professional and legal fees, and other non-interest expense.

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

(b) Included in professional and legal fees.

In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions.

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Annualized ROATE, as adjusted 14.90 % 13.53 % 14.97 % 12.75 %

Valley Net Interest Income

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 $301.8 million for the second quarter 2021 increased $8.2 million and $18.2 million as compared to the first quarter 2021 and second quarter 2020, respectively.

The increase as compared to the first quarter 2021 was mainly due to (i) continued run-off of higher cost time deposits and some account balance migration to lower cost deposits without stated maturities, (ii) repayment of FHLB advances upon their maturity, (iii) the redemption of $60 million of callable 6.25 percent subordinated notes on April 1, 2021 and (iv) a slightly higher yield on the PPP loan portfolio due to the accelerated recognition of unearned loan fees for loans forgiven during the second quarter 2021.

Interest expense of $32.7 million for the second quarter 2021 decreased $6.4 million as compared to the first quarter 2021 as we continue to reduce our cost of funding in the low rate environment.

Interest income on a tax equivalent basis in the second quarter 2021 increased by $1.8 million to $334.5 million as compared to the first quarter 2021 mainly due to moderately higher earned fees on our loan

portfolio driven by the accelerated recognition of unearned PPP loan fees, partially offset by lower yields on our investment securities portfolio.

Average interest earning assets increased $129.0 million to $37.9 billion for the second quarter 2021 as compared to the second quarter 2020 primarily due to organic loan growth, including PPP loans, over the 12-month period, partially offset by principal repayments on residential mortgage-backed securities and lower overall reinvestment in our investment securities portfolio.

As compared to the first quarter 2021, average interest earning assets increased by $521.2 million from $37.4 billion, mostly driven by higher levels of excess liquidity held in overnight investments with banks caused by the surge in customer deposit balances and fluctuations in timing of loan and investment funding.

Average interest bearing liabilities decreased $2.0 billion to $25.5 billion for the second quarter 2021 as compared to the second quarter 2020 primarily due to the repayments of overnight and other short-term borrowings, repayments of long-term FHLB advances and the redemption of $60 million in callable subordinated debt.

As compared to the first quarter 2021, average interest bearing liabilities decreased by $484.7 million in the second quarter 2021 mainly due to the continued repayments of short-term and long-term borrowings and redemption of $60 million in subordinated debt, partially offset by the surge in customer deposits, as well as some growth in relatively new deposit initiatives, including our marijuana related business (MRB) with a few large state licensed customers in our primary markets.

Total average deposits increased $887.9 million to $32.7 billion for the second quarter 2021 as compared to the first quarter 2021.

Net interest income on a tax equivalent basis totaling $301.7 million for the third quarter 2021 decreased $43 thousand as compared to the second quarter 2021 and increased $17.6 million from the third quarter 2020.

Interest expense of $27.8 million for the third quarter 2021 decreased $5.0 million as compared to the second quarter 2021 as we continue to reduce our cost of funding from both deposits and our repayment of other borrowings, primarily FHLB advances.

Interest income on a tax equivalent basis in the third quarter 2021 decreased by $5.0 million to $329.5 million as compared to the second quarter 2021 largely due to a $9.4 million decline in PPP loan related interest and fees caused by lower levels of loan forgiveness (prepayments) in the third quarter 2021 and lower yields on non-PPP new and renewed loans.

Average interest earning assets increased $565.2 million to $38.3 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to higher levels of excess liquidity held in overnight investments with banks caused by the surge in customer deposit balances and fluctuations in the timing of loan and investment funding.

As compared to the second quarter 2021, average interest earning assets increased by $425.5 million from $37.9 billion, mostly driven by higher levels of excess overnight liquidity and purchases of new taxable investments, partially offset by principal repayments in both the taxable and non-taxable investment portfolios.

Average interest bearing liabilities decreased $1.7 billion to $25.4 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to the repayment of borrowings with excess cash liquidity over the last 12-month period.

As compared to the second quarter 2021, average interest bearing liabilities decreased by $115.4 million in the third quarter 2021 mainly due to repayments of short-term and long-term borrowings, which were largely offset by the surge in both commercial and retail customer deposits.

Total average deposits increased $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021.

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

Our net interest margin on a tax equivalent basis of 3.18 percent for the second quarter 2021 increased by 4 basis points and 18 basis points from 3.14 percent and 3.00 percent for the first quarter 2021 and second quarter 2020, respectively.

The yield on average interest earning assets decreased by 3 basis points on a linked quarter basis, mostly due to the lower yield on our investment securities portfolio, a higher mix of excess cash liquidity held in low yielding overnight investments, partially offset by the positive impact of one more day during the second quarter 2021 as compared to first quarter 2021.

The yield on average loans increased by 2 basis points to 3.87 percent for the second quarter 2021 as compared to the first quarter 2021 partially due to the accelerated recognition of unearned PPP loan fees during the second quarter 2021.

The overall cost of average interest bearing liabilities decreased 9 basis points to 0.51 percent for the second quarter 2021 as compared to the linked first quarter 2021 and was largely due to continued runoff of time deposits and the customer shift to lower cost deposits without stated maturities.

Additionally, the net interest margin benefited from a 7 basis point decrease in the average cost of short-term borrowings driven by our greater reliance on funding from deposits and the repayment of FHLB advances during the second quarter 2021.

Our cost of total average deposits was 0.21 percent for the second quarter 2021 as compared to 0.28 percent for the first quarter 2021.

Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the second half of 2021 and beyond due to the low level of market rates and the potential negative impact on the overall yield on new and refinanced loan originations.

However, we are also encouraged by the continued potential opportunity to repay or reprice stated maturity deposits and borrowings maturing at low costs during the remainder of 2021.

The following table reflects the components of net interest income for the three months ended June 30, 2021, March 31, 2021 and June 30, 2020:

Our net interest margin on a tax equivalent basis of 3.15 percent for the third quarter 2021 decreased by 3 basis points and increased by 14 basis points from 3.18 percent and 3.01 percent for the second quarter 2021 and third quarter 2020, respectively.

The yield on average interest earning assets decreased by 9 basis points on a linked quarter basis mostly due to the lower yield on new and renewed loans, partially offset by one additional day in the third quarter 2021 as compared to the second quarter 2021.

The yield on average loans decreased by 8 basis points to 3.79 percent for the third quarter 2021 as compared to the second quarter 2021.

The overall cost of average interest bearing liabilities decreased 7 basis points to 0.44 percent for the third quarter 2021 as compared to the second quarter 2021.

The decrease was mainly due to:

(i) the continued run-off of maturing higher cost time deposits, (ii) repayment of maturing FHLB advances and other borrowings during the third quarter 2021, (iii) the prepayment of $248 million of long-term FHLB advances in June 2021 and (iv) the overall lower cost of deposits.

Our cost of total average deposits was 0.18 percent for the third quarter 2021 as compared to 0.21 percent for the second quarter 2021.

Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the fourth quarter 2021 and beyond due to the low level of market rates and the potential negative impact on the overall yield on new and refinanced loan originations.

However, we are also encouraged by the continued potential opportunity to selectively redeploy low yielding excess cash liquidity into new loans and investments during the fourth quarter 2021, as well as repay or reprice (at low costs) stated maturity deposits totaling approximately $3.3 billion with an average cost of 31 basis points scheduled to mature over the next 12-month period.

The following table reflects the components of net interest income for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020:

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

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Three Months Ended

June 30, 2021 March 31, 2021 June 30, 2020

September 30, 2021 June 30, 2021 September 30, 2020

Balance Interest Average

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3.15 % 3.18 % 3.01 %

The following table reflects the components of net interest income for the six months ended June 30, 2021 and 2020:

Six Months Ended

June 30, 2021 June 30, 2020

The following table reflects the components of net interest income for the nine months ended September 30, 2021 and 2020:

Nine Months Ended

September 30, 2021 September 30, 2020

Balance Interest Average

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Other assets 3,290,439 3,492,846

Unrealized gains (losses) on securities available for sale, net 38,486 26,245

Unrealized gains on securities available for sale, net 35,490 33,441

Total assets $ 41,144,375 $ 40,304,956

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Change in Net Interest Income on a Tax Equivalent Basis

Three Months Ended June 30, 2021

Compared to June 30, 2020 Six Months Ended June 30, 2021 Compared to June 30, 2020

Three Months Ended September 30, 2021

Compared to September 30, 2020 Nine Months Ended September 30, 2021 Compared to September 30, 2020

Volume Change

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Total decrease in interest expense (14,318) (12,164) (26,482) (34,978) (84,052) (119,030)

Total increase (decrease) in net interest income $ 14,643 $ 3,604 $ 18,247 $ 46,614 $ (1,166) $ 45,448

Total increase in net interest income $ 15,116 $ 2,509 $ 17,625 $ 61,511 $ 1,562 $ 63,073

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

Non-Interest Income

Non-interest income decreased $1.7 million and $11.9 million for the three and six months ended June 30, 2021 as compared to the same periods of 2020.

The following table presents the components of non-interest income for the three and six months ended June 30, 2021 and 2020:

Non-interest income decreased $6.8 million and $18.7 million for the three and nine months ended September 30, 2021 as compared to the same periods of 2020.

The following table presents the components of non-interest income for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Gains on sales of loans, net 6,442 13,366 20,016 26,253

Gains (losses) on sales of assets, net 232 (299) 36 (178)

Gains on sales of assets, net 344 894 380 716

Bank owned life insurance 2,018 (1,304) 6,824 7,661

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Total non-interest income $ 42,431 $ 49,272 $ 116,790 $ 135,499

Service charges of deposits accounts increased by $1.5 million and $949 thousand for the three and six months ended June 30, 2021, respectively as compared to the same periods in 2020, which was mostly due to a decline in waived fees largely related to COVID-19 customer relief efforts during the second quarter 2020.

Net gains on sales of loans increased $1.7 million for the three months ended June 30, 2021 as compared to the second quarter 2020.

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 decrease in the fair value of loans held for sale totaled $460 thousand for the three months ended June 30, 2021 as compared to a net increase of $3.2 million for the three months ended June 30, 2020.

During the second quarter 2021, we sold approximately $326.2 million of residential mortgage loans as compared to $237.1 million during the second quarter 2020.

Service charges on deposits accounts increased by $1.5 million and $2.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020, mostly due to a decline in waived fees largely related to COVID-19 customer relief efforts during the second and third quarters of 2020.

Net gains on sales of loans decreased $6.9 million and $6.2 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020.

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 losses from the change in the fair value of loans held for sale totaled $403 thousand and $10.4 million for the three and nine months ended September 30, 2021, respectively, as compared to net gains of $4.3 million and $8.3 million for the three and nine months ended September 30, 2020, respectively.

During the third quarter 2021, we sold approximately $234.6 million of residential mortgage loans as compared to $301.2 million during the third quarter 2020.

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

Bank owned life insurance income decreased $3.3 million and $4.2 million for the three and six months ended June 30, 2021, respectively, as compared to the same periods in 2020 partly due to lower yields on the underlying fixed income investments held by insurance policies and periodic death benefits received in the second quarter 2020.

Other non-interest income decreased $5.2 million and $12.4 million for the three and six months ended June 30, 2021, respectively, mainly caused by lower fee income related to derivative interest rate swaps executed with commercial lending customers due to lower transaction volumes.

Swap fee income totaled $7.6 million and $14.7 million for the three months ended June 30, 2021 and 2020, respectively, and $13.8 million and $28.9 million for the six months ended June 30, 2021 and 2020, respectively.

Bank owned life insurance income increased $3.3 million for the three months ended September 30, 2021 as compared to the same period in 2020.

The increase was attributable to a mortality contingency reserve adjustment recorded in third quarter 2020.

Other non-interest income decreased $5.6 million and $18.1 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020 primarily due to lower fee income related to derivative interest rate swaps executed with commercial lending customers caused by lower transaction volumes.

Swap fee income totaled $8.8 million and $19.2 million for the three months ended September 30, 2021 and 2020, respectively, and $22.6 million and $48.1 million for the nine months ended September 30, 2021 and 2020, respectively.

Non-Interest Expense

Non-interest expense increased $14.7 million and $19.3 million for the three and six months ended June 30, 2021, respectively, as compared to the same periods of 2020.

The following table presents the components of non-interest expense for the three and six months ended June 30, 2021 and 2020:

Non-interest expense increased $14.7 million and $34.0 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020.

The following table presents the components of non-interest expense for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Total non-interest expense $ 174,922 $ 160,185 $ 507,028 $ 473,007

Salary and employee benefits expense increased $12.6 million and $14.9 million for the three and six months ended June 30, 2021, respectively, as compared to the same periods of 2020 primarily due to strategic increases in our headcount to enhance lending and operations, increased health insurance costs, and higher cash and stock-based incentive compensation accruals.

The six months ended June 30, 2020 period included a special bonus expense of $1.8 million paid to hourly employees impacted by COVID-19 that was incurred in the first quarter 2020.

FDIC insurance assessment expense decreased $2.8 million and $3.4 million for the three and six months ended June 30, 2021, respectively, as compared to the same periods of 2020 partially due to the Bank's improved capital position and overall risk profile.

Loss on extinguishment of debt totaled $8.4 million for the three and six months ended June 30, 2021 reflecting the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021.

The prepayments were funded by excess cash liquidity at the Bank.

Salary and employee benefits expense increased $10.4 million and $25.3 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020 primarily due to strategic increases in our headcount to enhance lending and operations and increases in our branch compensation to preserve staffing and service levels, and to keep pace with the increases in wage demand across the industry.

higher cash and stock-based incentive compensation accruals and health insurance costs also contributed to the increases in both periods.

FDIC insurance assessment expense decreased $1.2 million and $4.6 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020 mostly due to the Bank's improved capital position and overall risk profile.

Professional and legal fees increased $4.7 million and $4.6 million f or the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020.

The increases were largely attributable to a $2.1 million accrual for general litigation reserves, $1.3 million of merger related fees, as well as increased consulting expenses duri ng the three and nine months ended September 30, 2021.

Higher consulting expenses mostly related to our technology transformation efforts and new product initiati ves.

Loss on extinguishment of debt totaled $8.4 million for the nine months ended September 30, 2021 reflecting the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021.

The loss on extinguishment of debt totaling $2.4 million during the three and nine months ended September 30, 2020 was

related to the prepayment of $50 million of long-term institutional repo borrowings.

All the prepayments were funded by excess cash liquidity at the Bank.

See Note 10 to the consolidated financial statements for additional information regarding our borrowed funds.

Other non-interest expense increased $2.1 million and $3.4 million f or the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020.

These increases were largely due to higher data processing costs, OREO related expenses as well as incrementally higher operating expenses in several categories due to the expansion of our operations.

See Notes 9 and 14 to the consolidated financial statements for information regarding the amortization of other intangible assets and tax credit investments, respectively.

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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 primarily by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, including, but not limited to loss on extinguishment of debt and merger related expenses.

The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and six months ended June 30, 2021 and 2020:

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, 2021 and 2020:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Amortization of tax credit investments (pre-tax) 3,079 2,759 8,795 9,403

Litigation reserve (a)

2,100 — 2,100 —

Merger related expenses (pre-tax) (a)

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Total non-interest income 42,431 49,272 116,790 135,499

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

(Gains) losses on available for sale and held to maturity securities transactions, net (pre-tax) (b)

(788) 46 (557) 127

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Efficiency ratio, adjusted 49.16 % 46.62 % 48.12 % 47.53 %

(a) Merger related expenses are primarily within professional and legal fees, and other non-interest expense.

(b) Included in gains on securities transactions, net within other non-interest income.

Income tax expense totaled $42.9 million for the second quarter 2021 as compared to $39.3 million and $33.5 million for the first quarter 2021 and second quarter 2020, respectively, and $82.2 million and $62.6 million for the six months ended June 30, 2021 and 2020, respectively.

Our effective tax rate was 26.2 percent, 25.4 percent and 25.9 percent for the second quarter 2021, first quarter 2021 and second quarter 2020, respectively.

The increase in income tax expense as compared to the first quarter 2021 was mainly due to the increase in pre-tax incom e.

(a) Included in professional and legal fees.

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

Income tax expense totaled $42.4 million for the third quarter 2021 as compared to $42.9 million and $38.9 million for the second quarter 2021 and third quarter 2020, respectively, and $124.6 million and $101.5 million for the nine months ended September 30, 2021 and 2020, respectively.

Our effective tax rate was 25.7 percent, 26.2 percent and 27.5 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively.

The decrease in the effective tax rate in the third quarter 2021 as compared to the second quarter 2021 and the third quarter 2020 was mainly due to the increase in excess stock compensation benefit.

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

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Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies .

For the remainder of 2021, we currently estimate that our effective tax rate will range from 25 percent to 27 percent.

Business Segments

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

The following tables present the financial data for each business segment for the three months ended June 30, 2021 and 2020:

Three Months Ended June 30, 2021

The following tables present the financial data for each business segment for the three months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021

Lending Commercial

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2.01 % 2.24 % 0.20 % N/A 1.72 %

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Lending Commercial

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Consumer Lending

This consumer lending segment represented 21.9 percent of our loan portfolio at June 30, 2021, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 13.0 percent of our loan portfolio at June 30, 2021) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.7 percent of total loans at June 30, 2021) is relatively unaffected by movements in the market level of interest rates.

This consumer lending segment represented 22.3 percent of our loan portfolio at September 30, 2021, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 13.3 percent of our loan portfolio at September 30, 2021) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 4.8 percent of total loans at September 30, 2021) 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 decreased $64.2 million to $7.2 billion for the three months ended June 30, 2021 as compared to the second quarter 2020.

The decrease was largely due to runoff from principal repayments with a higher percentage of new and refinanced mortgage loans originated for sale rather than held for investment over the last 12 month period.

Automobile loan demand was also tempered during the onset of the COVID-19 pandemic before steadily strengthening since the fourth quarter 2020.

Income before income taxes generated by the consumer lending segment increased $6.2 million to $35.8 million for the second quarter 2021 as compared to the second quarter 2020 largely due to a $4.7 million increase in non-interest income coupled with a $2.4 million decrease in provision for loan losses, partially offset by $1.1 million decrease in the net interest income.

The increase in non-interest income was partly due to a $1.7 million increase in net gains on sales of loans for the three months ended June 30, 2021, higher fee income from our wealth management division, and moderate increases in other fee categories as compared to the same period in 2020.

The decrease in the provision for loan losses was mainly due to the improvement in the economic forecast component of the allowance for loan losses at June 30, 2021 as compared to June 30, 2020.

Average interest earning assets in this segment increased $247.7 million to $7.4 billion for the three months ended September 30, 2021 as compared to the third quarter 2020.

The increase was largely due to loan growth from origination of new residential mortgage loans and automobile loans over most of the last 12-month period.

Income before income taxes generated by the consumer lending segmen t increased $2.6 million to $37.1 million for the third quarter 2021 as compared to the third quarter 2020 largely due to a $10.0 million decrease in the provision for loan losses and lower non-interest expense, partially offset by a $11.7 million decrease in non-interest income

coupled with a $2.0 million increase in the internal transfer expense.

The decrease of $11.7 million in non-interest income was partly due to a $6.9 million decrease in net gains on sales of loans for the three months ended September 30, 2021.

The decrease in the provision for loan losses was mainly due to the improvement in the economic forecast component of the allowance for loan losses at September 30, 2021 as compared to September 30, 2020.

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

The decrease in net interest income was largely driven by lower yields on new loans and the decline in average loan balances, partially offset by lower funding costs.

The net interest margin on the consumer lending portfolio decreased 2 basis points to 3.03 percent for the second quarter 2021 as compared to the second quarter 2020 mainly due to a 38 basis point decrease in the yield on average loans, partially offset by a 36 basis point decrease in the costs associated with our funding sources.

The 38 basis point decrease in loan yield was due to lower yielding new and refinanced loan volumes.

The decrease in our funding costs was largely due to continued runoff of time deposits and the customer shift to lower cost deposits without stated maturities and lower rates offered on deposit products.

The net interest margin on the consumer lending portfolio decreased 11 basis points to 2.97 percent for the third quarter 2021 as compared to the third quarter 2020 mainly due to a 40 basis point decrease in the yield on average loans, partially offset by a 29 basis point decrease in the costs associated with our funding sources.

The 40 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments.

The decrease in our funding costs was mainly due to continued runoff of higher cost time deposits, some customer migration to lower cost deposits without stated maturities and lower rates offered on deposit products.

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

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

Commercial and industrial loans totaled approximately $6.1 billion and represented 18.7 percent of the total loan portfolio at June 30, 2021.

Commercial real estate loans and construction loans totaled $19.3 billion and represented 59.4 percent of the total loan portfolio at June 30, 2021.

Average interest earning assets in this segment increased approximately $658.3 million to $25.5 billion for the three months ended June 30, 2021 as compared to the second quarter 2020.

The increase was mostly due to strong organic commercial real estate loan growth during the first half of 2021.

For the three months ended June 30, 2021, income before income taxes for the commercial lending segment increased $38.2 million to $140.7 million as compared to the second quarter 2020 mainly driven by a lower

provision for credit losses coupled with and an increase in net interest income.

The provision for loan losses decreased by $29.9 million mainly due to the improvement in the economic forecast component of the allowance for loan losses as compared to June 30, 2020.

Net interest income for this segment increased $22.9 million to $237.4 million for the second quarter 2021 as compared to the same period in 2020 primarily due to lower funding costs and loan growth.

The positive impact of the aforementioned items was partially offset by a decrease in non-interest income and higher internal transfer expense.

Non-interest income decreased $6.4 million to $9.8 million for the three months ended June 30, 2021 as compared to the second quarter 2020 mainly due to a $7.1 million decrease in swap fee income related to derivative interest rate swaps executed with commercial loan customers.

Internal transfer expense increased $4.3 million for the second quarter 2021 as compared to the second quarter 2020 partly due to general increases related to organic growth in our business.

The net interest margin for this segment increased 27 basis points to 3.73 percent for the second quarter 2021 as compared to the second quarter 2020 due to a 36 basis point decrease in the cost of our funding sources, which was partially offset by a 9 basis point decrease in the yield on average loans.

Commercial and industrial loans totaled approximately $5.6 billion and represented 17.3 percent of the total loan portfolio at September 30, 2021.

Commercial real estate loans and construction loans totaled $19.7 billion and represented 60.4 percent of the total loan portfolio at September 30, 2021.

Average interest earning assets in this segment decreased approximately $64.6 million to $25.3 billion for the three months ended September 30, 2021 as compared to the third quarter 2020 mostly due to commercial and industrial PPP loans which were paid off (forgiven), largely offset by strong new loan originations concentrated in the commercial real estate loan portfolio.

For the three months ended September 30, 2021, income before income taxes for the commercial lending segment increased $20.6 million to $141.9 million as compared to the third quarter 2020 mainly driven by a $18.5 million increase in net interest income and a $17.5 million decrease in the provision for loan losses, partially offset by lower non-interest income and higher internal expense.

Net interest income for this segment increased to $237.1 million for the third quarter 2021 as compared to the same period in 2020 primarily due to lower funding costs.

The provision for loan losses decreased by $17.5 million mainly due to the improvement in the economic forecast component of the allowance for loan losses as compared to September 30, 2020.

Non-interest income decreased $8.8 million to $11.6 million for the three months ended September 30, 2021 as compared to the third quarter 2020 mainly due to a $10.4 million decrease in swap fee income related to derivative interest rate swaps executed with commercial loan customers.

Internal transfer expense increased $4.8 million for the third quarter 2021 as compared to the third quarter 2020 partly due to general increases related to organic growth in our business.

The net interest margin for this segment increased 28 basis points to 3.74 percent for the third quarter 2021 as compared to the third quarter 2020 due to a 29 basis point decrease in the cost of our funding sources, which was marginally offset by a 1 basis point decrease in the yield on average loans.

I nvestment Management

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

Average interest earning assets in this segment decreased $465.1 million during the second quarter 2021 as compared to the second quarter 2020 primarily due to a $576.4 million decrease in average investment securities partially offset by a $111.4 million increase in average interest bearing deposits with banks.

The decrease in average investment securities was mainly driven by principal repayments on securities with lower reinvestment activity due to the low interest rate environment and funding of loan growth.

The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the second quarter 2021.

During the second quarter 2021, income before income taxes for the investment management segment decreased $4.0 million to $3.5 million as compared to the second quarter 2020 mostly due to decreases both in non-interest income and net interest income.

Non-interest income decreased $3.3 million to $2.5 million in the second quarter 2021 as compared to the second quarter 2020 mainly due to lower bank owned life insurance income.

The decrease in net interest income totaling $2.5 million was primarily due to accelerated repayments of higher yielding securities, higher amortization expense and the low yields on the increased overnight investment balances.

The net interest margin for this segment decreased 11 basis points to 1.17 percent for the second quarter 2021 as compared to the same quarter in 2020 largely due to a 47 basis point decrease in the yield on average investments, partially offset by a 36 basis point decrease in our cost of funding.

The decrease in the yield on average investments as compared to the second quarter 2020 was largely driven by principal repayments on higher yielding 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.

Average interest earning assets in this segment increased $382.0 million during the third quarter 2021 as compared to the third quarter 2020 due to a $546.1 million increase in average interest bearing deposits with banks, partially offset by a $164.1 million decrease in average investment securities.

The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the third quarter 2021 as we continued to experience a surge in customer deposits.

The decrease in average investment securities was mainly driven by principal repayments on securities with a slower rate of reinvestment activity due to the low interest rate environment and our preference to fund loan growth.

However, average investments did increase $73.9 million as compared to the linked second quarter 2021 as we modestly increased our investment purchases in the third quarter 2021.

During the second quarter 2021, income before income taxes for the investment management segment increased $1.8 million to $2.8 million as compared to $1.1 million for the third quarter 2020 mostly due to an increase in both net interest income and non-interest income, partially offset by higher internal transfer expense.

The increase in net interest income totaled $753 thousand and was mainly due to the decreased cost of funding, partially offset by lower yields on our investments securities and lower average investment balances.

Non-interest income increased $3.3 million in the third quarter 2021 as compared to the third quarter 2020 mainly due to higher bank owned life insurance income.

See the "Non-Interest Income" section for more details.

The net interest margin for this segment decreased 2 basis points to 1.18 percent for the third quarter 2021 as compared to the same quarter in 2020 largely due to a 31 basis point decrease in the yield on average investments, partially offset by a 29 basis point decrease in our cost of funding.

The decrease in the yield on average investments as compared to the third quarter 2020 was largely driven by the lower yielding investment securities and the higher average holdings in low yielding overnight cash investments.

Corporate and other adjustments

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

The corporate segment recognized pre-tax losses of $16.6 million and $10.6 million for the three months ended June 30, 2021 and 2020, respectively.

The increase in the pre-tax loss for the second quarter 2021 was mainly driven by the $12.3 million increase in non-interest expense partially due to a $8.4 million l oss on extinguishment of debt during the three months ended June 30, 2021, partially offset by $3.3 million increase in non-interest income.

The corporate segment recognized pre-tax losses of $16.9 million an d $15.7 million for the three months ended September 30, 2021 and 2020, respectively.

The $1.2 million increase in the pre-tax loss for the third quarter 2021 was mainly driven by the $19.2 million increase in non-interest expense largely caused by higher salaries and employee benefits expense, and professional and legal fees for the three months ended September 30, 2021.

These items were partially offset by increases of $10.3 million and $8.9 million in non-interest income and internal transfer income, respectively.

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

The following tables present the financial data for each business segment for the six months ended June 30, 2021 and 2020:

Six Months Ended June 30, 2021

The following tables present the financial data for each business segment for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30, 2021

Lending Commercial

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1.94 % 2.16 % 0.23 % N/A 1.70 %

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Lending Commercial

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Consumer Lending

Average interest earning assets in this segment decreased $115.8 million to $7.1 billion for the six months ended June 30, 2021 as compared to the same period in 2020.

Average interest earning assets in this segment decreased $11.8 million to $7.2 billion for the nine months ended September 30, 2021 as compared to the same period in 2020.

Automobile loan demand was also tempered during the onset of the pandemic in early 2020 before steadily strengthening since the fourth quarter 2020.

Income before income taxes generated by the consumer lending segment increased $21.4 million to $67.2 million for the six months ended June 30, 2021 as compared to the same period in 2020 largely due to a lower provision for loan losses and increases in both, net interest income and non-interest income.

The provision for loan losses decreased $11.8 million from a $9.9 million provision for the six months ended June 30, 2020 to a credit (negative) provision of $1.9 million for the corresponding period in 2021 mainly due to the improved economic forecast component of the allowance for loan losses as compared to June 30, 2020, as well as better actual loan performance within these loan categories.

However, automobile loan demand, which was tempered during much of 2020 due to the onset of the COVID-19 pandemic, was strong during the nine months ended September 30, 2021 due to built up demand for auto purchases by consumers.

Income before income taxes generated by the consumer lending segment increased $23.9 million to $104.3 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to a lower provision for loan losses and non-interest expense, and an increase in net interest income.

The provision for loan losses decreased $21.8 million to a credit (negative) provision of $6.5 million for the nine months ended September 30, 2021 from a $15.3 million provision for the same period of 2020.

The lower provision was mainly due to the improved economic forecast component of the allowance for loan losses as compared to September 30, 2020, as well as better actual loan performance within these loan categories.

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

The net interest income and non-interest income increased $4.8 million and $3.7 million, respectively.

The increase in net interest income was mainly driven by lower funding costs, which were partially offset by lower loan yields and average loans.

The increase in non-interest income was largely attributable to higher net gains on sales of loans for the six months ended June 30, 2021 as compared to the same period in 2020.

The net interest margin on the consumer lending portfolio increased 18 basis points to 3.06 percent for the six months ended June 30, 2021 as compared to the same period one year ago mainly due to a 53 basis point decrease in the costs associated with our funding sources, partially offset by a 35 basis point decrease in the yield on average loans.

The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits

continuing to reprice at lower interest rates and the repayment of maturing higher cost borrowings.

Net interest income increased $4.7 million primarily due to the lower funding costs, which were partially offset by lower loan yields, as well as the modest decline in average interest earning assets.

The higher net interest income was partially offset by a $7.9 million decrease in non-interest income, which was largely attributable to lower net gains on sales of loans for the nine months ended September 30, 2021 as compared to the same period in 2020.

The net interest margin on the consumer lending portfolio increased 10 basis points to 3.04 percent for the nine months ended September 30, 2021 as compared to the same period one year ago mainly due to a 46 basis point decrease in the costs associated with our funding sources, partially offset by a 36 basis point decrease in the yield on average loans.

The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates and the repayment of maturing higher cost borrowings.

The 36 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments.

Commercial Lending

Average interest earning assets in this segment increased $1.7 billion to $25.5 billion for the six months ended June 30, 2021 as compared to the same period in 2020.

This increase was mainly due to PPP loans originations during the last 12 months, as well as organic commercial real estate loan growth during the first half of 2021.

For the six months ended June 30, 2021, income before income taxes for the commercial lending segment increased $64.4 million to $269.8 million as compared to the same period in 2020 mainly driven by an increase in net interest income and a lower provision for credit losses, partially offset by a decline in non-interest income.

Net interest income increased $49.3 million to $466.5 million for the six months ended June 30, 2021 as compared to the same period in 2020 largely due to lower funding costs and the higher average commercial loan balances during the current period.

The provision for credit losses decreased $45.4 million to $19.7 million during the six months ended June 30, 2021 as compared to $65.1 million for the same period in 2020.

The decrease in the provision for loan losses was mainly due to an improvement in the economic forecast component of the allowance for loan losses and other qualitative factors related to the COVID-19 pandemic as compared to June 30, 2020.

Average interest earning assets in this segment increased $1.1 billion to $25.5 billion for the nine months ended September 30, 2021 as compared to the same period in 2020.

This increase was mainly due to PPP loan originations during the last 12 months, as well as organic commercial real estate loan growth during the nine months ended September 30, 2021.

For the nine months ended September 30, 2021, income before income taxes for the commercial lending segment increased $85.0 million to $411.7 million as compared to the same period in 2020 mainly driven by an increase in net interest income and a lower provision for loan losses.

Net interest income increased $67.8 million to $703.6 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to lower funding costs and the higher average commercial loan balances during the current period.

The provision for credit losses decreased $63.0 million to $27.8 million during the nine months ended September 30, 2021 as compared to $90.8 million for the same period in 2020.

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

The positive impact of the aforementioned items was partially offset by a $14.2 million decrease in non-interest income for the six months ended June 30, 2021 as compared to the same period in 2020 primarily due to a $15.1 million decrease in fee income related to derivative interest rate swaps executed with commercial loan customers.

Internal transfer expense also increased $10.7 million to $141.8 million for the six months ended June 30, 2021 as compared to the same period in 2020.

The net interest margin for this segment increased 14 basis points to 3.65 percent for the six months ended June 30, 2021 as compared to the same period in 2020 due to a 53 basis point decrease in the cost of our funding sources, partially offset by a 39 basis point decrease in yield on average loans.

The positive impa ct of the aforementioned items w as partially offset by a decrease in non-interest inc ome, as well as higher non-interest expense and internal transfer expense.

Non-interest income decreased $23.0 million for the nine months ended September 30, 2021 as compared to the same period in 2020 primarily due to a $25.5 million decrease in fee income related to derivative interest rate swaps executed with commercial loan customers.

Internal transfer expense increased $15.5 million to $212.9 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

The net interest margin for this segment increased 20 basis points to 3.68 percent for the nine months ended September 30, 2021 as compared to the same period in 2020 due to a 46 basis point decrease in the cost of our funding sources, partially offset by a 26 basis point decrease in yield on average loans.

I nvestment Management

Average interest earning assets in this segment decreased $166.7 million during the six months ended June 30, 2021 as compared to the same period in 2020 largely due to a $547.6 million decrease in average investment securities partially offset by an increase of $380.9 million in average interest bearing deposits with banks.

The increase in our excess liquidity held in overnight interest bearing deposits with banks was mainly caused by strong deposits growth over the 12-month period and management's lower rate of reinvestment in investment securities.

For the six months ended June 30, 2021, income before income taxes for the investment management segment decreased $9.1 million to $6.3 million as compared to the same period in 2020 mainly due to decreases in net interest income and non-interest income.

The negative impact of these items was partially offset by a decline in the provision for credit losses for held to maturity debt securities from an $800 thousand provision for the six months ended June 30, 2020 to a credit of $388 thousand for the first half of 2021.

The net interest margin for this segment decreased 21 basis points to 1.21 percent for the six months ended June 30, 2021 as compared to the same period in 2020 largely due to a 74 basis point decrease in the yield on average investments, partially offset by a 53 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 2020 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.

Average interest earning assets in this segment increased $39.6 million during the nine months ended September 30, 2021 as compared to the same period in 2020.

Within the category, a $458.4 million increase in average interest bearing deposits with banks was largely offset by $418.8 million decrease in average investment securities.

For the nine months ended September 30, 2021, income before income taxes for the investment management segment decreased $7.3 million to $9.1 million as compared to the same period in 2020 mainly due to decreases in the net interest income and non-interest income and a higher internal expense transfer.

The negative impact of these items was partially offset by a decline in the provision for credit losses for held to maturity debt securities from a $688 thousand provision for the nine months ended September 30, 2020 to a credit of $353 thousand for the nine months ended September 30, 2021.

The net interest margin for this segment decreased 15 basis points to 1.19 percent for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to a 61 basis point decrease in the yield on average investments, partially offset by a 46 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 2020 was mainly due to lower yielding investment securities and excess liquidity held in low yielding overnight investments.

Corporate and other adjustments

The pre-tax net loss for the corporate segment totaled $24.8 million for the six months ended June 30, 2021 as compared to $21.1 million for the same period in 2020.

The negative change of $3.8 million was mainly due to an increase in non-interest expense, partially offset by higher internal transfer income.

Non-interest expense increased $14.1 million to $238.2 million for the six months ended June 30, 2021 as compared to the same period in 2020 largely due to the $8.4 million l oss on extinguishment of debt during the second quarter 2021 and increases in salaries and employee benefits expenses.

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

Internal transfer income increased $9.6 million to $209.0 million for the six months ended June 30, 2021 as compared to the same period in 2020.

The pre-tax net loss for the corporate segment totaled $41.7 million for the nine months ended September 30, 2021 as compared to $36.8 million for the same period in 2020.

The negative change of $5.0 million was mainly due to an increase in non-interest expense, partially offset by higher internal transfer income and greater non-interest

Non-interest expense increased $33.3 million to $372.2 million for the nine months ended September 30, 2021 as compared to the same period in 2020 partially due to increases in salaries and employee benefits expenses, professional and legal fees and the l oss on extinguishment of debt during the current period as compared to prior.

Internal transfer income increased $18.5 million to $316.7 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

ASSET/LIABILITY MANAGEMENT

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

The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of June 30, 2021.

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

In the model, the forecasted shape of the yield curve remains static as of June 30, 2021.

In the model, the forecasted shape of the yield curve remains static as of September 30, 2021.

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

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2021.

Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2021 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the second quarter 2021.

The model also utilizes an immediate parallel shift in market interest rates at June 30, 2021.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2021.

Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2021 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 2021.

The model also utilizes an immediate parallel shift in market interest rates at September 30, 2021.

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

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Additionally, our net interest income is impacted by the level of competition within our marketplace.

Competition can negatively impact the level

of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods.

Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods.

Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.

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–200 (78,513) (6.66)

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

sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 month period by 3.05 percent.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at June 30, 2021.

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 month period by 4.45 percent.

Management believes the interest rate sensitivity remains within an acceptable tolerance range at September 30, 2021.

However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows.

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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 June 30, 2021.

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

The Bank was in compliance with the foregoing policies at September 30, 2021.

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

In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash

In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments.

Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below.

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

Total liquid assets were approximate ly $3.2 billion, representing 8.5 percent of earning assets at June 30, 2021 and $3.1 billion, representing 8.3 percent of earning assets at December 31, 2020.

Of the $3.2 billion of liquid assets at June 30, 2021, approximately $736.2 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities classified as trading and available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions.

Total liquid assets were approximate ly $3.0 billion, representing 7.9 percent of earning assets at September 30, 2021 and $3.1 billion, representing 8.3 percent of earning assets at December 31, 2020.

Of the $3.0 billion of liquid assets at September 30, 2021, approximately $547.5 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approx imately $747 million in principal payments from securities in the total investment portfolio over the next 12 month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

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

Loan principal payments (including loans held for sale at June 30, 2021) are projected in accordance with their scheduled contractual terms to be approximately $7.9 billion over the next 12 month period.

Loan principal payments (including loans held for sale at September 30, 2021) are projected in accordance with their scheduled contractual terms to be approximately $10.4 billion over the next 12 month period.

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

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

Average core deposits totaled approximately $29.4 billion and $25.8 billion for the six months ended June 30, 2021 and for the year ended December 31, 2020, respectively, representing 77.7 percent and 69.8 percent of average earning assets for the respective periods.

Average core deposits totaled approximately $29.2 billion and $25.8 billion for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively, representing 77.6 percent and 69.8 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.

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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 June 30, 2021, Valley had $700 million of MULOCs outstanding for this purpose.

At September 30, 2021, Valley had $1.0 billion of MULOCs outstanding for this purpose.

Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity.

At June 30, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans) under the Federal Reserve Bank's discount window was $1.8 billion.

At September 30, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans) under the Federal Reserve Bank's discount window was $1.8 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) decreased approximately $293.6 million to $854.4 million at June 30, 2021 as compared to December 31, 2020 due to normal FHLB advance repayments.

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $364.6 million to $783.3 million at September 30, 2021 as compared to December 31, 2020 due to normal FHLB advance repayments.

Corporation Liquidity

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Valley's cash needs are routinely satisfied by dividends collected from the Bank.

Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank.

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.

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Investment Securities Portfolio

As of June 30, 2021, we had $33.9 million, $21.2 million, $1.1 billion and $2.5 billion in equity, trading debt, available for sale and held to maturity debt securities, respectively.

As of September 30, 2021, we had $36.1 million, $4.8 million, $1.2 billion and $2.6 billion in equity, trading debt, available for sale and held to maturity debt securities, respectively.

Our trading securities portfolio wholly consists of investment grade municipal bonds.

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

Held to maturity and available for sale debt securities portfolios include of U.S.

The equity securities consisted of one publicly traded mutual fund, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in a partnership that invests in such companies.

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

Held to maturity and available for sale debt securities portfolios include U.S.

Treasury securities, U.S.

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

We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 2021 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors.

Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and six months ended June 30, 2021 and, as a result, there was no allowance for credit losses for

available for sale debt securities at June 30, 2021.There was no allowance for credit losses for available for sale debt securities at December 31, 2020.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2021 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, 2021 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2021.

There was no allowance for credit losses for available for sale debt securities at December 31, 2020.

Held to maturity debt securities.

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Treasury securities, U.S.

agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds, which are excluded from the model.

agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and

collateralized municipal bonds, which are excluded from the model.

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

Held to maturity debt securities were carried net of allowance for credit losses totaling $1.0 million and $1.4 million at June 30, 2021 and December 31, 2020, respectively.

There were no net charge-offs of held to maturity debt securities for the three and six months ended June 30, 2021 and 2020.

Held to maturity debt securities were carried net of allowance for credit losses totaling $1.1 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively.

There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2021 and 2020.

Investment grades.

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

The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at June 30, 2021:

June 30, 2021

The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at September 30, 2021:

September 30, 2021

Losses Fair Value

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The unrealized losses in the AAA rated category of the held to maturity debt securities (in the above table) are mainly related to residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae.

The investment securities held to maturity portfolio included $151.2 million of investments not rated by the rating agencies with

aggregate unrealized losses of $6.0 million at June 30, 2021 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.

The investment securities held to maturity portfolio included $140.0 million of investments not rated by the rating agencies with aggregate unrealized losses of $5.7 million at September 30, 2021 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 investments securities portfolio.

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

September 30,

2021 June 30,

2021 March 31,

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2020 September 30,

2020 June 30,

($ in thousands)

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Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

* Includes net unearned discount and deferred loan fees of $86.1 million, $108.6 million, $95.8 million, $116.2 million, and $131.3 million at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

Net unearned discounts and deferred loan fees included $40.9 million, $57.2 million, $43.2 million, $54.4 million and $62.1 million of net unearned fees related to PPP loans at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

Commercial and industrial loans decreased $1.1 billion, or 59.5 percent on an annualized basis, to $6.1 billion at June 30, 2021 as compared to March 31, 2021 mostly due t o $1.0 billion of PPP loans that were forgiven (i.e., repaid) during the second quarter 2021.

As of June 30, 2021, over 75 percent of the PPP loan balances from the first two rounds of our funding under the SBA program have been forgiven.

Valley expects the majority of the remaining $1.4 billion of PPP loans on June 30, 2021 to qualify for forgiveness under the guidelines of the SBA program, which will impact our ability to grow the commercial and industrial loan portfolio.

Non-PPP commercial and industrial loans modestly decreased by $50.2 million at June 30, 2021 as compared to March 31, 2021 as demand continues to be tempered by the uncertain sustainability of improving the economic recovery.

The usage (i.e., outstanding balances) of commercial lines of credit by our existing borrowers also declined.

Commercial real estate loans (excluding construction loans) increased $588.5 million, or 13.9 percent on an annualized basis, to $17.5 billion at June 30, 2021 from March 31, 2021 reflecting solid organic growth due to a strong demand across our geographic footprint driven by low interest rates.

Construction loans decreased $33.5 million to $1.8 billion at June 30, 2021 from March 31, 2021 partly due to the migration of completed construction projects to permanent loans.

Residential mortgage loans increased $166.5 million, or 16.4 percent on an annualized basis during the second quarter 2021 due to strong origination of new and refinanced residential mortgage loans totaling approximately $753.2 million for the second quarter 2021 as compared to $550.6 million and $494.2 million for the first quarter 2021 and second quarter 2020, respectively.

Florida originations totaled $206 million and represented 27 percent of total originations.

Of the total originations in the second quarter 2021, approximately $254 million of residential mortgage loans were originated for sale rather than held for investment.

During the second quarter 2021, the non-conforming residential mortgages originations outpaced conforming loans resulting in a higher percentage of our production held for investment in the loan portfolio as compared the first quarter 2021.

We sold approximately $326 million of residential mortgage loans originated for sale during the second quarter 2021 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the third quarter 2021 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.

Home equity loans increased by $1.3 million to $410.9 million at June 30, 2021 from March 31, 2021.

* Includes net unearned discount and deferred loan fees of $73.0 million, $86.1 million, $108.6 million, $95.8 million, and $116.2 million at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.

Net unearned discounts and deferred loan fees included $27.6 million, $40.9 million, $57.2 million, $43.2 million and $54.4 million of net unearned fees related to PPP loans at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.

Commercial and industrial loans decreased $449.2 million, or 29.5 percent on an annualized basis, to $5.6 billion at September 30, 2021 as compared to June 30, 2021 mostly due to $476.7 million of PPP loans that were forgiven (i.e., repaid) during the third quarter 2021.

As of September 30, 2021 , nearly 100 percent of the PPP loan balances from the first two rounds of our funding under the SBA program have been forgiven.

Valley expects the majority of the remaining $874 million of PPP loans on September 30, 2021 to qualify for forgiveness under the guidelines of the SBA program, which is expected to negatively impact our ability to grow the commercial and industrial loan portfolio.

Non-PPP commercial and industrial loans modestly increased by $27.5 million at September 30, 2021 as compared to June 30, 2021.

Commercial real estate loans (excluding construction loans) increased $399.9 million, or 9.1 percent on an annualized basis, to $17.9 billion at September 30, 2021 from June 30, 2021 reflecting solid organic growth mainly due to strong demand for non-owner occupied loans across our geographic footprint driven by low interest rates.

Construction loans increased $51.7 million to $1.8 billion at September 30, 2021 from June 30, 2021 partially due to higher demand for commercial and residential construction projects.

Residential mortgage loans increased $105.4 million, or 10.0 percent on an annualized basis during the third quarter 2021 due to continued strong origination of new and refinanced residential mortgage loans totaling $622.1 million for the third quarter 2021 as compared to $753.2 million and $540.2 million for the second quarter 2021 and third

quarter 2020, respectively.

Florida originations totaled approximately $163 million and represented 26 percent of total originations.

Of the total originations in the third quarter 2021, approximately $232.8 million of residential mortgage loans were originated for sale rather than held for investment as compared to $253.9 million during the second quarter 2021.

During the third quarter 2021 we retained over 60 percent of the total residential mortgages originations in our held for investment loan portfolio.

We sold approximately $235 million of residential mortgage loans held for sale during the third quarter 2021 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the fourth quarter 2021 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.

Home equity loans decreased by $8.2 million to $402.7 million at September 30, 2021 from June 30, 2021.

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.

Automobile loans increased by $86.4 million, or 23.9 percent on an annualized basis, to $1.5 billion at June 30, 2021 as compared to March 31, 2021 due to strong consumer demand seen across the auto industry during the first half of 2021.

We originated $251 million in auto loans through our dealership network during the second quarter 2021 as compared to $243 million in the first quarter 2021.

Of the total originations our Florida dealership network contributed approximately $41 million in auto loan originations, representing approximately 16 percent of new loans, during the second quarter 2021.

However, the strong auto loan originations experienced in the second quarter 2021 may be slowed during the second half of 2021 if inventory and auto part shortages remain problematic for the auto industry.

Other consumer loans increased $26.1 million to $938.9 million at June 30, 2021 as compared to $912.9 million at March 31, 2021 mainly due to higher new loan originations and consumer usage of collateralized personal lines of credit.

Automobile loans increased by $32.4 million, or 8.5 percent on an annualized basis, to $1.6 billion at September 30, 2021 as compared to June 30, 2021.

Consumer demand seen across the auto industry was solid during the first half of 2021 but started to slow in the third quarter 2021.

We originated $201 million in auto loans through our dealership network during the third quarter 2021 as compared to $251 million in the second quarter 2021.

Of the total originations our Florida dealership network contributed $30.4 million in auto loan originations, representing approximately 15 percent of new loans, during the third quarter 2021.

Strong auto loan originations experienced in the first half of 2021 slowed during the third quarter 2021 due to inventory and auto part shortages caused by supply chain disruptions affecting auto industry.

In the early stages of the fourth quarter 2021, vehicle inventories are near record lows, driving prices higher.

This trend may negatively impact our auto loan growth in fourth quarter 2021 and beyond.

Other consumer loans increased $17.2 million to $956.1 million at September 30, 2021 as compared to $938.9 million at June 30, 2021 mainly due to higher new loan originations and consumer usage of collateralized personal lines of credit.

Most of our lendin g is in northern and central New Jersey, New York City, Long Island, Florida and Alabama, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey.

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.

For the remainder of 2021, we remain cautiously optimistic about our non-PPP loan growth as the economic recovery continues and loan demand has largely returned to pre-pandemic levels .

In the early stages of the third quarter 2021, we are encouraged that our loan origination pipelines remain robust as the economy begins to accelerate as the supply chain for many industries improves.

During the second quarter 2021, approximately 45 percent of our commercial real estate loan growth came from Florida, which appears to be somewhat closer to pre-pandemic levels than our Northeast markets.

However, there can be no assurance that those positive trends will continue, or balances will not decline from June 30, 2021 given the uncertainty associated with COVID-19 and other market conditions, including the recent increase in COVID-19 cases in certain jurisdictions primarily caused by the Delta variant and the potential for unforeseen changes in consumer confidence and the economy.

We believe that many of our SBA PPP loans will continue to be forgiven in 2021 in accordance with the rules of this program resulting in further reduction in these loan balances.

For the remainder of 2021, we continue to believe that our non-PPP loan growth will remain strong.

In the early stages of the fourth quarter 2021, we are encouraged that our loan origination pipelines remain robust.

During the third quarter 2021, approximately 57 percent of our commercial real estate loan growth came from the New York and New Jersey market area.

However, there can be no assurance that those positive trends will continue, or balances will not decline from September 30, 2021 given the effects of the COVID-19 pandemic and the potential for unforeseen changes in consumer confidence and the economy, and other market conditions and supply chain issues.

We believe that many of our SBA PPP loans will continue to be forgiven in the fourth quarter 2021 in accordance with the rules of this program resulting in further reduction in these loan balances.

Non-performing Assets

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at June 30, 2021.

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at September 30, 2021.

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

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

Our NPAs increased $16.1 million to $226.6 million at June 30, 2021 as compared to March 31, 2021 mainly due to a $16.0 million increase in non-accrual loans in the second quarter 2021.

NPAs as a percentage of total loans and NPAs totaled 0.69 percent and 0.64 percent at June 30, 2021 and March 31, 2021, respectively (as shown in the table below).

We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio over the past 12 months, despite the uptick in non-accrual borrowers mainly caused by COVID-19 pandemic.

Our NPAs increased $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021 mainly due to a $37.0 million increase in non-accrual commercial real estate loans (see table below).

NPAs as a percentage of total loans and NPAs totaled 0.78 percent and 0.69 percent at September 30, 2021 and June 30, 2021, respectively (as shown in the table below).

We believe our total NPAs has remained relatively low as a percentage

of the total loan portfolio over the past 12 months, despite the uptick in non-accrual borrowers mainly caused by COVID-19 pandemic.

The level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties.

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

However, due to the potential for future credit deterioration caused by the uncertain path of the recovery from the COVID -19 pandemic and some of our borrowers that are still performing under forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at June 30, 2021.

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,

2021 June 30,

2021 March 31,

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2020 September 30,

2020 June 30,

($ in thousands)

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136.01 154.23 168.07 183.64 170.08

Loans past due 30 to 59 days increased $22.2 million to $59.1 million at June 30, 2021 as compared to March 31, 2021.

Commercial real estate loans past due 30 to 59 days increased $28.9 million to $40.5 million at June 30, 2021 as compared to March 31, 2021 largely due to three loans totaling $18.7 million related to borrowers negatively impacted by the COVID-19 pandemic.

Offsetting this negative impact, the residential mortgage loan delinquencies

decreased by $7.5 million to $8.5 million at June 30, 2021 as compared March 31, 2021 partly due to improved customer performance and results of our collection efforts during the second quarter 2021.

Loans past due 60 to 89 days increased $4.9 million to $15.4 million at June 30, 2021 as compared to March 31, 2021 mainly due to a $6.0 million increase in commercial real estate loan delinquencies .

Commercial real estate loans in this delinquency category totaled $11.5 million at June 30, 2021 and largely reflected one $11.2 million loan negatively impacted by the COVID-19 pandemic.

Loans past due 90 days or more and still accruing interest totaled $5.7 million at June 30, 2021 as compared to $5.4 million at March 31, 2021.

A ll of the loans past due 90 days or more and still accruing reported at June 30, 2021 are considered to be well secured and in the process of collection.

Non-accrual loans increased $16.0 million to $220.0 million at June 30, 2021 as compared to $204.0 million at March 31, 2021 almost entirely related to one construction borrower relationship with $3.0 million of related allowance reserves at June 30, 2021.

During second quarter 2021, we sold the majority of our Chicago taxi medallion loans for $4.5 million and charged-off $1.3 million of these loans to the reserve for credit losses for loans.

We continue to closely monitor our non-performing New York City taxi medallion loans totaling $86.5 million and the remaining $721 thousand of the Chicago taxi medallion portfolio within the commercial and industrial loan category at June 30, 2021.

Loans past due 30 to 59 days decreased $18.7 million to $40.4 million at September 30, 2021 as compared to June 30, 2021.

Commercial real estate loans past due 30 to 59 days decreased $17.6 million to $23.0 million at September 30, 2021 as compared to June 30, 2021 largely due to two loan relationships totaling $22.2 million that migrated to non-accrual loan status at September 30, 2021.

Loans past due 60 to 89 days decreased $5.9 million to $9.5 million at September 30, 2021 as compared to June 30, 2021.

Commercial real estate loans in this delinquency category decreased $5.6 million to $5.9 million at September 30, 2021 mainly as a result of one $10.9 million loan negatively impacted by the COVID-19 pandemic that migrated to non-accrual status at September 30, 2021, partially offset by the addition of a $5.5 million matured commercial real estate loan in the process of renewal in this delinquency category at September 30, 2021.

Loans past due 90 days or more and still accruing interest totaled $5.4 million at September 30, 2021 as compared to $5.7 million at June 30, 2021.

A ll of the loans past due 90 days or more and still accruing reported at September 30, 2021 are considered to be well secured and in the process of collection.

Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to $220.0 million at June 30, 2021 mostly driven by a $37.0 million increase in the commercial real estate loans.

This increase was caused by two loans totaling $22.2 million and one loan totaling $10.9 million that migrated to non-accrual status from the 30-59 days and 60 to 89 days past due categories reported at June 30, 2021, respectively.

These non-accrual loans totaling $33.1 million have allocated reserves of $3.7 million within our allowance for loan losses at September 30, 2021.

We continue to closely monitor our non-performing New York City and Chicago taxi medallion loans totaling $86.3 million and $577 thousand, respectively, within the commercial and industrial loan category at September 30, 2021.

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, all of the taxi medallion loans are on non-accrual status.

At June 30, 2021, taxi medallion loans totaling $87.2 million had related reserves of $58.6 million, or 67.2 percent of such loans, within the allowance for loan losses as compared to $93.8 million with related reserves of $63.2 million at March 31, 2021.

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

For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated rese rves of $6.4 million w ithin the allowance for loan losses based upon taxi medallion loan balances at June 30, 2021.

At September 30, 2021, the taxi medallion loans totaling $86.9 million had related reserves of $58.6 million, or 67.4 percent of such loans.

The related reserves were relatively unchanged as compared to June 30, 2021.

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

For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.9 million within the allowance for loan losses based upon the taxi medallion loan balances at September 30, 2021.

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

OREO properties totaled $4.5 million at June 30, 2021 and remained relatively unchanged as compared to March 31, 2021.

Net gains and losses from the sales of OREO properties totaled $300 thousand and $335 thousand for the three and six months ended June 30, 2021, respectively, and $274 thousand and $431 thousand for the three and six months ended June 30, 2020, 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 and $1.9 million at June 30, 2021 and December 31, 2020, respectively.

OREO properties totaled $4.0 million at September 30, 2021 and declined $556 thousand as compared to June 30, 2021.

Net losses and gains from the sales of OREO properties to taled a $67 thousand loss and a $268 thousand net gain fo r the three and nine months ended September 30, 2021, respectively, and net gains totaling $109 thousand and $540 thousand for the three and nine months ended September 30, 2020, respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.0 million and $1.9 million at September 30, 2021 and December 31, 2020, respectively.

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

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) decreased $3.0 million to $64.1 million at June 30, 2021 as compared to $67.1 million at March 31, 2021.

Performing TDRs consisted of 93 loans at June 30, 2021.

On an aggregate basis, the $64.1 million in performing TDRs at June 30, 2021 had a modified weighted average interest rate of approximately 4.31 percent as compared to a pre-modification weighted average interest rate of 4.54 percent.

Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) totaled $64.8 million at September 30, 2021 as compared to $64.1 million at June 30, 2021.

Performing TDRs consisted of 96 loans at September 30, 2021.

On an aggregate basis, the $64.8 million in performing TDRs at September 30, 2021 had a modified weighted average interest rate of approximately 4.36 percent as compared to a pre-modification weighted average interest rate of 4.60 percent.

Loan Forbearance .

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

As of June 30, 2021, Valley had approximately $142 million of outstanding loans remaining in their payment deferral period under short-term modifications, as compared to $284 million of loans in deferral at March 31, 2021.

Under the applicable guidance, none of these loans were classified as TDRs at June 30, 2021, March 31, 2021 and December 31, 2020.

The following table presents the outstanding loan b alances and number of loans in an active payment deferral period under short-term modifications as of June 30, 2021:

June 30, 2021

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

Under the applicable guidance, none of these loans were classified as TDRs at September 30, 2021 and December 31, 2020.

The following table presents the outstanding loan b alances and number of loans in an active payment deferral period under short-term modifications as of September 30, 2021:

September 30, 2021

Amount Number of loans

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Total $ 98,594 160

Higher Risk COVID-19 Credit Exposures .

V alley has identified certain borrower industries that may pose a higher risk of credit losses to us due to the negative impact of the COVID-19 pandemic.

The following table presents non-PPP loans in the primary COVID-19 e xposure industries at June 30, 2021 :

June 30, 2021

Non-PPP loan balance % of non-PPP loans

($ in thousands)

Retail trade $ 592,631 1.9 %

Hotels and hospitality 503,837 1.6

Doctors and surgery 485,681 1.6

Restaurants and food service 317,460 1.0

Entertainment and recreation 221,775 0.7

Total $ 2,121,384 6.8 %

As of June 30, 2021, Valley had outstanding loans of approximately $2.1 billion, or 6.8 percent of total loans (excluding PPP loans), that were made to borrowers in these industries.

There were no active deferrals in this category at June 30, 2021, as compared to $48.0 million, or 2.3 percent of total loans at March 31, 2021.

As of June 30, 2021, approximately 86 percent of loans within the higher risk industries were pass-rated under Valley’s internal risk rating system as compared to 88 percent at March 31, 2021.

As of September 30, 2021, Valley had approximately $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications as compared to $142.0 million of loans in deferral at June 30, 2021.

Commercial real estate forbearances representing approximately 66 percent of the active deferrals at September 30, 2021 decreased $28.6 million from $93.6 million at June 30, 2021 mainly due to loans being returned to normal interest accrual status following the end of their forebearance periods during the third quarter 2021.

Allowance for Credit Losses for Loans

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(1) a collective reserve component for estimated expected credit losses for pools of loans that share common 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.

Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit.

Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances.

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(i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent they do not exist in the historical loss information, and (iii) net expected recoveries of charged off loan balances.

These adjustments are based on

qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses.

These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses.

The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors.

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

For the second quarter 2021, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-1 scenarios as compared to Moody's Baseline, S-3 and S-4 scenarios used at March 31, 2021.

At June 30, 2021, Valley maintained its higher weighting to the Moody’s Baseline scenario and placed less emphasis on the Moody’s S-3 downside and S-1 upside scenario.

The Baseline weighting and the incorporation of the S-1 scenario at June 30, 2021 reflects the positive economic developments including federal stimulus and increasing vaccination levels that are expected to lead to improved labor market conditions and stronger economic growth during the remainder of 2021.

However, this positive outlook could still be tempered by continued COVID-19 hot spots in various locales, continued high unemployment rates in New York and New Jersey, and other factors.

The Moody's Baseline forecast carried the highest weighting in our three-scenario forecast and including the following assumptions at June 30, 2021:

• GDP expansion by over 6.7 percent in the third quarter 2021;

• Unemployment of 5.2 percent in the third quarter 2021 and improving to 3.5 percent by the second quarter 2023;

economy poised for robust growth primarily due to a continued surge in consumer spending as the economy fully reopens.

For the third quarter 2021, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-1 scenarios.

At September 30, 2021, Valley maintained the majority of its

weighting to the Moody’s Baseline scenario and modestly reduced its combined emphasis on the Moody’s S-3 downside and S-1 upside scenarios as compared to June 30, 2021.

The Baseline weighting and the S-1 scenario reflect the positive economic developments including federal stimulus and increasing vaccination levels that are expected to improve labor market conditions and promote stronger economic growth during the remainder of 2021.

However, this positive outlook could still be tempered by, among other factors, the uncertain ongoing impact of the COVID-19 pandemic on the economic recovery, as well as supply chain constrains contributing to inventory shortages and longer than anticipated elevated levels of inflation.

At September 30, 2021, the Moody's Baseline forecast included the following specific assumptions:

• GDP expansion by over 7.5 percent in the fourth quarter 2021;

• Unemployment of 4.5 percent in the fourth quarter 2021 and improving to 3.4 percent by the third quarter 2022;

• Strong U.S.

economic growth driven by continued consumer spending and congressional passage of another fiscal stimulus package.

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

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

Three Months Ended Six Months Ended

2021 March 31,

2021 June 30,

2020 June 30,

Three Months Ended Nine Months Ended

September 30,

2021 June 30,

2021 September 30,

2020 September 30,

2021 September 30,

($ in thousands)

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2016-13 effective January 1, 2020.

Net loan charge-offs totaled $9.4 million for the second quarter 2021 as compared to $6.1 million and $14.8 million for the first quarter 2021 and second quarter 2020, respectively.

The increase in net loan charge-offs for the second quarter 2021 was mainly due to an $8.0 million full charge-off of a commercial and industrial loan to an insurance

carrier in bankruptcy.

The partial gross charge-offs of taxi medallion loans totaled $1.4 million for the second quarter 2021 as compared to $3.3 million and $2.9 million for the first quarter 2021 and second quarter 2020, respectively.

Gross charge-offs of taxi medallion loans for the second quarter 2021 were primarily related to partial charge-offs of Chicago taxi medallion loans sold from the loans held for investment portfolio during the period.

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.

Net loan charge-offs totaled $293 thousand for the third quarter 2021 as compared to $9.4 million and $15.4 million for the second quarter 2021 and third quarter 2020, respectively.

The decrease in net loan charge-offs for the third quarter 2021 was mainly due to lower commercial and industrial loan charge-offs.

The partial gross charge-offs of

taxi medallion loans within the commercial and industrial loan category totale d $143 thousand for the third quarter 2021 as compared to $1.4 million and $6.1 million for the second quarter 2021 and third quarter 2020, re spectively.

The overall level of loan charge-offs (as presented in the above table) continued to trend within management's expectations for the credit quality of the loan portfolio for the third quarter 2021.

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

June 30, 2021 March 31, 2021 June 30, 2020

September 30, 2021 June 30, 2021 September 30, 2020

Allocation Allocation

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1.09 % 1.09 % 1.03 %

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including letters of credit), as a percentage of total loans was 1.09 percent, 1.08 percent and 0.99 percent at June 30, 2021, March 31, 2021 and June 30, 2020, respectively.

During the second quarter 2021, we recorded a $8.8 million provision for credit losses as compared to $9.0 million and $41.1 million for the first quarter 2021 and the second quarter 2020, respectively.

The provision in the second quarter 2021 reflects, among other factors, additional quantitative reserves related to certain segments of our commercial real estate portfolio and non-PPP loan growth, and the improvement in our economic forecast component of the reserve as compared to March 31, 2021.

The $8.8 million second quarter 2021 provision also included a $3.0 million provision for unfunded credit commitments largely related to an increase of approximately $375 million in our unfunded construction loan commitments at June 30, 2021 as compared to March 31, 2021.

At June 30, 2021, the allowance allocations for credit losses as a percentage of total loans increased in most loan categories as compared to March 31, 2021.

The allocated reserves as a percentage of commercial real estate loans increased 5 basis points mainly due to higher quantitative reserves for non-owner occupied loans, as well as loan growth within this category during the second quarter 2021.

The allocated reserves as a percentage of commercial and industrial loans increased by 3 basis points mainly due to repayments (loan forgiveness) of PPP loans guaranteed by the SBA with no related allowance at June 30, 2021.

The allowance for credit losses as a percentage

of total non-PPP loans was 1.14 percent, 1.17 percent and 1.06 percent for the second quarter 2021, first quarter 2021 and second quarter 2020, respectively.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including standby letters of credit), as a percentage of total loans was 1.09 percent at both September 30, 2021 and June 30, 2021, and 1.03 percent at September 30, 2020.

During the third quarter 2021, we recorded a $3.5 million provision for credit losses as compared to $8.8 million and $31.0 million for the second quarter 2021 and the third quarter 2020, respectively.

The third quarter 2021 provision reflects, among other factors, additional quantitative reserves related to certain segments of our commercial real estate portfolio, an increase in specific reserves, and non-PPP loan growth, largely offset by a decline in the economic forecast component of the reserve at September 30, 2021 as compared to June 30, 2021.

There was no provision for unfunded credit commitments for the third quarter 2021 as the overall level of such reserves remained materially unchanged at September 30, 2021 as compared to June 30, 2021.

At September 30, 2021, the allowance allocations for credit losses as a percentage of total loans increased in commercial and industrial and commercial real estate loan categories as compared to June 30, 2021.

The allocated reserves as a percentage of commercial and industrial loans increased by 4 basis points mainly due to the third quarter 2021 repayments (loan forgiveness) of PPP loans guaranteed by the SBA with no related allowance at September 30, 2021.

The allocated reserves as a percentage of commercial real estate loans increased 3 basis points largely due to higher quantitative reserves for the non-owner occupied loan portfolio during the third quarter 2021.

The a llowance for credit losses as a percentage of total non-PPP loans was 1.12 percent , 1.14 percent and 1.11 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively.

Capital Adequacy

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

At June 30, 2021 and December 31, 2020, shareholders’ equity totaled approximately $4.7 billion and $4.6 billion, respectively, which represented 11.5 percent and 11.3 percent of total assets, respectively.

During the six months ended June 30, 2021, total shareholders’ equity increased by $145.7 million primarily due to net income of $236.2 million and a $16.2 million increase attributable to the effect of our stock incentive plan.

At September 30, 2021 and December 31, 2020, shareholders’ equity totaled approximately $4.8 billion and $4.6 billion, respectively, which represented 11.7 percent and 11.3 percent of total assets, respectively.

During the nine months ended September 30, 2021, total shareholders’ equity increased by $230.4 million primarily due to net income of $358.8 million and a $30.4 million increase attributable to the effect of our stock incentive plan.

These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $145.1 million and an increase in other comprehensive loss of $13.7 million .

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We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes.

As of June 30, 2021 and December 31, 2020, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

As of September 30, 2021 and December 31, 2020, 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 since adoption (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2021 and December 31, 2020:

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, 2021 and December 31, 2020:

Actual Minimum Capital

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($ in thousands)

As of June 30, 2021

As of September 30, 2021

Total Risk-based Capital

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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,

2021 December 31,

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

Our retention ratio was approximately 60.7 percent for the six months ended June 30, 2021 as compared to 52.7 percent for the year ended December 31, 2020.

Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2021 and 2020.

Our retention ratio was approximately 61.6 percent for the nine months ended September 30, 2021 as compared to 52.7 percent for the year ended December 31, 2020.

Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2021 and 2020.

The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis