What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-08 · 393 added, 563 removed, 549 unchanged (64% of the section changed)

16 unchanged sentences

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

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

• greater than expected costs or difficulties relating to Bank Leumi USA integration matters;

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

• greater than expected non-recurring charges related to the Bank Leumi USA acquisition;

• macroeconomic factors in the U.S.

and globally due to COVID-19 or otherwise, including business disruptions, reductions in employment, supply chain interruptions, inflation, Federal Reserve actions impacting the level of market interest rates and an increase in business failures, specifically among our clients;

• 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 and new variants of COVID-19 may arise in our primary markets;

• continued deterioration in general business and economic conditions or turbulence in domestic or global financial markets;

• 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;

• damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;

• a prolonged downturn in the economy, mainly in New Jersey, New York, Florida, Alabama, California, and Illinois, as well as an unexpected decline in commercial real estate values within our market areas;

• higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;

• the inability to grow customer deposits to keep pace with loan growth;

• a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;

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

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

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

natural and other disasters (including severe weather events) and health emergencies, acts of terrorism or other external events;

• risks associated with our acquisition of Bank Leumi Le-Israel Corporation (Bank Leumi USA), including (i) the inability to realize expected cost savings and synergies from the acquisition in the amounts or timeframe anticipated and (ii) greater than expected costs or difficulties relating to integration matters;

• the loss of or decrease in lower-cost funding sources within our deposit base;

• the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;

• the inability to attract new customer deposits to keep pace with loan growth strategies;

• a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;

• greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;

• the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;

• the risks related to the replacement of the London Interbank Offered Rate with Secured Overnight Financing Rate and other reference rates, including increased expenses, risk of litigation and the effectiveness of hedging strategies;

• cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

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

changes in the enforcement and interpretation of such laws and regulations;

and changes in accounting and reporting standards;

• higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;

• results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;

• our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;

• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events;

• unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors.

A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

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

At September 30, 2022, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

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

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

At March 31, 2023, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

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

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Company Overview.

At September 30, 2022, Valley had consolidated total assets of approximately $55.9 billion, total net loans of $44.7 billion, total deposits of $45.3 billion and total shareholders’ equity of $6.3 billion.

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

Valley operates many convenient branch office locations and commercial banking offices in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn and Queens, Long Island, Westchester County, New York, Florida, California, Alabama and Illinois.

Of our current 238 branch network, 55 percent, 19 percent, 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 8 percent of the branches in Alabama, California, and Illinois combined.

Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years both through organic efforts and bank acquisitions.

Our most recent bank acquisition is discussed below.

Bank Leumi Le-Israel Corporation.

On April 1, 2022, Valley completed its acquisition of Bank Leumi Le-Israel Corporation, the U.S.

subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA, collectively referred to as "Bank Leumi USA".

At the acquisition date, Bank Leumi USA had approximately $8.1 billion in assets, $5.9 billion of loans and $7.0 billion of deposits, after purchase accounting adjustments.

Valley issued approximately 85 million shares of common stock and paid $113.4 million in cash in the transaction.

The consideration for the acquisition totaled approximately $1.2 billion, inclusive of the value of stock options.

The transaction resulted in $403.2 million of goodwill and $153.4 million of combined core deposit and other intangible assets subject to amortization.

See Note 2 to the consolidated financial statements for additional details regarding the acquisition of Bank Leumi USA and other recent acquisition activities.

Impact of COVID-19.

During the third quarter 2022, worldwide inflationary concerns continued to outweigh the other negative impacts of COVID-19.

Among other factors, China's "zero COVID" policy has created disruption of China's manufacturing industry which could have prolonged negative consequences for the global economy as China exports up to one-third of the world's intermediate goods.

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

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 wh ich $3.1 billion have received forgiveness from the SBA.

As of September 30, 2022 , we had $85.8 million (includi ng $35.5 mi llion acquired from Bank Leumi USA) of PPP loans still outstanding.

Of our current 230 branch network, 56 percent, 18 percent, and 18 percent of the branches are in New Jersey, New York and Florida, respectively, with the remaining 8 percent of the branches in Alabama, California, and Illinois combined.

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

Recent Industry Developments.

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

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

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

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

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

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

See "Bank Liquidity" section for additional information.

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

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

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

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

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

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

See the "Capital Adequacy" section for additional details.

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

See "Loan Portfolio" section for more information.

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

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

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

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

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

Quarterly Results.

Net income for the third quarter 2022 was $178.1 million, or $0.34 per diluted common share as compared to $122.6 million, or $0.29 per diluted common share, for the third quarter 2021.

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

The $29.8 million increase in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes:

• a $153.0 million increase in net interest income mainly due to higher average loan balances driven by both acquired and organic loan volumes and increased yields on new and adjustable-rate loans;

• a $13.8 million increase in non-interest income primarily driven by increases in wealth management and trust fees, service charges on deposit accounts and other income totaling $5.7 million, $4.9 million and $7.1 million, respectively, related to additional income resulting from the Bank Leumi USA acquisition, partially offset by lower net gains on sales of residential mortgage loans;

• a $1.5 million decrease in our provision for credit losses, partially offset by:

• an $86.7 million increase in non-interest expense largely due to increases in salary and employee benefits;

technology, furniture and equipment expenses;

and net occupancy caused by our expanded banking operations resulting from the acquisitions of Bank Leumi USA on April 1, 2022 and The Westchester Bank Holding Corporation (Westchester) on December 1, 2021;

• a $26.0 million increase in income tax expense mostly due to higher pre-tax income in the third quarter 2022 .

See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the impact of the items above on our third quarter 2022 results.

Operating Environment.

During the third quarter of 2022, real gross domestic product increased 2.8 percent compared to a decline of 0.6 percent in the second quarter of 2022.

The increase in economic activity was driven in large part by household spending on goods and services, and a favorable mix of export activity outpacing imports.

Residential fixed investments declined as mortgage rates increased markedly which weighed on the headline result.

Business fixed investment, inventory restocking and government spending increased at a tepid rate.

During the third quarter 2022, the Federal Reserve raised the target range for the federal funds rate by 150 basis points to a target range of 3.00 percent to 3.25 percent at the end of the third quarter.

Following its meeting in November, the Federal Reserve raised the federal fund rate by another 75 basis points to a target range of 3.75 percent to 4.00 percent.

In addition, the Federal Reserve has continued to reduce its holdings of Treasury securities and agency debt and mortgage-backed securities.

Consistent with its previously announced plan, the Federal Reserve targeted a reduction of its Treasury and agency securities portfolio by $47.5 billion per month through September 21, 2022 and, effective September 22, 2022, raised its target reduction of securities to $95 billion per month.

These actions reflect the Federal Reserve’s strong commitment to returning inflation to its 2 percent objective.

• a $118.4 million increase in net interest income mainly due to higher average loan balances driven by both acquired and organic loan volumes and increased yields on new and adjustable-rate loans, partially offset by higher cost of deposits;

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

These items were partially offset by:

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

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

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

See the "Net Interest Income", "Non-Interest Income", "Non-Interest Expense" and "Income Taxes" sections below for more details on the impact of the items above on our first quarter 2023 results.

Economic Conditions.

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

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

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

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

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

The 10-year U.S.

Treasury note yield ended the third quarter of 2022 at 3.83 percent, 85 basis points higher compared to June 30, 2022.

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

Treasury note yields ended the quarter at negative 0.39 percent, a 45 basis point decline from June 30, 2022.

For all commercial banks in the U.S., loans and leases increased approximately 2.5 percent from June 30, 2022 to September 30, 2022.

While loan growth moderated somewhat during the quarter, survey data from the industry reported that demand for most commercial and industrial loan products increased.

Alternatively, demand for most real estate related loans declined, particularly for commercial real estate loans with construction and land development purposes.

During the third quarter 2022, Valley’s new loan originations decreased across most product types as compared to the second quarter, but loan growth remained at robust levels partly due to slower paydowns on existing loans due to the rising market interest rate environment.

While confident in our commercial loan pipelines, we expect a more challenging overall loan origination environment moving forward, especially in the residential mortgage and consumer loan portfolios, due to the impact of higher market interest rates on customer demand and selective tightening of certain underwriting standards by Valley.

Further expected increases in market interest rates, persistently high inflation, the lingering impact of supply chain issues, tight labor market conditions, and global economic fallout from the Russia-Ukraine war, among other factors, has added a higher level of uncertainty to the future path of the U.S.

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

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

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

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

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

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

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

economy and an elevated risk of a recession.

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

Total loans increased $1.6 billion to $45.2 billion at September 30, 2022 from June 30, 2022 primarily due to strong organic loan growth.

Our loan portfolio increased 15 percent on an annualized basis during the third quarter 2022 from the second quarter 2022 as a result of solid commercial loan volumes and a continued increase in new residential mortgage loans originated for investment rather than sale.

During the third quarter 2022, we sold only $48 million of residential mortgage loans.

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

Asset Quality.

Non-accrual loans represented 0.65 percent and 0.72 percent of total loans at September 30, 2022 and June 30, 2022, respectively.

Net recoveries of loan charge-offs totaled $5.6 million for the third quarter 2022 as compared to net loan charge-offs of $2.3 million for the second quarter 2022.

Total accruing past due loans increased $25.2 million to $98.7 million, or 0.22 percent of total loans, at September 30, 2022 as compared to $73.5 million, or 0.17 percent of total loans, at June 30, 2022.

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

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

Deposits and Other Borrowings

Overall, average deposits increased by $1.9 billion to $44.8 billion for the third quarter 2022 as compared to the second quarter 2022 mostly due to growth in our retail and brokered CD portfolios.

The retail growth resulted from strategic CD campaigns, while the brokered CD growth resulted from our increased utilization of brokered deposits, as a favorable funding alternative, during the third quarter 2022 .

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

Average non-interest-bearing deposits;

savings, NOW and money market deposits;

and time deposits represented approximately 36 percent, 53 percent and 12 percent of total deposits as of September 30, 2022, respectively.

Actual ending balances for deposits increased $1.4 billion to approximately $45.3 billion at September 30, 2022 from June 30, 2022 largely due to the increased utilization of brokered deposits, consisting of both money market and time deposit accounts, in our funding mix.

Total brokered deposits increased to $3.7 billion at September 30, 2022 as compared to $2.3 billion at June 30, 2022.

Non-interest bearing deposits decreased $718.9 million at September 30, 2022 as compared to June 30, 2022 largely due to fluctuations in certain commercial customer balances, as well as some migration of both commercial and retail balances to interest bearing deposit products.

While our overall deposit levels increased during the third quarter 2022, w e believe the current operating environment will likely remain very challenging for Valley’s deposit gathering initiatives.

As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at September 30, 2022.

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

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

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

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

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

Non-interest bearing deposits;

savings, NOW and money market deposits;

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

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

(in thousands)

Less than three months $ 349,067

Three to six months 97,841

Six to twelve months 77,179

More than twelve months 1,208,902

Total $ 1,732,989

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

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

Treasury securities, changes in customer behavior and other factors.

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

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

Three Months Ended Nine Months Ended

September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Three Months Ended

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

(in thousands)

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Subordinated debt 754,972 753,165 631,056

Securities sold under repurchase agreements — — 86,957 — 228,205

Junior subordinated debentures issued to capital trusts 56,805 56,718 56,457

Total $ 1,686,830 $ 1,598,379 $ 1,476,469

Average short-term borrowings increased $155.8 million during the third quarter 2022 as compared to the third quarter 2021 mostly due to an increase in the balance of federal funds purchased as a part of our overall funding strategy, partially offset by less utilization of FHLB advances.

Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased $117.9 million from the third quarter 2021 largely due to the repayment of long-term repurchase agreements during the third quarter 2021 and, to a lesser extent, maturities of FHLB advances over the last 12 months.

Actual ending balances for short-term borrowings decreased $603.5 million to $919.3 million at September 30, 2022 as compared to June 30, 2022 largely due to the maturity of FHLB advances during the third quarter 2022 and our increased utilization of broker deposits, as a favorable alternative funding source, in our funding mix at September 30, 2022.

Long-term borrowings increased to approximately $1.5 billion at September 30, 2022 as compared to $1.4 billion at June 30, 2022 primarily due to the issuance of new subordinated notes during the third quarter 2022.

On September 20, 2022, Valley issued $150 million of 6.25 percent fixed-to-floating rate subordinated notes due September 30, 2032.

At September 30, 2022, the subordinated notes had a carrying value of $147.5 million, net of unamortized debt issuance costs.

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

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

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

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

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

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

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

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

Non-GAAP Financial Measures

The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated.

The Company believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding Valley’s underlying operational performance, business, and performance trends, and may facilitate comparisons of our current and prior performance with the performance of others in the financial services industry.

Valley believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding its underlying operational performance, business, and performance trends, and may facilitate comparisons of current and prior performance with the performance of others in the financial services industry.

Management utilizes these measures for internal planning, forecasting and analysis purposes.

Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management.

These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S.

These non-GAAP financial measures should not be considered in isolation, as a substitute for or superior to financial measures calculated in accordance with U.S.

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

The following table presents our annualize performance ratios :

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Selected Performance Indicators ($ in thousands, except for %)

Selected Performance Indicators ($ in thousands)

GAAP measures:

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Efficiency ratio 53.79 53.18

September 30,

2023 December 31,

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Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(in thousands)

Net income, as reported (GAAP) $ 146,551 $ 116,728

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

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

(24) (565) (74) (399)

Provision for credit losses (net of tax) (b)

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

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

Merger related expenses (net of tax) (c)

3,360 1,207 47,103 1,207

Litigation reserves (net of tax) (d)

— 1,505 — 1,505

Net income, as adjusted (non-GAAP) $ 154,530 $ 120,313

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

(b) Represents the provision for credit losses for non-PCD loans, unfunded credit commitments and held to maturity debt securities acquired from Bank Leumi USA on April 1, 2022.

(c) Merger related expenses are primarily within salary and employee benefits expense, technology, furniture and equipment expense, and professional and legal fees for the nine months ended September 30, 2022.

(d) Included in professional and legal fees.

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

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

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

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Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

($ in thousands)

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

($ in thousands)

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

($ in thousands)

9 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

($ in thousands)

Total non-interest expense, as reported (GAAP) $ 272,166 $ 197,340

Loss on extinguishment of debt (pre-tax) — — — 8,406

Amortization of tax credit investments (pre-tax) 4,253 2,896

Merger related expenses (pre-tax) (a)

4,707 1,287 63,831 1,287

Litigation reserve (pre-tax) (b)

— 2,100 — 2,100

Total non-interest expense, as adjusted (non-GAAP) $ 263,780 $ 189,816

1 unchanged sentence

Total non-interest income, as reported (GAAP) 54,299 39,270

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

(33) (788) (102) (557)

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

Total net interest income and non-interest income, as adjusted (non-GAAP) $ 490,343 $ 356,948

Efficiency ratio (non-GAAP) 53.79 % 53.18 %

(a) Included primarily within salary and employee benefits expense, technology, furniture and equipment expense, and professional and legal fees for the nine months ended September 30, 2022.

(b) Included in professional and legal fees.

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

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

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding, as follows:

September 30,

2023 December 31,

5 unchanged sentences

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

Tangible book value per common share (non-GAAP) $ 7.87 $ 7.94

Book value per common share (GAAP) $ 12.41 $ 12.23

Tangible book value per common share (non-GAAP) $ 8.36 $ 8.15

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.

N et interest income on a tax equivalent basis totaling $455.3 million for the third quarter 2022 increased $35.7 million as compared to the second quarter 2022 and increased $153.6 million from the third quarter 2021.

Interest income on a tax equivalent basis in the third quarter 2022 increased $83.7 million to $538.0 million as compared to the second quarter 2022.

The increase was mostly due to higher average loan balances driven by our organic loan growth and increased yields on both new originations and adjustable rate loans in our portfolio.

Interest expense of $82.7 million for the third quarter 2022 increased $47.9 million as compared to the second quarter 2022 largely due to higher interest rates on both non-maturity deposits and short-term borrowings, as well as a $1.5 billion increase in average interest bearing liabilities.

Average interest earning assets increased $12.2 billion to $50.5 billion for the third quarter 2022 as compared to the third quarter 2021 primarily due to the acquisitions of Bank Leumi USA and Westchester on April 1, 2022 and December 1, 2021, respectively, as well as strong organic loan growth over the 12-month period ended September 30, 2022 .

Compared to the second quarter 2022, average interest earning assets increased by $1.6 billion during the third quarter 2022.

The increase was primarily driven by a $1.8 billion increase in average loan balances due to organic loan growth mainly in the commercial loan categories, as well as residential mortgage loans.

Average interest bearing liabilities increased $5.9 billion to $31.2 billion for the third quarter 2022 as compared to the third quarter 2021 mainly due to $2.5 billion of interest bearing deposits assumed from Bank Leumi USA, growth in commercial and retail customer deposit balances without stated maturities and brokered deposits, and $727 million of interest bearing deposits assumed from Westchester.

As compared to the second quarter 2022, average interest bearing liabilities increased by $1.5 billion in the third quarter 2022 mainly due to growth in our retail and brokered CD portfolios, partially offset by maturities and less use of short-term borrowings as a funding source.

The retail growth resulted from successful targeted CD campaigns, while the brokered CD growth resulted from our increased utilization of such deposits as a cost-effective funding alternative.

Total average deposits, including non-interest bearing deposits, increased $1.9 billion to $44.8 billion for the third quarter 2022 as compared to the second quarter 2022.

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

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

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

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

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

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

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

The increase was primarily driven by a $1.8 billion increase in average loan balances due to organic loan growth mainly in the commercial loan categories and $1.1 billion increase in average interest bearing cash held mainly overnight with the Federal Reserve Bank of New York as part of our liquidity management.

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

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

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

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

Our net interest margin on a tax equivalent basis of 3.60 percent for the third quarter 2022 increased by 17 basis points and 45 basis points from 3.43 percent and 3.15 percent for the second quarter 2022 and third quarter 2021, respectively.

The yield on average interest earning assets increased by 54 basis points on a linked quarter basis mostly due to the aforementioned higher yields on new and adjustable rate loans in the third quarter 2022 as compared to the second quarter 2022.

The yield on average loans increased by 57 basis points to 4.48 percent for the third quarter 2022 as compared to the second quarter 2022 largely due to the higher level of market interest rates.

The yields on average taxable and non-taxable investments also increased 9 basis points and 25 basis points, respectively, from the second quarter 2022 largely due to investment maturities and prepayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the third quarter 2022.

Our cost of total average deposits increased to 0.59 percent for the third quarter 2022 from 0.19 percent for the second quarter 2022.

The overall cost of average interest bearing liabilities also increased 59 basis points to 1.06 percent for the third quarter 2022 as compared to the second quarter 2022.

The increased cost of funds was mainly due to higher interest rates on most of our interest bearing deposit products combined with greater utilization of brokered and retail CDs in our funding mix during the third quarter 2022.

The Federal Reserve continued to raise the federal funds rate by 75 basis points after each of their meetings in July, September, and November 2022 resulting in a current target range of 3.75 percent to 4.00 percent.

The higher levels of market interest rates will benefit certain interest earning assets on our balance sheet and are likely to provide us the opportunity to reinvest any excess cash, including normal repayments of loans and investments, at higher rates.

Funding costs also increased during the third quarter 2022 and the early stages of the fourth quarter 2022, however at this time, we expect a continued benefit to our net interest income from the immediate repricing of certain earning assets and a degree of lag in higher funding costs due to the current market and our ability to manage the balance sheet.

While our outlook for our net interest income in the fourth quarter 2022 and beyond is positive, we cannot provide any assurances with respect to the future trajectory of market interest rates or that our net interest margin or income will remain at the levels reported for the third quarter 2022.

The following table reflects the components of net interest income for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021:

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

The decrease as

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

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

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

The yields on average taxable and non-taxable investments also increased 12 basis points and 9 basis points, respectively, from the fourth quarter 2022, l argely due to investment maturities and repayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the first quarter 2023.

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

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

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

While our revised outlook for our net interest income is still positive, we cannot provide any assurances with respect to the future trajectory of market interest rates or that our net interest margin or income will remain at the levels reported for the first quarter 2023.

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

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

1 unchanged sentence

Three Months Ended

September 30, 2022 June 30, 2022 September 30, 2021

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

Balance Interest Average

37 unchanged sentences

3.16 % 3.57 % 3.16 %

The following table reflects the components of net interest income for the nine months ended September 30, 2022 and 2021:

Nine Months Ended

September 30, 2022 September 30, 2021

Average Balance Interest Average Rate Average Balance Interest Average Rate

($ in thousands)

Interest earning assets:

_____________

Taxable investments (3)

4,525,323 81,906 2.41 % 3,191,930 45,717 1.91

Tax-exempt investments (1)(3)

574,699 16,079 3.73 % 480,599 11,621 3.22

Interest bearing deposits with banks 975,601 6,026 0.82 % 1,588,656 1,101 0.09

Total interest earning assets 46,605,417 1,333,547 3.82 % 37,902,547 996,762 3.51

Allowance for credit losses (428,078) (348,011)

Cash and due from banks 378,819 263,910

Other assets 4,078,903 3,290,439

Unrealized gains on securities available for sale, net (47,051) 35,490

Total assets $ 50,588,010 $ 41,144,375

Liabilities and shareholders’ equity

Interest bearing liabilities:

Savings, NOW and money market deposits $ 22,374,949 $ 77,423 0.46 % 17,730,438 32,896 0.25 %

Time deposits 4,122,169 21,274 0.69 4,853,891 21,766 0.60

Total interest bearing deposits 26,497,118 98,697 0.50 22,584,329 54,662 0.32

Short-term borrowings 1,072,791 10,049 1.25 966,544 4,390 0.61

Long-term borrowings (4)

1,472,344 31,566 2.86 2,037,312 40,595 2.66

Total interest bearing liabilities 29,042,253 140,312 0.64 25,588,185 99,647 0.52

Non-interest bearing deposits 14,679,354 10,147,130

Other liabilities 996,667 690,100

Shareholders’ equity 5,869,736 4,718,960

Total liabilities and shareholders’ equity $ 50,588,010 $ 41,144,375

Net interest income/interest rate spread (5)

$ 1,193,235 3.18 % $ 897,115 2.99 %

Tax equivalent adjustment (3,414) (2,515)

Net interest income, as reported $ 1,189,821 $ 894,600

Net interest margin (6)

3.40 % 3.15 %

Tax equivalent effect 0.01 0.01

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

3.41 % 3.16 %

_____________

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

8 unchanged sentences

Change in Net Interest Income on a Tax Equivalent Basis

Three Months Ended September 30, 2022

Compared to September 30, 2021 Nine Months Ended September 30, 2022 Compared to September 30, 2021

Volume Change

Change Change

Three Months Ended March 31, 2023

Compared to March 31, 2022

Volume Change

11 unchanged sentences

Long-term borrowings and junior subordinated debentures 1,520 8,153 9,673

Total increase (decrease) in interest expense 4,150 50,810 54,960 (4,577) 45,242 40,665

Total increase in interest expense 25,781 235,640 261,421

Total increase (decrease) in net interest income $ 131,392 $ (12,297) $ 119,095

1 unchanged sentence

Non-Interest Income

Non-interest income increased $13.8 million and $37.2 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

The following table presents the components of non-interest income for the three and nine months ended September 30, 2022 and 2021:

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

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(in thousands)

1 unchanged sentence

Insurance commissions 2,420 1,859

Capital markets 10,892 14,360

Service charges on deposit accounts 10,476 6,212

5 unchanged sentences

Total non-interest income $ 54,299 $ 39,270

Wealth management and trust fees income increased by $5.7 million and $13.6 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 mostly due to brokerage fees resulting from the acquisition of Bank Leumi USA and its wholly owned broker dealer subsidiary now legally named Valley Financial Management, In c.

The brokerage fees totaled $3.9 million and $9.3 million for the three and nine months ended September 30, 2022, respectively.

The increases in both 2022 periods were also supplemented by additional revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments, which we acquired in October 2021.

Insurance commissions increased $2.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 mostly due to stronger business volumes generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts increased by $4.9 million and $11.0 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021 largely related to revenues resulting from deposit accounts acquired from Bank Leumi USA.

Net losses on securities transactions of $1.1 million for the nine months ended September 30, 2022 were mostly due to net trading losses related to our trading municipal bond portfolio.

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 reporting period end.

Net gains on sales of loans decreased $5.5 million and $14.5 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

The third quarter 2022 decrease was mostly due to lower loan sale volumes as we sold approximately $48.4 million of residential mortgage loans compared to $234.6 million during the third quarter 2021.

The mark to market change on loans held for sale at fair value resulted in net losses totaling $116 thousand and $403 thousand for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $10.4 million for the nine months ended September 30, 2022 and 2021, respectively.

Our ability to generate net gains on sales of loans could continue to be challenged by a number of factors, including increases in market interest rates, lower customer demand for conforming loan products and our decision to originate certain residential mortgage loans for investment in our loan portfolio rather than sale.

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

Other non-interest income increased $7.1 million and $27.5 million for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively, partially due to higher fee income from derivative interest rate swaps executed with commercial lending customers caused by a greater volume of transactions and higher foreign exchange fees .

Swap fee inc ome totaled $10.7 million and $8.8 million for the three months ended September 30, 2022 and 2021, respectively, and $35.8 million and $22.6 million for the nine months ended September 30, 2022 and 2021, respectively.

While we believe our commercial loan swap based product will remain attractive to borrowers in the current interest rate environment, we can provide no assurance that our swap fees will remain at the level reported for the third quarter 2022.

Foreign excha nge fees totaled $1.5 million and $4.0 million three and nine months ended September 30, 2022, respectively.

Foreign exchange fees for the respective reporting periods in 2021 were not material.

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

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

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

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

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

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

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

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

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

Non-Interest Expense

Non-interest expense increased $86.7 million and $251.7 million for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively.

The following table presents the components of non-interest expense for the three and nine months ended September 30, 2022 and 2021:

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

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

(in thousands)

5 unchanged sentences

Professional and legal fees 16,814 14,749

Loss on extinguishment of debt — — — 8,406

Amortization of tax credit investments 4,253 2,896

1 unchanged sentence

Total non-interest expense $ 272,166 $ 197,340

Salary and employee benefits expense increased $40.6 million and $123.9 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

The increases in both 2022 periods were primarily due to strategic increases in our headcount to enhance lending and operations (including additions to staff due to the Bank Leumi USA and Westchester acquisitions), 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.

In addition, salary and employee benefits expense included approximately $1.3 million and $29.3 mi llion of merger related expenses for the three and nine months ended September 30, 2022, respectively.

The merger expenses, primarily consisted of change in control and severance payments, related to Bank Leumi USA during the second quarter 2022.

Net occupancy expense increased $6.5 million and $11.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021 mainly due to higher lease expense, depreciation expense and repair and maintenance costs, as well as $1.5 million of merger related expense for the third quarter 2022.

Technology, furniture and equipment expense increased $18.4 million and $50.3 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

The increases are largely driven by higher data processing costs related to the acquisitions of Bank Leumi USA and Westchester and additional investments in technology and equipment, and higher depreciation expense.

Within this expense category, merger related costs totaled $1.8 million and $17.1 million for the three and nine months ended September 30, 2022, respectively.

FDIC insurance assessment expense increased $2.9 million and $5.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021 mainly due to the Bank Leumi USA acquisition, as well as our balance sheet organic growth.

Amortization of other intangible assets increased $5.8 million and $10.2 million for the three and nine months ended September 30, 2022 , respectively, as compared to the same period of 2021 mostly due to additional core deposit and other intangible assets resulting from the Bank Leumi USA acquisition.

See Notes 2 and 9 to the consolidated financial statements for additional information.

Professional and legal fees increased $4.3 million and $35.7 million for the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

The increases were primarily due to

higher consulting expense mainly related to technology transformation and new product initiatives, and increased managed services.

Within this expense category, merger related costs totaled $75 thousand and $11.5 million for the three and nine months ended September 30, 2022, respectively.

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.

Other non-interest expense increased $8.2 million and $22.1 million f or the three and nine months ended September 30, 2022, respectively, as compared to the same periods of 2021.

These increases within this expense category mostly related to incrementally higher operating expenses due to the expansion of our operations, including acquisitions of Bank Leumi USA and Westchester.

In addition, the 2022 periods included a $2.0 million contribution to the Valley Bank Charitable Fund.

Income tax expense totaled $68.4 million for the third quarter 2022 as compared to $36.6 million and $42.4 million for the second quarter 2022 and third quarter 2021, respectively.

Our effective tax rate was 27.7 percent, 27.5 percent and 25.7 percent for the third quarter 2022, second quarter 2022 and third quarter 2021, respectively.

The increase in the effective tax rate in the third quarter 2022 as compared to the third quarter 2021 was partly due to a $3.8 million excess stock compensation benefit recognized in the 2021 period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

1 unchanged sentence

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

Based on the current information available, we anticipate that our effective tax rate will range from 27 percent to 29 percent for the remainder of 2022, exclusive of pending potential tax rate increases.

Operating Segments

Prior to the second quarter 2022, Valley operated as four reportable segments:

Consumer Lending, Commercial Lending, Investment Management, and Corporate and Other Adjustments.

Valley re-evaluated its segment reporting during the second quarter 2022 to consider the Bank Leumi USA acquisition on April 1, 2022 along with other factors, including changes in the internal structure of operations, discrete financial information reviewed by key decision-makers, balance sheet management strategies and personnel.

As a result, Valley determined it operated reportable segments consisting of Consumer Lending, Commercial Lending and Treasury and Corporate Other at June 30, 2022.

Treasury and Corporate Other was reorganized to consolidate Treasury and other corporate-wide functions, including the Treasury managed investment securities portfolios and overnight interest earning cash balances formerly reported under Investment Management.

The discrete financial information related to the activities previously reported in the Investment Management segment is no longer provided to Valley's CEO, who is the chief operating decision maker.

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

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

Valley regularly assesses its strategic plans, operations, and reporting structures to identify its reportable segments.

There were no additional changes to Valley's reportable segments at September 30, 2022.

Valley regularly assesses its strategic plans, operations and reporting structures to identify its reportable segments and no changes to the reportable segments were determined necessary during the first quarter 2023.

The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S.

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

The prior-period balances reflect reclassifications to conform the presentation in those periods to the current operating segment structure.

Valley's consolidated results were not impacted by the changes discussed above and remain unchanged for all periods presented.

The following tables present the financial data for Valley's operating segments for the three months ended September 30, 2022 and 2021:

Three Months Ended September 30, 2022

Lending Commercial

Lending Treasury and Corporate Other Total

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

These reclassifications did not impact Valley's consolidated results.

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

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

Three Months Ended March 31, 2023

Banking Commercial

Banking Treasury and Corporate Other Total

($ in thousands)

Average interest earning assets $ 8,768,482 $ 39,090,889 $ 7,503,419 $ 55,362,790

Income before income taxes 20,137 255,802 (29,415) 246,524

Income (loss) before income taxes 1,024 223,610 (20,918) 203,716

Annualized return on average interest earning assets (before tax)

0.05 % 2.29 % (1.12) % 1.47 %

Three Months Ended September 30, 2021

Lending Commercial

Lending Treasury and Corporate Other Total

Three Months Ended March 31, 2022

Banking Commercial

Banking Treasury and Corporate Other Total

($ in thousands)

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See Note 16 to the consolidated financial statements for additional details.

Consumer Lending

Consumer Lending represented 18.7 percent of our loan portfolio at September 30, 2022, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 11.5 percent of our loan portfolio at September 30, 2022) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

The weighted average life of the automobile loans (representing 3.8 percent of total loans at September 30, 2022) is relatively unaffected by movements in the market level of interest rates.

Consumer Banking

Consumer Banking represented 18.2 percent of our loan portfolio at March 31, 2023, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans).

The duration of the residential mortgage loan portfolio (which represented 11.3 percent of our loan portfolio at March 31, 2023) is subject to movements in the market level of interest rates and forecasted prepayment speeds.

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

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

Consumer Lending also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services.

Average interest earning assets in Consumer Lending increased $934.1 million to $8.3 billion for the three months ended September 30, 2022 as compared to the third quarter 2021.

The increase was mostly due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, as well as growth in automobile loans and secured personal lines of credit.

Loans acquired from Bank Leumi USA on April 1, 2022 and Westchester on December 1, 2021 did not materially impact this operating segment.

Income before income taxes generated by Consumer Lending decreased $17.0 million to $20.1 million for the third quarter 2022 as compared to the third quarter 2021 largely due to a $11.8 million increase in the provision for loan losses, a $5.6 million increase in the internal transfer expense and higher non-interest expense.

The higher internal transfer expense and non-interest expense was mostly driven by general increases related to organic growth in our retail business and the recent bank acquisitions.

The increase in the provision for loan losses was mainly due to higher quantitative reserves for residential mortgage loans, loan growth, and qualitative reserve allocations related to Hurricane Ian in this category.

The negative impact of these items was partially offset by a $7.8 million increase in non-interest income for the third quarter 2022 as compared to the third quarter 2021 largely due to increases in service charges on deposit accounts and brokerage fees within wealth management and trust fees, partially o ffset by

lower gains on sales of residential mortgage loans.

The net interest income also increased by a $3.4 million in the third quarter 2022 as compared to the same quarter in the prior year, mainly driven by higher average loan balances.

The net interest margin on the Consumer Lending portfolio decreased 16 basis points to 2.81 percent for the third quarter 2022 as compared to the third quarter 2021 mainly due to a 37 basis point increase in the costs associated with our funding sou rces, partially offset by a 21 basis point increase in the yield on average loans .

The increase in our funding costs was mainly due to the rising market interest rate environment, additional funding sourced through brokered deposits and FHLB advances for loan growth and a shift in some customer preference to the interest-bearing deposit products from non-interest bearing during the third quarter 2022 .

The 21 basis point increase in loan yield was largely due to higher yielding new loan volumes and normal repayments of lower yielding loans over the last 12-month period.

Consumer Banking also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services.

Average interest earning assets within Consumer Banking increased $1.1 billion to $8.8 billion for the three months ended March 31, 2023 as compared to the same period of 2022 .

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

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

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

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

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

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

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

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

The 78 basis point increase in loan yield was largely due to higher yielding new loan volumes and adjustable rate loans in our portfolio.

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

Commercial Lending

Commercial Lending is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans.

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

Commercial and industrial loans totaled approximately $8.7 billion and represented 19.2 percent of the total loan portfolio at September 30, 2022.

Commercial real estate loans and construction loans totaled $28.1 billion and represented 62.1 percent of the total loan portfolio at September 30, 2022.

Average interest earning assets in this segment increased approximately $10.7 billion to $36.0 billion for the three months ended September 30, 2022 as compared to the third quarter 2021 mostly due to acquired loans from Bank Leumi USA and Westchester and strong new organic loan originations primarily concentrated in the commercial real estate loan portfolio.

The increases were partially offset by continued run-off of commercial and industrial PPP loans, which totaled only $85.8 million at September 30, 2022 as compared to $874.0 million at September 30, 2021, due to SBA loan forgiveness.

Income before income taxes for the three months ended September 30, 2022 for Commercial Lending increased $113.9 million to $255.8 million as compared to the third quarter 2021.

The increase was mainly driven by increases in both net interest income and non-interest income and lower provision for loan losses, partially offset by an increase in the internal transfer expense.

Net interest income for this segment increased $135.6 million to $372.6 million for the third quarter 2022 as compared to the same period in 2021 primarily due to additional income generated on higher average loan balances and loan yield.

Non-interest income increased $11.9 million to $23.5 million for the three months ended September 30, 2022 as compared to the third quarter 2021.

The increase was mostly due to general increases in service charges on commercial deposit accounts, swap fee income from derivative interest rate swaps executed with commercial loan customers, foreign exchange fees and fee income from commercial letters of credit.

The provision for loan losses decreased by $13.5 million as compared to the second quarter 2021.

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

Commercial Banking

Commercial Banking is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans.

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

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

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

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

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

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

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

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

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

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

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

Internal transfer expense increased $42.8 million for the third quarter 2022 as compared to the third quarter 2021 due to general increases related to both organic and acquired growth in our business.

The net interest margin for this segment increased 40 basis points to 4.14 percent for the third quarter 2022 as compared to the third quarter 2021 due to a 77 basis point increase in the yield on average loans, partially offset by a 37 basis point increase in the cost of our funding sources.

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

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

Treasury and Corporate Other

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Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York).

Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are

allocated from Treasury and Corporate Other to the Consumer Lending and Commercial Lending segments.

Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer Banking and Commercial Banking segments.

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

Other items disclosed in this segment include net gains and losses on available for sale and held to maturity securities transactions, interest expense related to subordinated notes, amortization (and impairment) of tax credit investments, as well as other non-core items, including merger expenses.

Average interest earning assets in this segment increased $554.9 million during the three months ended September 30, 2022 mainly due to an increase of $1.5 billion in average taxable investment securities, partially offset by lower a verage interest bearing deposits with banks.

The increase in the average investment securities balance was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA.

Average interest bearing deposits with banks decreased $1.2 billion as compared to the same period in 2021 mainly due to continued funding of loan growth, fluctuations in the timing of loan and investment activity and surge deposits from customers that drove higher levels of excess liquidity in the third quarter 2021.

The pre-tax loss for this segment totaled $29.4 million for the three months ended September 30, 2022 as compared to a $14.1 million for the same period in 2021.

The $15.4 million increase in the pre-tax loss during the 2022 period was mainly due to increases in non-interest expense that were partially offset by an increase in internal transfer income.

Non-interest expense increased $71.6 million to $205.5 million during the three months ended September 30, 2022 as compared to the same period a year ago largely due to increases in technology, furniture and equipment, and occupancy expense, as well as higher salaries and employee benefit expenses incurred during the third quarter 2022 and our expanded banking operations resulting from the Bank Leumi USA acquisition .

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

The internal transfer income increased by $48.4 million to $140.2 million for the three months ended September 30, 2022 as compared to the same period a year ago mostly due to general increases related to our growth and recent acquisitions.

The net interest margin for this segment increased 88 basis points to 2.01 percent for the for the third quarter 2022 as compared to the third quarter 2021 due to a 125 basis point increase in the yield on average investments, partially offset by a 37 basis point increase in cost of our funding sources.

The increase in the yield on average investments as compared to the third quarter 2021 was largely due to investment maturities and prepayments redeployed into new higher yielding securities, as well as lower premium amortization expense caused by a decline in prepayments on mortgage-backed securities during the third quarter 2022 .

The following tables present the financial data for Valley's operating segment for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, 2022

Lending Commercial

Lending Treasury and Corporate Other Total

($ in thousands)

Average interest earning assets $ 7,978,732 $ 32,551,062 $ 6,075,623 $ 46,605,417

Income before income taxes 56,796 519,640 (40,905) 535,531

Annualized return on average interest earning assets (before tax)

0.95 % 2.13 % (0.90) % 1.53 %

Nine Months Ended September 30, 2021

Lending Commercial

Lending Treasury and Corporate Other Total

($ in thousands)

Average interest earning assets $ 7,176,086 $ 25,465,276 $ 5,261,185 $ 37,902,547

Income (loss) before income taxes 104,308 411,712 (32,592) 483,428

Annualized return on average interest earning assets (before tax)

1.94 % 2.16 % (0.83) % 1.70 %

Consumer Lending

Consumer Lending's average interest earning assets increased $802.6 million to $8.0 billion for the nine months ended September 30, 2022 as compared to the same period in 2021.

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

Income before income taxes generated by Consumer Lending decreased $47.5 million to $56.8 million for the nine months ended September 30, 2022 as compared to the same period in 2021 largely due to a $32.5 million increase in the internal transfer expense coupled with a higher provision for loan losses and higher non-interest expense.

The provision for loan losses increased $21.0 million for the nine months ended September 30, 2022 from $6.5 million credit (negative) provision for the same period of 2021.

The increase in provision was mainly due to higher reserves related to residential loan growth.

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

Net interest income increased $9.5 million primarily due to additional income generated on higher average loan balances.

Non-interest income also increased $3.1 million mostly due to increases in wealth management and trust fees and service charges on deposit accounts caused by our recent acquisitions, partially offset by lower net gains on sales of residential mortgage loans for the nine months ended September 30, 2022 as compared to the same period in 2021.

Net interest margin on the Consumer Lending portfolio decreased 15 basis points to 2.89 percent for the nine months ended September 30, 2022 as compared to the same period one year ago mainly due to a 10 basis point decrease in the yield on average loans and a 5 basis point increase in the costs associated with our funding sources.

The 10 basis point decrease in loan yield was largely due to lower yielding new loan volumes prior to the second quarter 2022 and normal loan repayments.

The increase in our funding costs was mainly due to higher interest rates on most of our interest bearing deposit products, including brokered deposits, a low er mix of non-interest bearing deposits, and higher cost short-term borrowings due to the rising interest rate environment in 2022.

Commercial Lending

Average interest earning assets in Commercial Lending increased $7.1 billion to $32.6 billion for the nine months ended September 30, 2022 as compared to the same period in 2021.

This increase was primarily due to strong organic loan growth over the 12-month period ended September 30, 2022, as well as loans acquired from Bank Leumi USA and Westchester.

For the nine months ended September 30, 2022, income before income taxes for Commercial Lending increased $107.9 million to $519.6 million as compared to the same period in 2021 mainly driven by increases net interest income and non-interest income, partially offset by higher i nternal transfer expense and provision for loan losses.

Net interest income increased $248.3 million to $951.9 million for the nine months ended September 30, 2022 as compared to the same period in 2021 mainly due to higher average commercial loan balances and loan yield during the 2022 period.

Non-interest income increased $25.7 million for the nine months ended September 30, 2022 as compared to the same period in 2021 mainly due to a $13.2 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers, a $4.0 million increase in foreign exchange fees and higher service charges on commercial deposit accounts .

Internal transfer expense increased $158.3 million to $371.2

million for the nine months ended September 30, 2022 as compared to the same period in 2021 largely due to the significant acquired and organic expansion of our operations over the last 12-month period .

T he provision for credit losses increased $6.8 million to $34.6 million during the nine months ended September 30, 2022 as compared to $27.8 million for the same period in 2021 mainly due to the provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA on April 1, 2022.

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

The net interest margin for this segment increased 22 basis points to 3.90 percent for the nine months ended September 30, 2022 as compared to the same period in 2021 due to a 27 basis point increase in yield on average loans, partially offset by a 5 basis point increase in the cost of our funding sources.

Treasury and Corporate Other

Treasury and Corporate Other's average interest earning assets increased $814.4 million during the nine months ended September 30, 2022 as compared to the same period in 2021.

Within the category, a $1.3 billion increase in taxable investment securities was partially offset by a $613.1 million decrease in average interest bearing deposits with banks.

The increase in average taxable investment securities was mainly due to $1.3 billion of investment securities acquired from Bank Leumi USA.

The lower levels of excess liquidity were mainly due to the strong organic loan growth over the last 12-month period and a reduction in the impact of surge customer deposits as compared to the 2021 period.

The pre-tax loss for this segment totaled $40.9 million for the nine months ended September 30, 2022 as compared to $32.6 million for the same period in 2021.

The $8.3 million increase in pre-tax loss was mainly due to an increase in non-interest expense largely offset by higher in internal transfer income and net interest income.

Non-interest expense increased $244.1 million to $617.7 million for the nine months ended September 30, 2022 as compared to the same period in 2021 partially due to a $62.6 million increase in merger related expenses, as well as other additional expenses related to our expanded banking operations and organic business growth.

However, the comparative 2021 period also included an $8.4 million pre-tax l oss on extinguishment of debt.

Average interest earning assets within Treasury and Corporate Other increased $1.8 billion to $7.5 billion for the three months ended March 31, 2023 mainly due to investment securities acquired from Bank Leumi USA, as well as other select investment securities purchases largely classified as held to maturity over the last 12-month period .

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

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

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

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

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

Internal transfer income increased $190.8 million to $463.8 million for the nine months ended September 30, 2022 as compared to the same period in 2021 due to the higher allocation of non-interest expense over the same period.

Treasury and Corporate Other's net interest margin increased 74 basis points to 1.87 percent for the nine months ended September 30, 2022 as compared to the same period in 2021 due to a 79 basis point increase in the yield on average investments, and a 5 basis point increase in cost of our funding sources.

The increase in the yield on average investments as compared to the same period in 2021 was largely driven by new higher yielding investments and lower premium amortization expense caused, in part, by slower principal repayments in the rising interest rate environment of 2022.

The internal transfer income increased $33.9 million to $162.5 million for the three months ended March 31, 2023 as compared to the same period a year ago due to the higher allocation of non-interest expense over the same period.

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

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

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

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

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

ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Interest Rate Risk

Our success is largely dependent upon our ability to manage interest rate risk.

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We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities.

Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained

in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

We use a simulation model to analyze net interest income sensitivity to movements in interest rates.

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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 September 30, 2022.

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

In the model, the forecasted shape of the yield curve remains static as of September 30, 2022.

In the model, the forecasted shape of the yield curve remains static as of March 31, 2023.

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

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2022.

Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2022 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 2022.

The model also utilizes an immediate parallel shift in market interest rates at September 30, 2022.

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

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

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

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

Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at September 30, 2022.

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

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

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Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.

The Bank has no required regulatory liquidity ratios to maintain;

however, it adheres to an internal liquidity policy.

The current policy maintains that we may not have a ratio of loans to deposits in 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, 2022.

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

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

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

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

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

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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 $2.6 billion , representing 5.2 percent of earning assets at September 30, 2022 and $3.5 billion, representing 8.7 percent of earning assets at December 31, 2021.

Of the $2.6 billion of liquid assets at September 30, 2022, approximately $348 million of various investment securities were pledged to counterparties to support our earning asset funding strategies.

We anticipate the receipt of approx imately $310 million in principal payments from securities in the total investment portfolio at September 30, 2022 over the

next 12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Total liquid assets were approximate ly $7.2 billion , representing 12.1 percent of earning assets at March 31, 2023 and $2.4 billion, representing 4.6 percent of earning assets at December 31, 2022.

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

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

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

Loan principal payments from total loans and loans held for sale at September 30, 2022 are projected in accordance with their scheduled contractual terms to be approximately $11.2 billion over the next 12-month period.

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

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

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

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

Average core deposits totaled approximately $37.9 billion and $29.4 billion for the nine months ended September 30, 2022 and for the year ended December 31, 2021, respectively, representing 81.4 percent and 78.3 percent of average earning assets for the respective periods.

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

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

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

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

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

While these lending lines are uncommitted, management believes that the Bank could borrow approximately $2.1 billion from these banks on a collective basis.

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

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

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

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

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

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

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

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

At September 30, 2022, Valley h ad $1.6 billion of MULOCs outst anding 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 September 30, 2022, our borrowing capacity under the Federal Reserve Bank's discount window was $2.1 billion.

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

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

Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $263.6 million to $919.3 million at September 30, 2022 as compared to December 31, 2021 mainly due a higher utilization of FHLB advances, partially offset by lower repo balances at September 30, 2022.

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

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

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

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

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

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

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

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

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

Corporation Liquidity

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In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances.

Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions.

Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods of up to five years, but not beyond the stated maturity dates, and subject to other conditions.

Investment Securities Portfolio

As of September 30, 2022, we had $43.3 million, $1.3 billion, and $3.7 billion in equity, available for sale and held to maturity debt securities, respectively.

There were $4.1 million of trading debt securities at September 30, 2022 consisting of investment grade municipal bonds and U.S.

Treasury securities.

The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in partnerships that invest in such companies.

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

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

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

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

Treasury securities, U.S.

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Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, which may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers.

We acquired $6.2 million, $505.9 million, and $806.6 million of equity securities, available for sale debt and held to maturity debt securities, respectively, from Bank Leumi USA on April 1, 2022.

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

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

Treasury securities.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed to.

These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments primarily made into the available for sale and held to maturity debt securities portfolios.

Allowance for Credit Losses and Impairment Analysis

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In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a

credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value is less than the amortized cost basis.

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

We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2022 and December 31, 2021 and determined that the declines in fair value were 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, 2022 and the year ended December 31, 2021.

As a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2022 and December 31, 2021.

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

Based on a comparison of the present value of expected cash flows to the amortized cost, Valley recognized a credit related impairment of one corporate bond issued by Signature Bank resulting in both a provision for credit losses and full charge-off of the security totaling $5.0 million during the three months ended March 31, 2023.

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

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

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

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

Held to maturity debt securities.

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

Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.7 million and $1.2 million at September 30, 2022 and December 31, 2021, respectively.

There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2022 and 2021.

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

Investment grades.

The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the

date of our purchase of the securities.

For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool.

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

The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at September 30, 2022:

September 30, 2022

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

March 31, 2023

Losses Fair Value

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

The unrealized losses in the AAA and AA rated categories of both the held to maturity and available for sale debt securities portfolios (in the above table) were mainly related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and continued to be driven by the rising interest rate environment during the third quarter 2022.

The investment securities held to maturity portfolio included $158.2 million of investments not rated by the rating agencies with aggregate unrealized losses of $10.6 million at September 30, 2022 mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million and several corporate and other debt securities.

The unrealized losses in the AAA and AA rated categories of both the available for sale and held to maturity debt securities portfolios (in the above table) were largely related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and continued to be driven by the rising interest rate environment during the last 12 months.

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

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

The unrealized losses within non-rated held to maturity debt securities mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million and several corporate and other debt securities.

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

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

September 30,

2022 June 30,

2023 December 31,

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Commercial and industrial $ 9,043,946 $ 8,804,830

Commercial and industrial $ 8,615,557 $ 8,378,454 $ 5,411,601

Commercial and industrial PPP loans 85,820 136,004 435,950

Total commercial and industrial * 8,701,377 8,514,458 5,847,551

Commercial real estate:

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Total 100.0 % 100.0 %

* Includes net unearned discount and deferred loan fees of $136.5 million, $141.2 million, and $78.5 million at September 30, 2022, June 30, 2022, and December 31, 2021, respectively.

The increases from December 31, 2021 were largely due to a $98 million net purchase discount associated with the loans acquired from Bank Leumi USA on April 1, 2022.

Loans increased $1.6 billion to approximately $45.2 billion at September 30, 2022 from June 30, 2022 largely due to solid organic loan originations and slower paydown activity of existing loans.

C ommercial and industrial, total commercial real estate (including construction) and residential mortgage loans increased 9 percent, 17 percent and 14 percent, respectively, on an annualized basis during the third quarter 2022 .

Commercial and industrial loans increased $186.9 million to $8.7 billion at September 30, 2022 as compared to June 30, 2022.

Excluding PPP loans, the commercial and industrial loan organic growth totale d $237.1 million during the third quarter 2022 mainly due to solid organic loan volumes largely amongst our pre-existing long-term customer base across most of our primary market areas.

In addition, the new loan pipeline was driven by direct calling efforts of our commercial lending team.

SBA Paycheck Protection Program (PPP) loans decreased $50.2 million to $85.8 million at September 30, 2022 compared to $136.0 million at June 30, 2022 mainly due to loan forgiveness (repayments).

Commercial real estate loans (excluding construction loans) increased $1.0 billion to $24.5 billion at September 30, 2022 from June 30, 2022 driven by solid organic growth mainly in the non-owner occupied and multifamily loan portfolios.

The new loan volumes were generated across most of our geographic footprints.

Construction loans increased $197.4 million to $3.6 billion at September 30, 2022 from June 30, 2022 mainly due to a high volume of advances on new, and to a lesser extent, pre-existing construction projects during the third quarter 2022.

Residential mortgage loans increased $172.1 million, or 13.8 percent on an annualized basis, during the third quarter 2022 primarily due to new loan activity in the purchased home market and an increase in such loans originated for investment rather than sale.

New and refinanced residential mortgage loan originations totaled $342.9 million for the third quarter 2022 as compared to $540.7 million and $622.1 million for the second quarter 2022 and third quarter 2021, respectively.

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

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

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

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

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

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

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

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

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

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

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

These loans are geographically disbursed largely across Florida, Alabama, New Jersey, New York, and Manhattan with a combined weighted average loan to value ratio of 54 percent and debt service coverage ratio of 1.90.

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

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

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

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

Florida originations totaled $53.6 million and represented 27.6 percent of total residential mortgage loan originations in the quarter.

Of the total originations in the third quarter 2022, only $36.7 million of residential mortgage loans were originated for sale rather than held for investment as compared to $61.9 million during the second quarter 2022.

During the third quarter 2022, we retained approximately 89 percent of the total residential mortgages originations in our held for investment loan portfolio.

We sold approximately $48.4 million of residential mortgage loans held for sale during the third quarter 2022.

We may continue to retain a higher percentage of new loan volumes during the fourth quarter 2022 due to several factors, including consumer demand and preferences for certain mortgage products and our management of the interest rate risk and the mix of the interest earning assets on our balance sheet.

Additionally, the volume of both new and refinanced loan applications have continued to decline in the early stages of the fourth quarter 2022 due to the increase in the level of mortgage interest rates and may challenge our ability to grow this loan category.

Home equity loans increased by $35.7 million to $467.1 million at September 30, 2022 compared to June 30, 2022.

However, new home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest and we anticipate growth in this loan category to be challenged by the unfavorable rising interest rate environment.

Automobile loans increased by $37.6 million, or 9.0 percent on an annualized basis, to $1.7 billion at September 30, 2022 as compared to June 30, 2022 as loan originations volumes continued to outpace loan repayments during the third quarter 2022 .

However, loan originations slowed significantly during the third quarter 2022 as demand for new and used vehicle financing declined due to the higher interest rate environment.

W e originated $196.6 million in auto loans through our dealership network during the third quarter 2022 as compared to $278.2 million in the second quarter 2022.

Of the total originations, our Florida dealership network contributed $33.7 million in auto loan originations, representing approximately 17 percent of new loans, during the third quarter 2022.

Despite increased new automobile inventories available to consumers, we anticipate that the impact of inflation on average new vehicle prices coupled with rising interest rates could have a negative impact on our ability to grow this loan category during the fourth quarter 2022.

Other consumer loans increased $36.9 million to $1.1 billion at September 30, 2022 from June 30, 2022.

A large part of our lendin g is in northern and central New Jersey, New York City, Long Island, and Florida.

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

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

We may continue to retain a higher percentage of new loan volumes during the second quarter 2023 mainly due to our management of the interest rate risk and the mix of the interest earning assets on our balance sheet.

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

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

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

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

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

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

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

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

A significant part of our lendin g is in northern and central New Jersey, New York City, Long Island and Florida.

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

Despite the moderate decline in new loan originations for the third quarter 2022, we anticipate solid organic commercial and industrial non-PPP and commercial real estate loan growth to continue in the fourth quarter 2022.

Based upon current projections, we anticipate a range of 8 to 10 percent annualized loan growth for the fourth quarter 2022.

However, there can be no assurance that those positive trends will continue, or balances will not decline from September 30, 2022 due to several factors, including, but not limited to persistently high inflation, the Federal Reserve's rapid monetary policy tightening, and the ongoing negative impact of Russia-Ukraine war on the global economy.

In addition, w e anticipate that residential mortgage and other consumer loan activity will continue to slow meaningfully in the fourth quarter 2022.

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

We expect a more challenging overall loan origination environment moving forward, especially in the residential mortgage and consumer loan portfolios, due to the impact of higher market interest rates on customer demand and selective tightening of certain underwriting standards by Valley.

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 September 30, 2022.

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

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 is acquired through foreclosure on loans secured by land or real estate.

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

Our NPAs decreased $19.9 million to $294.8 million at September 30, 2022 as compared to June 30, 2022 mostly due to declines in non-accrual commercial and industrial and commercial real estate loans mainly caused by a few large loan repayments, and, to a lesser extent, loan charge-offs during the third quarter 2022.

NPAs as a percentage of total loans and NPAs totaled 0.65 percent and 0.72 percent at September 30, 2022 and June 30, 2022, respectively (as shown in the table below).

We believe our total NPAs has remained relatively low as a percentage of the total loan portfolio and 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.

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

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

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

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

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

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain

optimistic regarding the overall future performance of our loan portfolio.

During the nine months ended September 30, 2022, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the challenges of the global supply chain issues, high inflation and overall uncertain economy and the ongoing impact of COVID-19.

However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at September 30, 2022 due to the aforementioned or other factors potentially impacting our lending customers.

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

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

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

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,

2022 June 30,

2022 March 31,

2023 December 31,

($ in thousands)

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Commercial real estate 13,580 6,638

Construction — 9,108 1,708

Residential mortgage 12,599 16,146

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Commercial real estate — 3,167

Construction 12,969 3,862 3,125

Residential mortgage 2,133 3,315

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Commercial real estate — 2,292

Construction 6,450 3,990

Residential mortgage 1,668 1,866

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Total non-performing assets (NPAs) $ 244,935 $ 271,984

Performing troubled debt restructured loans

$ 69,748 $ 67,274 $ 56,538

Total non-accrual loans as a % of loans 0.50 % 0.57 %

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

0.87 0.89 0.91

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

180.54 170.02

Loans past due 30 to 59 days decreased $139 thousand to $45.0 million at September 30, 2022 as compared to June 30, 2022.

Construction loans within this delinquency category decreased $9.1 million due to one loan acquired from Bank Leumi USA included in this category at June 30, 2022 that is reported as 60 to 89 days past due at September 30, 2022.

Commercial real estate loans past due 30 to 59 days decreased $4.3 million to $6.2 million at September 30, 2022 as compared to June 30, 2022 mainly due to one loan that became current as to all contractual payments at September 30, 2022.

These decreases were largely offset by higher commercial and industrial loans

delinquencies mostly driven by matured loans in the process of renewal included in this category at September 30, 2022.

Loans past due 60 to 89 days increased $11.2 million to $22.7 million at September 30, 2022 as compared to June 30, 2022 mainly due to the one aforementioned construction loan that migrated to this delinquency category at September 30, 2022.

Loans past due 90 days or more and still accruing interest increased $14.2 million to $31.1 million at September 30, 2022 as compared to June 30, 2022.

The increase was mainly driven by the two commercial real estate loan relationships totaling $9.7 million and $5.4 million, respectively, included in this delinquency category at September 30, 2022.

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

Non-accrual loans decreased $19.7 million to $293.4 million at September 30, 2022 as compared to $313.1 million at June 30, 2022 mainly due to decreases in non-performing c ommercial and industrial and commercial real estate loans, partially offset by one construction loan relationship totaling $12.7 million put on non-accrual status at September 30, 2022.

Non-accrual commercial and industrial loans totaled $135.2 million at September 30, 2022 and included non-performing taxi medallion loans totaling $76.3 million.

Non-performing taxi medallion loans decreased $4.1 million from $80.4 million at June 30, 2022 mostly due to partial loan charge-offs totaling $3.8 million related to one borrower during the third quarter 2022.

The partial loan charge-offs were fully reserved for in our allowance for loan losses at June 30, 2022.

At September 30, 2022, the taxi medallion loans (primarily collateralized by New York City medallions) had related reserve s of $51.4 million, or 67.3 percent of such l oans.

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

For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserve s of $4.7 million within the allow ance for loan losses based upon the taxi medallion loan balances at September 30, 2022.

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

OREO properties totaled $286 thousand at September 30, 2022 and declined $136 thousand as compared to June 30, 2022.

During the third quarter 2022, OREO activity continues to trend downward as sales of owned properties outpaced new foreclosures.

The sales of OREO properties resulted in net losses of $69 thousand and $692 thousand for the three and nine months ended September 30, 2022, respectively, and net losses of $67 thousand and net gains of $268 thousand for the three and nine months ended September 30, 2021, respectively.

The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totale d $1.9 million and $2.5 million at September 30, 2022 and December 31, 2021, 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 interest or as non-accrual loans) totaled $69.7 million at September 30, 2022 as compared to $67.3 million at June 30, 2022.

Performing TDRs consisted of 87 loans at September 30, 2022.

On an aggregate basis, the $69.7 million in performing TDRs at September 30, 2022 had a modified weighted average interest rate of approximately 4.90 percent as compared to a pre-modification weighted average interest rate of 4.32 percent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Allowance for Credit Losses for Loans

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Under CECL, our methodology to establish the allowance for loan losses has two basic components:

(i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, 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 standby 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.

In estimating the component of the allowance on a collective basis, we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics.

The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses.

The metrics are based on the migration of loans within the commercial and industrial loan categories from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses.

The model's expected losses based on loss history are adjusted for qualitative factors.

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

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

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

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

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

The expected credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis.

credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis.

Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis.

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

For the third quarter 2022, we incorporated a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios.

At September 30, 2022, Valley moderately increased its probability weighting to the combined Moody's S-3 downside and S-4 (most adverse) scenarios from the Moody's Baseline scenario as compared with such weighting in the June 30, 2022 ACL analysis .

Our scenario weighting at September 30, 2022, as well as the standalone Moody's Baseline scenario, reflects a less optimistic outlook than at June 30, 2022 in terms of GDP growth, unemployment levels and potential near term negative economic impacts, given present uncertain economic conditions .

At September 30, 2022, the Moody's Baseline forecast included the following specific assumptions:

• GDP expansion by about 1.6 percent in the fourth quarter 2022;

• Unemployment of 3.7 percent in the fourth quarter 2022 and 3.9 to 4.1 percent over the remainder of the forecast period ending in the third quarter 2024;

economic growth continues in 2022;

however, it is expected to be challenged by a strained supply chain, rising interest rates and elevated inflation that will negatively affect consumer spending.

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

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

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

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

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

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

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

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

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

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 Nine Months Ended

September 30,

2022 June 30,

2022 September 30,

2021 September 30,

2022 September 30,

Three Months Ended

2023 December 31,

2022 March 31,

($ in thousands)

Average loans outstanding $ 44,341,894 $ 42,517,287 $ 32,698,382 $ 40,529,794 $ 32,641,362

Allowance for credit losses for loans

Beginning balance $ 483,255 $ 498,408 $ 375,702

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

— 70,319 — 70,319 —

Impact of the adoption of ASU No.

Beginning balance, adjusted 481,887 498,408 375,702

Loans charged-off:

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Commercial real estate — (388) (173)

Construction (5,698) — —

Residential mortgage — (1) (26)

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Commercial real estate 24 13 107

Construction — — — — 4

Residential mortgage 21 17 457

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Total recoveries 2,205 1,597 2,645

Net loan recoveries (charge-offs) 5,610 (2,320) (293) 3,340 (15,714)

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

Provision charged for credit losses 9,450 7,289 3,500

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Total provision for credit losses for loans $ 9,450 $ 7,289 $ 3,500

Annualized ratio of net (recoveries) charge-offs to average loans outstanding (0.05) % 0.02 % 0.00 % (0.01) % 0.06 %

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

(2) The three months ended June 30, 2022 and nine months ended September 30, 2022 both include $36.3 million and $4.7 million of provision related to non-PCD loans and unfunded credit commitments, respectively, acquired from Bank Leumi USA in the second quarter 2022.

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

Three Months Ended Nine Months Ended

September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Allowance for credit losses for loans as a % of total loans

0.95 % 1.03 % 1.07 %

(1) Represents the opening adjustment for the adoption of ASU No.

2022-02 effective January 1, 2023.

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

Three Months Ended

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

($ in thousands)

Net loan recoveries (charge-offs)

Net loan (charge-offs) recoveries

Commercial and industrial $ (24,648) $ (21,037) $ (747)

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Total $ 47,859,371 $ 46,086,363 $ 34,623,402

Net loan (recoveries) charge-offs to average loans outstanding

Annualized net loan charge-offs (recoveries) to average loans outstanding

Commercial and industrial 1.13% 0.97% 0.05%

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Total consumer 0.01 0.13 (0.06)

Net recoveries of loan charge-offs totaled $5.6 million for the third quarter 2022 as compared to net loan charge-offs of $2.3 million (excluding $62.4 million of Day 1 PCD loan charge-offs related to the Bank Leumi USA acquisition) for the second quarter 2022 and net loan charge-offs of $293 thousand for the third quarter 2021.

The net recoveries of loan charge-offs for the third quarter 2022 were largely driven by two commercial and industrial loan relationships totaling $11.2 million in gross recoveries for the period.

Partial loan charge-offs of taxi medallion loans totaled $3.8 million within the commercial and industrial loan category for the third quarter 2022 as compared to $143 thousand and $1.9 million during the third quarter 2021 and second quarter 2022, respectively.

The overall level of loan charge-offs (as presented in the above table) continued to remain very low and trend well within management's expectations for the credit quality of the loan portfolio for the third quarter 2022.

Total loans 0.25 0.19 0.00

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

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

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

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

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

September 30, 2022 June 30, 2022 September 30, 2021

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

Allocation Allocation

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Allowance for credit losses for loans as a % total loans 0.95 % 1.03 % 1.07 %

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 1.10 percent at September 30, 2022 as compared to 1.13 percent and 1.09 percent at June 30, 2022 and September 30, 2021, respectively .

During the third quarter 2022, the provision for credit losses for loans totaled $1.8 million as compared to $43.7 million and $3.5 million for the second quarter 2022 and third quarter 2021, respectively.

The second quarter 2022 provision was largely elevated due to $41 million of provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA.

Overall, an increased economic forecast reserve component of our CECL model (driven by a more pessimistic outlook incorporated into the updated Moody's scenarios) was largely offset by lower expected quantitative loss experience at September 30, 2022 .

As part of our CECL model analysis at September 30, 2022, we closely assessed the expected credit losses in our Florida loan portfolio in the wake of Hurricane Ian.

As a result, our management adjustment and allocated reserves related to the hurricane were immaterial at September 30, 2022.

We will continue to support our impacted customers as they recover from the storm and diligently monitor our loss assessment for material changes.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.95 percent at March 31, 2023 as compared to 1.03 percent and 1.07 percent at December 31, 2022 and March 31, 2022, respectively.

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

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

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

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

Capital Adequacy

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

At September 30, 2022 and December 31, 2021, shareholders’ equity totaled approximately $6.3 billion and $5.1 billion, which represented 11.2 percent and 11.7 percent of total assets, respectively.

During the nine months ended September 30, 2022, total shareholders’ equity increased by approximately $1.2 billion primarily due to:

• additional capital of $1.1 billion issued in the Bank Leumi USA acquisition,

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

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

• net income of $146.6 million,

• a $10.6 million i ncrease attributable to the effect of our stock incentive plan, partially offset by

• cash dividends declared on common and preferred stock totaling a combined $168.8 million,

• an other comprehensive loss of $147.6 million, and

• repurchases of $13.5 million of our common stock with these shares held as treasury stock.

• other comprehensive income of $20.4 million,

• additional capital issued totaling $3.8 million,

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

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

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

As of September 30, 2022 and December 31, 2021, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, we deferred 100 percent of the CECL Day 1 impact to shareholders' equity plus 25 percent of the reserve build (i.e.

provision for credit losses less net charge-offs) for a two-year period ending January 1, 2022.

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

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

On January 1, 2022, the deferral amount totaling $47.3 million after-tax started to be phased-in by 25 percent and will increase 25 percent per year until fully phased-in on January 1, 2025.

As of September 30, 2022, approximately $11.8 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk-based capital ratios by approximately 3 basis points.

The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2022 and December 31, 2021:

As of March 31, 2023, approximately $23.6 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk-based capital ratios by approximately 6 basis points.

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

Actual Minimum Capital

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($ in thousands)

As of September 30, 2022

As of March 31, 2023

Total Risk-based Capital

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

Our retention ratio was approximately 58.2 percent for the nine months ended September 30, 2022 as compared to 60.7 percent for the year ended December 31, 2021.

Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2022 and 2021.

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

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

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.

4 unchanged sentences

Valley’s market risk is composed primarily of interest rate risk.

See pa ge 72 for a discussion of interest rate sensitivity.

See pa ge 65 for a discussion of interest rate risk.

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