VALLEY NATIONAL BANCORP 10-Q

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A. The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. 48 Cautionary Statement Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as “intend,” “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “would,” “could,” “typically,” “usually,” “anticipate,” “may,” “estimate,” “outlook,” “project,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to: • the impact of Federal Reserve actions affecting the level of market interest rates and increases in business failures, specifically among our clients, as well as on our business, our employees and our ability to provide services to our customers; • the impact of recent and possible future bank failures on the business environment in which we operate and resulting market volatility and reduced confidence in depository institutions, including impact on stock price, customer deposit withdrawals from Valley National Bank, or business disruptions or liquidity issues that have or may affect our customers; • the impact of unfavorable macroeconomic conditions or downturns, instability or volatility in financial markets, unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by and factors outside of our control, such as geopolitical instabilities or events; 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 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; • 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 49 fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters; • changes to laws and regulations, including changes affecting oversight of the financial services industry; changes in the enforcement and interpretation of such laws and regulations; and changes in accounting and reporting standards; • higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law; • results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities; • our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings; • a prolonged downturn in the economy, 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; and • unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors. A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A of this Form 10-Q. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Critical Accounting Estimates Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions in accordance with these policies that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and results of operations for the periods indicated. At June 30, 2023, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies and estimates with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies and estimates are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2022, and there have been no material changes in such policies and estimates since the date of such report. New Authoritative Accounting Guidance See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition. 50 Executive Summary Company Overview. A t June 30, 2023, Valley had consolidated total assets of approximately $61.7 billion, total net loans of $49.4 billion, total deposits of $49.6 billion and total shareholders’ equity of $6.6 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 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. Industry Developments. The combination of rapidly rising interest rates, increased competition and economic uncertainty continues to weigh on the banking industry in the wake of the recent bank failures. We have consistently operated the Bank with a focus on diversification to maintain stability through various economic cycles. During the second quarter 2023, we continued to position our balance sheet to mitigate potential risks from the market uncertainty affecting the banking industry in general and Valley, its clients and communities in particular. • Total assets decreased to $61.7 billion at June 30, 2023, a decrease of 4.1 percent from March 31, 2023. Liquidity remained strong with total liquid assets of approximate ly $13.1 billion at June 30, 2023, representing 6.0 percent of interest earning assets. We continue to maintain significant access to readily available, diverse funding sources to fulfill both short-term and long-term funding needs. See "Bank Liquidity" section for additional information. • Total deposits increased $2.0 billion to $49.6 billion at June 30, 2023 as compared to $47.6 billion at March 31, 2023 largely due to higher CD balances. 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 June 30, 2023. Total shareholders' equity increased $63.6 million to $6.6 billion at June 30, 2023 as compared to March 31, 2023. See the "Capital Adequacy" section for additional details. • Total loans increased $1.2 billion, or 10.0 percent on an annualized basis to $49.9 billion at June 30, 2023 from March 31, 2023 mainly due to continued organic loan growth in commercial loan categories and relatively low levels of prepayment activity during the second quarter 2023. See "Loan Portfolio" section for more information. • Asset quality continued to reflect our disciplined underwriting and lending practices during the second quarter 2023. Non-performing assets (NPAs) as a percentage of total loans and NPAs totaled 0.51 percent and 0.50 percent at June 30, 2023 and March 31, 2023, respectively. See the "Non-Performing Assets" section for additional information. • Total investment securities were $5.1 billion, or 8.2 percent of total assets, at June 30, 2023 and remained relatively unchanged as compared to March 31, 2023. See the "Investment Securities Portfolio" section for more details. Quarterly Results. Net income for the second quarter 2023 was $139.1 million, or $0.27 per diluted common share as compared to $96.4 million, or $0.18 per diluted common share, for the second quarter 2022. The $42.6 million increase in quarterly net income as compared to the same quarter one year ago was mainly due to the following changes: • a $37.9 million decrease in our provision for credit losses mainly due to a provision related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA in the second quarter 2022; 51 • a $1.6 million increase in net interest income mainly due to increased yields on both new loan originations and adjustable-rate loans and higher average loan balances, largely offset by the increased cost of deposits; • a $1.5 million increase in non-interest income primarily due to an increase in capital markets fees and wealth management and trust fees, partially offset by lower n et gains on sales of loans ; and • a $16.8 million decrease in non-interest expense was due, in part, to a $40.2 million decrease in merger expenses, partially offset by a $11.2 million restructuring charge and various other increases; These items were partially offset by: • a $15.2 million increase in income tax expense mostly due to higher pre-tax income in the second 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 second quarter 2023 results. U.S. Economic Conditions. During t he second quarter 2023, real gross domestic product (GDP) increased at an annual rate of 2.4 percent as compared to an increase of 2.0 percent during the first quarter 2023. The 2.4 percent increase in real GDP reflected robust consumer spending, private inventory investment, nonresidential fixed investment, and government spending, as well as improved supply chain. Inflation moderately cooled, but remained well above the Federal Reserve’s target of 2 percent in the second quarter 2023. During the first quarter 2023, the Federal Reserve raised the target range for the federal funds rate by an additional 25 basis points in May 2023 and paused rate increases in June to observe the full impact of its changes over the past year. In July 2023, the Federal Reserve raised the target again by another 25 basis points to a range of 5.25 to 5.5 percent. The 10-year U.S. Treasury note yield ended the second quarter 2023 at 3.81 percent, or 33 basis points higher as compared to the first quarter 2023, and the 2-year U.S. Treasury note yield ended the second quarter 2023 at 4.87 percent, or 81 basis points higher as compared to the first quarter 2023. For all U.S. commercial banks, commercial and industrial loans decreased approximately by 1.3 percent at June 30, 2023 as compared to March 31, 2023, while consumer loans increased by 1.3 percent. Alternatively, demand for commercial real estate loans remained flat compared to the prior quarter. Overall the commercial real estate market was constricted by the financial environment this quarter as rising interest rates eroded investment profitability. Despite higher mortgage rates, demand for residential real estate remained steady, although sales were constrained by low inventories. While many economic measures continue to defy recessionary concerns, further increases in market interest rates, the inverted yield curve, high inflation, 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 created a challenging banking environment. 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 $311.6 million to $47.5 billion for the second quarter 2023 as compared to the first quarter 2023 mostly due to higher time deposits driven by successful retail CD generation and increased utilization of fully insured indirect customer (i.e., brokered) deposits, partially offset by a decrease in average non-interest bearing deposits. The decline in non-interest bearing deposits was largely due to a moderate shift in customer balances to our interest bearing deposit products in a rising interest rate environment and outflows due to attractive investment alternatives to deposits in the marketplace. Average non-interest-bearing deposits; savings, 52 NOW and money market deposits; and time deposits represented approximately 27 percent, 47 percent and 26 percent of total deposits as of June 30, 2023, respectively. Actual ending balances for deposits increased $2.0 billion to approximately $49.6 billion at June 30, 2023 from March 31, 2023 mainly due to a $3.8 billion increase in time deposits, partially offset by decreases in non-interest bearing deposits, and savings, NOW and money market deposits totaling $1.1 billion and $626.1 million, respectively. The increase in time deposits from March 31, 2023 was partially driven by higher fully-insured indirect customer CD balances at June 30, 2023. Total fully-insured indirect customer deposits, consisting of both brokered time deposit and money market accounts, increased $3.2 billion to $10.3 billion at June 30, 2023 from March 31, 2023. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 25 percent, 45 percent and 30 percent of total deposits as of June 30, 2023, respectively, as compared to 29 percent, 48 percent and 23 percent of total deposits as of March 31, 2023, respectively. The following table lists, by maturity, uninsured certificates of deposit at June 30, 2023: (in thousands) Less than three months $ 410,010 Three to six months 445,585 Six to twelve months 922,713 More than twelve months 261,279 Total $ 2,039,587 Total estimated uninsured deposits, excluding collateralized government deposits and intercompany deposits (i.e., deposits eliminated in consolidation), totaled approximately $12.1 billion, or 24 percent of total deposits, at June 30, 2023 as compared to $14.9 billion, or 31 percent of total deposits, at March 31, 2023. While our diversified commercial and consumer deposit base has remained relatively stable during the early stages of the third quarter 2023, deposit gathering initiatives could remain challenging due to market competition, attractive investment alternatives, such as U.S. Treasury securities, and other factors. As a result, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at June 30, 2023. The following table presents average short-term and long-term borrowings for the periods indicated : Three Months Ended Six Months Ended June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (in thousands) Average short-term borrowings: FHLB advances $ 3,656,593 $ 2,513,983 $ 822,913 $ 3,088,445 $ 629,753 Securities sold under repurchase agreements 99,327 99,546 142,790 99,436 145,666 Federal funds purchased 122,537 190,214 637,495 156,188 326,116 Total $ 3,878,457 $ 2,803,743 $ 1,603,198 $ 3,344,069 $ 1,101,535 Average long-term borrowings: FHLB advances $ 1,523,500 $ 875,053 $ 788,803 $ 1,201,068 $ 788,879 Subordinated debt 759,334 754,972 617,291 757,165 624,135 Junior subordinated debentures issued to capital trusts 56,893 56,805 56,544 56,848 56,501 Total $ 2,339,727 $ 1,686,830 $ 1,462,638 $ 2,015,081 $ 1,469,515 Average short-term borrowings increased $1.1 billion during the second quarter 2023 as compared to the first quarter 2023 mostly due to the higher utilization of FHLB advances in March 2023 to increase our excess liquidity 53 position. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased $652.9 million as compared to the first quarter 2023 mainly due to the new FHLB advances issued in March 2023 and the second quarter 2023. Actual ending balances for short-term borrowings decreased $5.3 billion to $1.1 billion at June 30, 2023 as compared to March 31, 2023 mainly due to maturities and repayment of FHLB advances. In March 2023, we increased our short-term borrowings to bolster our liquidity position out of an abundance of caution in the wake of the two bank failures and subsequently managed these balances to a lower level during the second quarter 2023, partially through the greater use of time deposits. We continue to closely monitor changes in the current banking environment and have substantial access to additional liquidity. Actual ending balances for long-term borrowings totaled $2.4 billion at June 30, 2023 and remained relatively unchanged as compared to March 31, 2023. See the "Bank Liquidity" section for more details on our available funding sources. Non-GAAP Financial Measures The table below presents selected performance indicators, their comparative non-GAAP measures and the (non-GAAP) efficiency ratio for the periods indicated. Valley believes that the non-GAAP financial measures provide useful supplemental information to both management and investors in understanding its underlying operational performance, business, and performance trends, and may facilitate comparisons of current and prior performance with the performance of others in the financial services industry. Management utilizes these measures for internal planning, forecasting and analysis purposes. Management believes that Valley’s presentation and discussion of this supplemental information, together with the accompanying reconciliations to the GAAP financial measures, also allows investors to view performance in a manner similar to management. These non-GAAP financial measures should not be considered in isolation, as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. 54 The following table presents our annualized performance ratios : Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Selected Performance Indicators ($ in thousands) GAAP measures: Net income, as reported $ 139,060 $ 96,413 $ 285,611 $ 213,141 Return on average assets 0.90 % 0.72 % 0.94 % 0.88 % Return on average shareholders’ equity 8.50 6.18 8.80 7.51 Non-GAAP measures: Net income, as adjusted $ 147,081 $ 165,803 $ 301,611 $ 286,116 Return on average assets, as adjusted 0.95 % 1.25 % 0.99 % 1.18 % Return on average shareholders' equity, as adjusted 8.99 10.63 9.29 10.09 Return on average tangible shareholders' equity (ROATE) 12.37 9.33 12.87 11.07 ROATE, as adjusted 13.09 16.05 13.59 14.87 Efficiency ratio 55.59 50.78 54.69 51.81 June 30, 2023 December 31, 2022 Common Equity Per Share Data: Book value per common share (GAAP) $ 12.54 $ 12.23 Tangible book value per common share (non-GAAP) 8.51 8.15 Non-GAAP Reconciliations to GAAP Financial Measures Adjusted net income is computed as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in thousands) Net income, as reported (GAAP) $ 139,060 $ 96,413 $ 285,611 $ 213,141 Add: Losses (gains) on available for sale and held to maturity debt securities, net (net of tax) (a) 6 (56) 23 (50) Add: Restructuring charge (net of tax) (b) 8,015 — 8,015 — Add: Provision for credit losses for available for sale securities (c) — — 5,000 — Add: Non-PCD provision for credit losses, (net of tax) (d) — 29,282 — 29,282 Add: Merger related expenses (net of tax) (e) — 40,164 2,962 43,743 Net income, as adjusted (non-GAAP) $ 147,081 $ 165,803 $ 301,611 $ 286,116 (a) Included in gains (losses) on securities transactions, net. (b) Represents severance expense related to workforce reductions within salary and employee benefits expense. (c) Included in provision for credit losses for available for sale and held to maturity securities (tax disallowed). (d) Represents provision for credit losses for non-PCD loans and unfunded credit commitments acquired during the period. (e) Included primarily within salary and employee benefits expense. 55 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 reported in capital markets fees. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, loan portfolio sales, brokerage fees, and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details. Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in thousands) Net income, as adjusted (non-GAAP) $ 147,081 $ 165,803 $ 301,611 $ 286,116 Average assets $ 61,877,464 $ 53,211,422 $ 60,877,792 $ 48,417,469 Annualized return on average assets, as adjusted (non-GAAP) 0.95 % 1.25 % 0.99 % 1.18 % Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in thousands) Net income, as adjusted (non-GAAP) $ 147,081 $ 165,803 $ 301,611 $ 286,116 Average shareholders' equity $ 6,546,452 $ 6,238,985 $ 6,493,627 $ 5,673,014 Annualized return on average shareholders' equity, as adjusted (non-GAAP) 8.99 % 10.63 % 9.29 % 10.09 % ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in thousands) Net income, as reported (GAAP) $ 139,060 $ 96,413 $ 285,611 $ 213,141 Net income, as adjusted (non-GAAP) 147,081 165,803 301,611 286,116 Average shareholders’ equity (GAAP) $ 6,546,452 $ 6,238,985 $ 6,493,627 $ 5,673,014 Less: Average goodwill and other intangible assets 2,051,591 2,105,585 2,056,487 1,823,538 Average tangible shareholders’ equity (non-GAAP) $ 4,494,861 $ 4,133,400 $ 4,437,140 $ 3,849,476 Annualized ROATE (non-GAAP) 12.37 % 9.33 % 12.87 % 11.07 % Annualized ROATE, as adjusted (non-GAAP) 13.09 % 16.05 % 13.59 % 14.87 % 56 The efficiency ratio is computed as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 ($ in thousands) Total non-interest expense, as reported (GAAP) $ 282,971 $ 299,730 $ 555,137 $ 497,070 Less: Restructuring charge (pre-tax) (a) 11,182 — 11,182 — Less: Amortization of tax credit investments (pre-tax) 5,018 3,193 9,271 6,089 Less: Merger related expenses (pre-tax) (b) — 54,496 4,133 59,124 Total non-interest expense, as adjusted (non-GAAP) $ 266,771 $ 242,041 $ 530,551 $ 431,857 Net interest income, as reported (GAAP) $ 419,765 $ 418,160 $ 855,785 $ 735,829 Total non-interest income, as reported (GAAP) 60,075 58,533 114,374 97,803 Add: Losses (gains) on available for sale and held to maturity debt securities, net (pre-tax) (c) 9 (78) 33 (69) Total net interest income and non-interest income, as adjusted (non-GAAP) $ 479,849 $ 476,615 $ 970,192 $ 833,563 Efficiency ratio (non-GAAP) 55.59 % 50.78 % 54.69 % 51.81 % (a) Represents severance expense related to workforce reductions within salary and employee benefits expense. (b) Included primarily within salary and employee benefits expense. (c) Included in gains (losses) on securities transactions, net. 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: June 30, 2023 December 31, 2022 ($ in thousands, except for share data) Common shares outstanding 507,619,430 506,374,478 Shareholders’ equity (GAAP) $ 6,575,184 $ 6,400,802 Less: Preferred stock 209,691 209,691 Less: Goodwill and other intangible assets 2,046,882 2,066,392 Tangible common shareholders’ equity (non-GAAP) $ 4,318,611 $ 4,124,719 Book value per common share (GAAP) $ 12.54 $ 12.23 Tangible book value per common share (non-GAAP) $ 8.51 $ 8.15 Net Interest Income Net interest income on a tax equivalent basis totaling $421.3 million for the second quarter 2023 decreased $16.2 million as compared to the first quarter 2023 and increased $1.7 million as compared to the second quarter 2022. The decrease as compared to the first quarter 2023 was mainly due to a $3.3 billion increase in average interest bearing liabilities and higher interest rates on most interest bearing deposit products and short-term borrowings, partially offset by higher loan yields. As a result, interest expense increased $83.5 million to $367.7 million for the second quarter 2023 as compared to the first quarter 2023. Interest income on a tax equivalent basis increased $67.3 million to $789.0 million in the second quarter 2023 as compared to the first quarter 2023. The increase was mostly due to higher yields on both new originations and adjustable rate loans in our portfolio and a $1.6 billion increase in average loan balances driven by organic new loan volumes and a continuation of slower loan prepayments. Average interest earning assets increased $8.5 billion to $57.4 billion for the second quarter 2023 as compared to the second quarter 2022 mainly due to a $6.9 billion increase in average loan balances and $1.4 billion increase in average interest bearing cash balances largely due to higher excess cash held overnight as part of our prudent liquidity management navigating the fallout from the recent bank failures. Compared to the first quarter 2023, 57 average interest earning assets increased by $2.0 billion during the second quarter 2023. The increase was primarily driven by a $1.6 billion increase in average loan balances mainly due to organic commercial loan growth and a $351.6 million increase in average interest bearing cash as compared to the prior linked quarter. Average interest bearing liabilities increased $11.2 billion to $40.9 billion for the second quarter 2023 as compared to the second quarter 2022 mainly due to increases of $8.1 billion and $2.3 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 enhanced liquidity management efforts during the first half of 2023, including increased usage of fully FDIC-insured indirect customer CD and successful retail CD initiatives. As compared to the first quarter 2023, average interest bearing liabilities increased by $3.3 billion in the second quarter 2023 largely due to a $2.5 billion increase in average time deposits mainly driven by increased usage of fully FDIC-insured indirect customer CD and successful retail CD initiatives, as well as an increase in short-term borrowings, as part of our funding and liquidity sources. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above. Net interest margin on a tax equivalent basis of 2.94 percent for the second quarter 2023 decreased by 22 basis points and 49 basis points from 3.16 percent and 3.43 percent for the first quarter 2023 and the second quarter 2022, respecti vely. The decrease as compared to the first quarter 2023 was largely driven by higher interest rates on interest bearing deposits and short-term borrowings, partially offset by a 29 basis point increase in the yield on average interest earning assets. The yield on average loans increased by 30 basis points to 5.78 percent for the second quarter 2023 as compared to the first quarter 2023 largely due to higher interest rates on new originations and adjustable rate loans. The yields on average taxable and non-taxable investments also increased 13 basis points and 16 basis points, respectively, from the first quarter 2023 mostly due to investment maturities and prepayments redeployed into new higher yielding securities during the first half of 2023. Our cost of total average deposits increased to 2.45 percent for the second quarter 2023 from 1.96 percent and 0.19 percent for the first quarter 2023 and the second quarter 2022, respectively. The overall cost of average interest bearing liabilities also increased 57 basis points to 3.59 percent for the second quarter 2023 as compared to the first quarter 2023 primarily driven by the rising market interest rates on deposits during the first half of 2023. Based upon our current estimates at June 30, 2023 , we anticipate net interest income growth in the low single digits (i.e., less than 10 percent) for the full year of 2023 , revised down fro m 16 to 18 percent previously estimated in the M D&A of Valley's Form 10-K for the year ended December 31, 2022. While we are seeing initial signs of stabilization in net interest income and margin as compared to the declines in both experienced in the first quarter 2023, 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 second quarter 2023. 58 The following table reflects the components of net interest income for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022: Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and Net Interest Income on a Tax Equivalent Basis Three Months Ended June 30, 2023 March 31, 2023 June 30, 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 49,457,937 $ 715,195 5.78 % $ 47,859,371 $ 655,250 5.48 % $ 42,517,287 $ 415,602 3.91 % Taxable investments (3) 5,065,812 39,436 3.11 5,033,134 37,474 2.98 4,912,994 30,610 2.49 Tax-exempt investments (1)(3) 629,342 7,062 4.49 623,145 6,739 4.33 684,471 6,571 3.84 Interest bearing deposits with banks 2,198,717 27,276 4.96 1,847,140 22,205 4.81 776,478 1,569 0.81 Total interest earning assets 57,351,808 788,969 5.50 55,362,790 721,668 5.21 48,891,230 454,352 3.72 Allowance for credit losses (446,098) (466,837) (428,193) Cash and due from banks 415,075 445,005 426,187 Other assets 4,709,061 4,702,376 4,362,789 Unrealized gains on securities available for sale, net (152,382) (176,332) (40,591) Total assets $ 61,877,464 $ 59,867,002 $ 53,211,422 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 22,512,128 $ 164,843 2.93 % $ 23,389,569 $ 150,766 2.58 % $ 23,027,347 $ 17,122 0.30 % Time deposits 12,195,479 125,764 4.12 9,738,608 80,298 3.30 3,601,088 3,269 0.36 Total interest bearing deposits 34,707,607 290,607 3.35 33,128,177 231,064 2.79 26,628,435 20,391 0.31 Short-term borrowings 3,878,457 50,207 5.18 2,803,743 33,948 4.84 1,603,198 4,083 1.02 Long-term borrowings (4) 2,339,727 26,880 4.60 1,686,830 19,198 4.55 1,462,638 10,313 2.82 Total interest bearing liabilities 40,925,791 367,694 3.59 37,618,750 284,210 3.02 29,694,271 34,787 0.47 Non-interest bearing deposits 12,756,862 14,024,742 16,267,946 Other liabilities 1,648,359 1,783,295 1,010,220 Shareholders’ equity 6,546,452 6,440,215 6,238,985 Total liabilities and shareholders’ equity $ 61,877,464 $ 59,867,002 $ 53,211,422 Net interest income/interest rate spread (5) $ 421,275 1.91 % $ 437,458 2.19 % $ 419,565 3.25 % Tax equivalent adjustment (1,510) (1,438) (1,405) Net interest income, as reported $ 419,765 $ 436,020 $ 418,160 Net interest margin (6) 2.93 % 3.15 % 3.42 % Tax equivalent effect 0.01 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 2.94 % 3.16 % 3.43 % 59 The following table reflects the components of net interest income for the six months ended June 30, 2023 and 2022: Six Months Ended June 30, 2023 June 30, 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate ($ in thousands) Assets Interest earning assets: Loans (1)(2) $ 48,663,070 $ 1,370,446 5.63 % $ 38,592,151 $ 732,991 3.80 % Taxable investments (3) 5,049,563 76,910 3.05 4,377,990 50,725 2.32 Tax-exempt investments (1)(3) 626,261 13,800 4.41 543,646 9,757 3.59 Interest bearing deposits with banks 2,023,900 49,481 4.89 1,096,181 2,030 0.37 Total interest earning assets 56,362,794 1,510,637 5.36 44,609,968 795,503 3.57 Allowance for credit losses (456,410) (398,258) Cash and due from banks 429,957 354,433 Other assets 4,705,742 3,864,997 Unrealized gains on securities available for sale, net (164,291) (13,671) Total assets $ 60,877,792 $ 48,417,469 Liabilities and shareholders’ equity Interest bearing liabilities: Savings, NOW and money market deposits $ 22,948,425 $ 315,608 2.75 % $ 21,781,907 $ 26,749 0.25 % Time deposits 10,973,830 206,062 3.76 3,577,933 6,100 0.34 Total interest bearing deposits 33,922,255 521,670 3.08 25,359,840 32,849 0.26 Short-term borrowings 3,344,069 84,156 5.03 1,101,535 4,889 0.89 Long-term borrowings (4) 2,015,081 46,078 4.57 1,469,515 19,838 2.70 Total interest bearing liabilities 39,281,405 651,904 3.32 27,930,890 57,576 0.41 Non-interest bearing deposits 13,387,299 13,989,897 Other liabilities 1,715,461 823,668 Shareholders’ equity 6,493,627 5,673,014 Total liabilities and shareholders’ equity $ 60,877,792 $ 48,417,469 Net interest income/interest rate spread (5) $ 858,733 2.04 % $ 737,927 3.16 % Tax equivalent adjustment (2,948) (2,098) Net interest income, as reported $ 855,785 $ 735,829 Net interest margin (6) 3.04 % 3.30 % Tax equivalent effect 0.01 0.01 Net interest margin on a fully tax equivalent basis (6) 3.05 % 3.31 % _____________ (1) Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate. (2) Loans are stated net of unearned income and include non-accrual loans. (3) The yield for securities that are classified as available for sale is based on the average historical amortized cost. (4) Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition. (5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis. (6) Net interest income as a percentage of total average interest earning assets. 60 The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category. Change in Net Interest Income on a Tax Equivalent Basis Three Months Ended June 30, 2023 Compared to June 30, 2022 Six Months Ended June 30, 2023 Compared to June 30, 2022 Change Due to Volume Change Due to Rate Total Change Change Due to Volume Change Due to Rate Total Change (in thousands) Interest Income: Loans* $ 76,106 $ 223,487 $ 299,593 $ 223,680 $ 413,775 $ 637,455 Taxable investments 978 7,848 8,826 8,583 17,602 26,185 Tax-exempt investments* (558) 1,049 491 1,618 2,425 4,043 Interest bearing deposits with banks 6,755 18,952 25,707 3,078 44,373 47,451 Total increase in interest income 83,281 251,336 334,617 236,959 478,175 715,134 Interest Expense: Savings, NOW and money market deposits (392) 148,113 147,721 1,509 287,350 288,859 Time deposits 22,935 99,560 122,495 34,214 165,748 199,962 Short-term borrowings 11,897 34,227 46,124 24,064 55,203 79,267 Long-term borrowings and junior subordinated debentures 8,083 8,484 16,567 9,146 17,094 26,240 Total increase in interest expense 42,523 290,384 332,907 68,933 525,395 594,328 Total increase (decrease) in net interest income $ 40,758 $ (39,048) $ 1,710 $ 168,026 $ (47,220) $ 120,806 * Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate. 61 Non-Interest Income Non-interest income increased $1.5 million and $16.6 million for the three and six months ended June 30, 2023, respectively, as compared to the same period of 2022. The following table presents the components of non-interest income for the three and six months ended June 30, 2023 and 2022: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in thousands) Wealth management and trust fees $ 11,176 $ 9,577 $ 20,763 $ 14,708 Insurance commissions 3,139 3,463 5,559 5,322 Capital markets 16,967 14,711 27,859 29,071 Service charges on deposit accounts 10,542 10,067 21,018 16,279 Gains (losses) on securities transactions, net 217 (309) 595 (1,381) Fees from loan servicing 2,702 2,717 5,373 5,498 Gains on sales of loans, net 1,240 3,602 1,729 4,588 Bank owned life insurance 2,443 2,113 5,027 4,159 Other 11,649 12,592 26,451 19,559 Total non-interest income $ 60,075 $ 58,533 $ 114,374 $ 97,803 Wealth management and trust fees income increased $1.6 million and $6.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. The increase as compared to the second quarter 2022 was mainly driven by higher revenues generated by our advisory firm, Dudley Ventures, LLC, specializing in the investment and management of tax credit investments. The increase for the six months ended June 30, 2023 was largely related to higher brokerage fees related to our broker dealer subsidiary, Valley Financial Management, Inc., acquired on April 1, 2022 from Bank Leumi USA. Brokerage fees totaled $9.7 million and $4.9 million for the six months ended June 30, 2023 and 2022, respectively. Capital markets income increased $2.3 million and decreased $1.2 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mainly due to changes in volume of interest rate swap transactions executed for commercial loan customers. Service charges on deposit accounts increased $4.7 million for the six months ended June 30, 2023 compared to the same period in 2022 largely due to the additional deposit accounts acquired from Bank Leumi USA on April 1, 2022. Net gains on sales of loans decreased $2.4 million and $2.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mostly due to lower loan sale volumes as we continued to retain a higher percentage of new loan volumes during the first half of 2023. During the six months ended June 30, 2023, we sold $71.8 million of residential mortgage loans as compared to $326.2 million for same period in 2022. Other non-interest income increased $6.9 million for the six months ended June 30, 2023 as compared to the same period in 2022. The increase for the six months ended June 30, 2023 was mostly due to incremental increases in several operating non-interest income categories caused by the acquisition of Bank Leumi USA and organic growth of our business operations over the last 12 months. 62 Non-Interest Expense Non-interest expense decreased $16.8 million and increased $58.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. The following table presents the components of non-interest expense for the three and six months ended June 30, 2023 and 2022: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (in thousands) Salary and employee benefits expense $ 149,594 $ 154,798 $ 294,580 $ 262,531 Net occupancy expense 25,949 22,429 49,205 44,420 Technology, furniture and equipment expense 32,476 49,866 68,984 75,880 FDIC insurance assessment 10,426 5,351 19,581 9,509 Amortization of other intangible assets 9,812 11,400 20,331 15,837 Professional and legal fees 21,406 30,409 38,220 45,158 Amortization of tax credit investments 5,018 3,193 9,271 6,089 Other 28,290 22,284 54,965 37,646 Total non-interest expense $ 282,971 $ 299,730 $ 555,137 $ 497,070 Salary and employee benefits expense decreased $5.2 million and increased $32.0 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. As compared to second quarter 2022, the decline was largely due to decreases in cash incentive compensation expense and Bank Leumi USA merger related costs (which totaled $28.0 million in the second quarter 2022), partially offset by higher salary expense and a restructuring charge of $11.2 million, consisting of severance expense related to recent workforce reductions. The increase for the six months ended June 30, 2023 was primarily driven by higher headcount from the Bank Leumi USA acquisition and organic growth in our operations, the aforementioned restructuring charge, and inflationary pressures on our overall labor costs. These increases were partially offset by lower cash incentive compensation expense and merger related costs. The merger related costs totaled $4.1 million for the six months ended June 30, 2023 as compared to $28.0 million for the same period in 2022. Net occupancy expense increased $3.5 million and $4.8 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 mainly driven by increased lease expense. Technology, furniture and equipment expense decreased $17.4 million and $6.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. The second quarter 2023 decrease was largely due to Bank Leumi USA merger related expenses (largely consisting of technology related costs) totaling $15.3 million for the second quarter 2022. The decrease for the six months ended June 30, 2023 was mainly due to decline in merger related expense, partially offset by higher depreciation expense as compared to the same period in 2022. FDIC insurance assessment expense increased $5.1 million and $10.1 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods of 2022 mainly due to growth in our balance sheet, as well as a two basis point increase in the initial base rate effective for 2023. Amortization of other intangible assets increased $4.5 million for the six months ended June 30, 2023 as compared to the same period in 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 decreased $9.0 million and $6.9 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022, largely due to declines in merger related expense, partially offset by higher technology transformation consulting and managed services. Within the category, merger 63 related expenses (related to the Bank Leumi USA acquisition) totaled $11.4 million and $12.2 million for the three and six months ended June 30, 2023 and 2022, respectively. Other non-interest expense increased $6.0 million and $17.3 million for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022 primarily due to general increases in several categories caused by our acquired and organic growth in operations, higher charitable contributions, and increased charges related to collateral liabilities in connection with derivative transactions. We continuously monitor and closely manage our non-interest expense in an effort to optimize our operating efficiency. To offset the current headwinds impacting our net interest income and margin, we began the implementation of a new cost saving initiative in late June 2023. The identified cost savings are expected to primarily come from workforce reductions, more efficient third-party consulting and service usage, and specific technology cost reductions. As noted above, we incurred $11.2 million of severance expense associated with these efforts during the second quarter 2023. Overall, the new initiative is expected to generate more than $40 million of annual pre-tax cost savings and be realized over the next 12 months. Income Taxes Income tax expense totaled $51.8 million for the second quarter 2023 as compared to $57.2 million and $36.6 million for the first quarter 2023 and second quarter 2022, respectively. Our effective tax rate was 27.1 percent, 28.1 percent and 27.5 percent for the second quarter 2023, first quarter 2023 and second quarter 2022, respectively. The decline in the effective tax rate in the second quarter 2023 was primarily due to the release of a state valuation allowance related to New Jersey net operating loss carryforwards. U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations and tax planning strategies. Operating Segments Valley manages its business operations under 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 and no changes to the reportable segments were determined necessary during the first half of 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. GAAP. The financial reporting for each segment contains allocations and reporting in line with Valley’s operations, which may not necessarily be comparable to those of any other financial institution. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. 64 The following tables present the financial data for Valley's operating segments for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, 2023 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,904,483 $ 40,553,454 $ 7,893,871 $ 57,351,808 Income (loss) before income taxes 12,200 247,459 (68,840) 190,819 Annualized return on average interest earning assets (before tax) 0.55 % 2.44 % (3.49) % 1.33 % Three Months Ended June 30, 2022 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,967,305 $ 34,549,982 $ 6,373,943 $ 48,891,230 Income (loss) before income taxes 13,678 127,007 (7,720) 132,965 Annualized return on average interest earning assets (before tax) 0.69 % 1.47 % (0.48) % 1.09 % See Note 16 to the consolidated financial statements for additional details. Consumer Banking Consumer Banking represented 18.0 percent of our loan portfolio at June 30, 2023, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 11.1 percent of our loan portfolio at June 30, 2023) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (which represented 3.3 percent of total loans at June 30, 2023) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. Consumer Banking also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, brokerage, insurance and tax credit advisory services. Average interest earning assets within Consumer Banking increased $937.2 million to $8.9 billion for the three months ended June 30, 2023 as compared to the same period of 2022 . The increase was largely due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, and, to a lesser extent, growth in home equity and secured personal lines of credit. Income before income taxes for Consumer Banking decreased $1.5 million to $12.2 million for the second quarter 2023 as compared to the second quarter 2022 mainly driven by lower net interest income and, to a lesser extent, an increase in non-interest expense. Net interest income decreased $23.0 million in the second 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 the cost of such interest bearing liabilities . The negative impact of these items was partially offset by an increase in non-interest income and lower internal transfer expense. Non-interest income increased $8.4 million mainly due to increases in wealth management and trust fees, capital markets and service charges on deposit accounts, partially offset by lower gains on sales of loans. Internal transfer expense decreased $15.6 million for the second quarter 2023 as compared to the second quarter 2022 due to the lower allocation of non-interest expense over the same period. The provision for loan losses decreased $1.9 million for the three months ended June 30, 2023 due to a decrease in non-economic qualitative factors as compared to one year ago. See further details in the “Allowance for Credit Losses” section of this MD&A. 65 Net interest margin on the Consumer Banking portfolio decreased 134 basis points to 1.60 percent for the second quarter 2023 as compared to the second quarter 2022 mainly due to a 224 basis point increase in the costs associated with our funding sou rces, partially offset by a 90 basis point increase in the yield on average loans . The increase in our funding costs was mainly driven by higher interest rates on most of our interest bearing commercial and retail deposit products, increased utilization of fully FDIC-insured indirect customer deposits and higher cost of other borrowings held during the second quarter 2023 . The 90 basis point increase in loan yield was largely due to higher yielding new loan volumes and adjustable rate loans in our portfolio. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources. The return on average interest earning assets before income taxes for the consumer banking segment was 0.55 percent for the second quarter 2023 compared to 0.69 percent for the second 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 $9.3 billion and represented 18.6 percent of the total loan portfolio at June 30, 2023. Commercial real estate loans and construction loans totaled $31.6 billion and represented 63.4 percent of the total loan portfolio at June 30, 2023. Average interest earning assets in Commercial Banking increased $6.0 billion to $40.6 billion for the three months ended June 30, 2023 as compared to the second quarter 2022 primarily due to strong organic loan growth concentrated in the commercial real estate loan portfolio. Income before income taxes for Commercial Banking increased $120.5 million to $247.5 million for the three months ended June 30, 2023 as compared to the same period of 2022 mainly due to an increase in net interest income and decreases in the provision for credit losses and internal transfer expense, partially offset by higher non-interest expense. Net interest income for this segment increased $41.0 million to $373.7 million for the second 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 decreased $55.0 million to $102.4 million for the three months ended June 30, 2023 as compared to the second quarter 2022. The provision for credit losses decreased $35.5 million to $2.8 million as compared to the same period in 2022 mainly due to elevated provision for credit losses for the second quarter 2022 related to non-PCD loans and unfunded credit commitments acquired from Bank Leumi USA. See details in the "Allowance for Credit Losses for Loans" section of this MD&A. Non-interest expense increased $10.9 million to $35.4 million for three months ended June 30, 2023 as compared to the second quarter 2022. The net interest margin for this segment decreased 16 basis poin ts to 3.69 percent for the second quarter 2023 as compared to the second quarter 2022 due to a 224 basis point increase in the cost of our funding sources, partially offset by a 208 basis point increase in the yield on average loans. The return on average interest earning assets before income taxes for the commercial banking segment was 2.44 percent for the three months ended June 30, 2023 compared to 1.47 percent for the same period in 2022. Treasury and Corporate Other Treasury and Corporate Other largely consists of the Treasury managed held to maturity and available for sale debt securities portfolios mainly utilized in the liquidity management needs of our lending segments and income and expense items resulting from support functions not directly attributable to a specific segment. Interest income is generated through investments in various types of securities (mainly comprised of fixed rate securities) and interest-bearing deposits with other banks (primarily the Federal Reserve Bank of New York). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from Treasury and Corporate Other to the Consumer Banking and Commercial Banking segments. Interest 66 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 interest 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 of tax credit investments, as well as other non-core items, including merger expenses. Average interest earning assets within Treasury and Corporate Other increased $1.5 billion to $7.9 billion for the three months ended June 30, 2023 mainly due to a $1.4 billion increase in average overnight interest bearing deposits with banks as compared to the same period in 2022. Our average overnight cash levels increased in the second quarter 2023 as a cautionary liquidity manageme nt measure resulting from the bank failures in March and April 2023. For the three months ended June 30, 2023, loss before income taxes in this segment totaled $68.8 million compared to $7.7 million for the same period in 2022. The $61.1 million increase in the pre-tax loss during the second quarter 2023 period was mainly due to lower internal transfer income and net interest income, partially offset by a decrease in non-interest expense. The internal transfer income decreased $70.6 million to $124.4 million for the three months ended June 30, 2023 as compared to the same period a year ago due to the lower allocation of non-interest expense over the same period. Non-interest expense decreased $32.1 million to $224.4 million during the three months ended June 30, 2023 as compared to the same period in 2022 mainly attributable to merger expenses incurred during the second quarter 2022 resulting from the Bank Leumi USA acquisition. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. The net interest margin for this segment decreased 93 basis points to 1.19 percent for the second quarter 2023 as compared to the second quarter 2022 due to a 224 basis point increase in cost of our funding sources, partially offset by a 131 basis point increase in the yield on average investments. The increase in the yield on average investments as compared to the same period a year ago was largely driven by new higher yielding investments and a reduction in premium amortization expense mostly caused by slower principal repayments in the rising interest rate environment. The following tables present the financial data for Valley's operating segments for the six months ended June 30, 2023 and 2022: Six Months Ended June 30, 2023 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 8,836,859 $ 39,826,630 $ 7,699,305 $ 56,362,794 Income before income taxes 13,224 471,069 (89,758) 394,535 Annualized return on average interest earning assets (before tax) 0.30 % 2.37 % (2.33) % 1.40 % Six Months Ended June 30, 2022 Consumer Banking Commercial Banking Treasury and Corporate Other Total ($ in thousands) Average interest earning assets $ 7,848,764 $ 30,743,387 $ 6,017,817 $ 44,609,968 Income (loss) before income taxes 36,659 263,838 (11,490) 289,007 Annualized return on average interest earning assets (before tax) 0.93 % 1.72 % (0.38) % 1.30 % 67 Consumer Banking Consumer Banking's average interest earning assets increased $988.1 million to $8.8 billion for the six months ended June 30, 2023 as compared to the same period in 2022. The increase was largely due to new residential mortgage loan volumes originated for investment rather than sale over the last 12-month period, as well as growth in home equity loans and secured personal lines of credit. Income before income taxes generated by Consumer Banking decreased $23.4 million to $13.2 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly driven by lower net interest income, and, to a lesser extent, increases in non-interest expense and the provision for loan losses. Net interest income decreased $37.0 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to additional interest expense generated from higher average deposit balances, as well as an increase in interest rate s on such balances. The provision for loan losses increased $2.7 million for the six months ended June 30, 2023 due to additional reserves related to residential loan growth, and changes in the 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. The negative impact of these items was partially offset by an $8.9 million increase in non-interest income coupled with a $13.4 million decrease in the internal transfer expense f or the six months ended June 30, 2023 as compared to the same period in 2022. The increase in non-interest income was mainly driven by increases in wealth management and trust fees and service charges on deposit accounts. Net interest margin on the Consumer Banking portfolio decreased 116 basis points to 1.76 percent for the six months ended June 30, 2023 as compared to the same period one year ago mainly due to a 202 basis point increase in the costs associated with our funding sources, partially offset by an 86 basis point increase in the yield on average loans. The 86 basis point increase in loan yield was largely due to higher yielding new loan volumes and adjustable rate loans in our portfolio. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources. The return on average interest earning assets before income taxes for the consumer banking segment was 0.30 percent for the six months ended June 30, 2023 compared to 0.93 percent as compared to the same period one year ago . Commercial Banking Average interest earning assets in Commercial Banking increased $9.1 billion to $39.8 billion for the six months ended June 30, 2023 as compared to the same period in 2022. This increase was primarily due to strong organic loan growth, especially in the commercial real estate portfolio over the 12-month period ended June 30, 2023, as well as loans acquired from Bank Leumi USA on April 1, 2022. For the six months ended June 30, 2023, income before income taxes for Commercial Banking increased $207.2 million to $471.1 million as compared to the same period in 2022 mainly due to an increase in net interest income and a lower provision for credit losses, partially offset by higher non-interest expense. Net interest income increased $172.6 million to $751.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 primarily due to higher average commercial loan balances and higher interest rates on new and adjustable loans. T he provision for credit losses decreased $34.1 million to $5.8 million during the six months ended June 30, 2023 as compared to $39.9 million for the same period in 2022 mainly due to a provision for non-PCD loans and unfunded credit commitments acquired from Bank Leumi in the second quarter 2022. See details in the "Allowance for Credit Losses for Loans" section of this MD&A. Non-interest expense increased $21.6 million to $71.1 million for the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to acquired and organic growth in our commercial operations . See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. The net interest margin for this segment increased 1 basis point to 3.78 percent for the six months ended June 30, 2023 as compared to the same period in 2022 due to a 203 basis point increase in yield on average loans, partially offset by a 202 basis point increase in the cost of our funding sources. 68 The return on average interest earning assets before income taxes for the commercial banking segment was 2.37 percent for the six months ended June 30, 2023 compared to 1.72 percent for the same period in 2022. Treasury and Corporate Other Treasury and Corporate Other's average interest earning assets increased $1.7 billion during the six months ended June 30, 2023 as compared to the same period in 2022 mainly due to investment securities acquired from Bank Leumi USA, as well as other select new investment securities purchases over the last 12-month period . Average interest bearing deposits with banks increased $47.5 million as compared to the same period in 2022 due to additional cash held as a cautionary liquidity management measur e starting in March 2023 and through most of the second quarter 2023. The loss before income taxes for this segment totaled $89.8 million for the six months ended June 30, 2023 as compared to $11.5 million for the same period in 2022. The $78.3 million increase in pre-tax loss was mainly due to an increase in non-interest expense and decreases in both net interest income and internal transfer income, partially offset by higher non-interest income. Non-interest expense increased $30.4 million to $442.6 million for the six months ended June 30, 2023 as compared to the same period in 2022 largely due to expenses related to our expanded banking operations and organic business growth including higher salary and employee benefits expense, technology, furniture and equipment and professional and legal fees. Internal transfer income decreased $36.7 million to $286.9 million for the six months ended June 30, 2023 as compared to the same period in 2022 due to the higher allocation of non-interest expense over the same period. Non-interest income increased $8.9 million during the six months ended June 30, 2023 as compared to the same period in 2022 mostly due to incremental increases in several operating non-interest income categories caused by acquired and organic growth of our business operations over the last 12-month period. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A. Provision for credit losses increased $4.4 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. Treasury and Corporate Other's net interest margin decreased 46 basis points to 1.35 percent for the six months ended June 30, 2023 as compared to the same period in 2022 due to a 202 basis point increase in cost of our funding sources, partially offset by a 156 basis point increase in the yield on average investments. The increased yield on average investments as compared to the same period in 2022 was largely driven by new higher yielding investments and a reduction in premium amortization expense mostly caused by slower principal repayments in the rising interest rate environment. ASSET/LIABILITY MANAGEMENT Interest Rate Risk Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities. 69 We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of June 30, 2023. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of June 30, 2023. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model. Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of June 30, 2023. Although the size of Valley’s balance sheet is forecasted to remain static as of June 30, 2023 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the second quarter 2023. The model also utilizes an immediate parallel shift in market interest rates at June 30, 2023. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet. Convexity is a measure of how the duration of a financial instrument changes as market interest rates change. Potential movements in the convexity of bonds held in our investment portfolio, as well as the duration of the loan portfolio may have a positive or negative impact on our net interest income in varying interest rate environments. As a result, the increase or decrease in forecasted net interest income may not have a linear relationship to the results reflected in the table below. Management cannot provide any assurance about the actual effect of changes in interest rates on our net interest income. The following table reflects management’s expectations of the change in our net interest income over the next 12- month period considering the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below. Estimated Change in Future Net Interest Income Changes in Interest Rates Dollar Change Percentage Change (in basis points) ($ in thousands) +300 $ 215,671 12.16 % +200 143,021 8.06 +100 70,754 3.99 –100 (72,077) (4.06) –200 (143,067) (8.06) –300 (213,209) (12.02) 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 70 interest income over the next 12-month period by 3.99 percent. Management believes the interest rate sensitivity of our balance sheet remains within an acceptable tolerance range at June 30, 2023. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows. Liquidity and Cash Requirements Bank Liquidity Liquidity measures Valley's ability to satisfy its current and future cash flow needs. Our objective is to have liquidity available to fulfill loan demands, repay deposits and other liabilities, and execute balance sheet strategies in all market conditions while adhering to internal controls and income targets. Valley's liquidity program is managed by the Treasury Department and routinely monitored by the Asset and Liability Management Committee and two board committees. Among other actions, Treasury actively monitors Valley's current liquidity profile, sources and stability of funding, availability of assets for pledging or sale, opportunities to gather additional funds, and anticipated future funding needs, including the level of unfunded commitments. The Bank adheres to certain internal liquidity measures including ratios of loans to deposits below 110 percent and wholesale funding to total funding below 25 percent, as summarized in the table below. Management maintains flexibility to temporarily exceed these thresholds in certain operating environments. The following table presents Valley's loan to deposits and wholesale funding to total funding ratios at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Loans to deposits 100.5 % 98.5 % Wholesale funding to total funding 24.8 13.8 Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payments related to leases, capital expenditures and other purchase commitments. In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments. Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below. On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York) and other sources. The following table summarizes Valley's sources of liquid assets: June 30, 2023 December 31, 2022 (in thousands) Cash and due from banks $ 463,318 $ 444,325 Interest bearing deposits with banks 1,491,091 503,622 Trading debt securities 3,409 13,438 Held to maturity debt securities (1) 182,280 177,614 Available for sale debt securities (2) 1,236,946 1,261,397 Loans held for sale 33,044 18,118 Total liquid assets $ 3,410,088 $ 2,418,514 (1) Represents securities that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid) within the held to maturity debt security portfolio. 71 (2) Includes a pproximately $847 million and $333 million of various investment securities that were pledged to counterparties to support our earning asset funding strategies at June 30, 2023 and December 31, 2022, respectively. Total liquid assets represented 6.0 percent and 4.6 percent of earning assets at June 30, 2023 and December 31, 2022, respectively. Other sources of funds on the asset side are derived from scheduled loan payments of principal and interest, as well as prepayments received. At June 30, 2023, estimated cash inflows from total loans are projected to be approximately $14.7 billion over the next 12-month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtail ment of lending activities. We anticipate the receipt of approx imately $386.2 million in principal payments from securities in the total investment portfolio at June 30, 2023 over the next 12-month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities. On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, fully FDIC-insured indirect customer deposits, collateralized municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes all fully insured indirect customer deposits, as well as retail certificates of deposit over $250 thousand, represents the largest of these source s. Average core deposits totaled approximately $42.0 billion and $38.1 billion for the six months ended June 30, 2023 and for the year ended December 31, 2022, respectively, representing 74.6 percent and 79.2 percent of average interest earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds, rates prevailing in the capital markets, competition, and the need to manage interest rate risk sensitivity. In addition to customer deposits, the Bank has ample access to readily available borrowing sources available to supplement its current and projected funding needs. The following table presents short-term borrowings outstanding at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 (in thousands) FHLB advances $ 1,000,000 $ 24,035 Securities sold under agreements to repurchase 88,899 114,694 Total short-term borrowings $ 1,088,899 $ 138,729 The following table summarizes the Bank's estimated unused available non-deposit borrowing capacities at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 (in thousands) FHLB borrowing capacity* $ 13,093,000 $ 6,891,000 Unused FRB discount window* 7,684,000 2,099,000 Unused federal funds lines available from commercial banks 2,065,000 1,940,000 Unencumbered investment securities 1,326,000 3,502,000 Total $ 24,168,000 $ 14,432,000 * FHLB and FRB borrowings are collateralized by certain pledged securities, including but not limited to U.S. government and agency mortgage-backed securities and blanket qualifying first lien on certain real estate and residential mortgage secured loans. Additionally, the Federal Reserve established the Bank Term Funding Program on March 12, 2023 as a funding source for eligible depository institutions. The Program can provide short-term liquidity (up to one year) against the par value of certain high-quality collateral, such as U.S. Treasury securities, and eliminate the potential need for an 72 institution to sell those securities in times of stress. Advances under the Program can be requested until March 11, 2024. This Program is currently another short-term liquidity source for Valley. Valley had no outstanding borrowings under the Program at June 30, 2023. Corporation Liquidity Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our ongoing asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures and subordinated notes (including $125 million of 5.125 percent subordinated notes which are maturing on September 27, 2023). Valley's cash needs are routinely satisfied by dividends collected from the Bank. Projected cash flows from the Bank are expected to be adequate to pay preferred and common dividends, if declared, and interest expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods of up to five years, but not beyond the stated maturity dates, and subject to other conditions. Investment Securities Portfolio As of June 30, 2023, we had $61.0 million, $1.2 billion, and $3.8 billion in equity, available for sale debt securities and held to maturity debt securities, respectively. The available for sale and held to maturity debt securities portfolios, which comprise the majority of the securities we own, include: U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions, residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies and high quality corporate bonds. Among other securities, our available for sale debt securities include securities such as bank issued and other corporate bonds, as well as municipal special revenue bonds, which may pose a higher risk of future impairment charges to us as a result of the uncertain economic environment and its potential negative effect on the future performance of the security issuers. The equity securities consisted of two publicly traded mutual funds, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in partnerships that invest in such companies. Our CRA and other equity investments are a mix of both publicly traded entities and privately held entities. We also had $3.4 million of trading debt securities at June 30, 2023 consisting of U.S. Treasury securities. We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed 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 Available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, 73 such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. We have evaluated all available for sale debt securities that are in an unrealized loss position as of June 30, 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 six months ended June 30, 2023. There was no other impairment recognized within the available for sale debt securities portfolio during the three months ended June 30, 2023 and the three and six months ended June 30, 2022. Valley does not intend to sell any of its available for sale debt securities in an unrealized loss position prior to recovery of our amortized cost basis, and it is more likely than not that Valley will not be required to sell any of its securities prior to recovery of our amortized cost basis. None of the available for sale debt securities were past due as of June 30, 2023 and t here was no allowance for credit losses for available for sale debt securities at June 30, 2023 and December 31, 2022. Held to maturity debt securities. Valley estimates the expected credit losses on held to maturity debt securities that have loss expectations using a discounted cash flow model developed by a third party. Valley has a zero-loss expectation for certain securities within the held to maturity portfolio, including U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party . Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of an allowance for credit losses totaling approximately $1.4 million and $1.6 million at June 30, 2023 and December 31, 2022, respectively. Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio. 74 The following table presents the available for sale and held to maturity debt investment securities portfolios by investment grades at June 30, 2023: June 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (in thousands) Available for sale investment grades: * AAA Rated $ 1,052,295 $ 39 $ (124,114) $ 928,220 AA Rated 149,623 — (27,011) 122,612 A Rated 17,213 — (3,000) 14,213 BBB Rated 69,905 — (8,598) 61,307 Non-investment grade 5,000 — (1,222) 3,778 Not rated 120,644 — (13,828) 106,816 Total $ 1,414,680 $ 39 $ (177,773) $ 1,236,946 Held to maturity investment grades: * AAA Rated $ 3,333,395 $ 918 $ (455,892) $ 2,878,421 AA Rated 237,338 105 (15,184) 222,259 A Rated 5,898 1 (145) 5,754 BBB Rated 6,000 — (780) 5,220 Non-investment grade 5,416 — (872) 4,544 Not rated 178,791 1 (16,042) 162,750 Total $ 3,766,838 $ 1,025 $ (488,915) $ 3,278,948 Allowance for credit losses 1,351 — — 1,351 Total, net of allowance for credit losses $ 3,765,487 $ 1,025 $ (488,915) $ 3,277,597 * Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels. The unrealized losses in the AAA and AA rated categories of both the available for sale and held to maturity debt securities portfolios (in the above table) were largely related to residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac and continued to be driven by the rising interest rate environment during the last 12 months. The investment securities available for sale and held to maturity portfolio included $120.6 million and $178.8 million, respectively, of investments not rated by the rating agencies with aggregate unrealized losses of $13.8 million and $16.0 million, respectively, at June 30, 2023. The unrealized losses within non-rated available for sale debt securities mostly related to several large corporate bonds negatively impacted by rising interest rates, and not changes in underlying credit. The unrealized losses within non-rated held to maturity debt securities mostly related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.1 million and several corporate and other debt securities. See Note 7 to the consolidated financial statements for additional information regarding our investment securities portfolio. 75 Loan Portfolio The following table reflects the composition of the loan portfolio as of the dates presented: June 30, 2023 March 31, 2023 December 31, 2022 ($ in thousands) Loans Commercial and industrial $ 9,287,309 $ 9,043,946 $ 8,804,830 Commercial real estate: Commercial real estate 27,793,072 27,051,111 25,732,033 Construction 3,815,761 3,725,967 3,700,835 Total commercial real estate 31,608,833 30,777,078 29,432,868 Residential mortgage 5,560,356 5,486,280 5,364,550 Consumer: Home equity 535,493 516,592 503,884 Automobile 1,632,875 1,717,141 1,746,225 Other consumer 1,252,382 1,118,929 1,064,843 Total consumer loans 3,420,750 3,352,662 3,314,952 Total loans * $ 49,877,248 $ 48,659,966 $ 46,917,200 As a percent of total loans: Commercial and industrial 18.6 % 18.6 % 18.8 % Commercial real estate 63.4 63.2 62.7 Residential mortgage 11.1 11.3 11.4 Consumer loans 6.9 6.9 7.1 Total 100.0 % 100.0 % 100.0 % * Includes net unearned discount and deferred loan fees of $119.1 million, $125.4 million and $120.5 million at June 30, 2023, March 31, 2023 and December 31, 2022, respectively. Total loans increased $1.2 billion, or 10.0 percent on an annualized basis to $49.9 billion at June 30, 2023 from March 31, 2023 mainly due to continued organic loan growth in commercial loan categories and relatively low levels of loan prepayment activity during the second quarter 2023 . Residential mortgage loans held for sale at fair value totaled $23.0 million and $17.2 million at June 30, 2023 and March 31, 2023, respectively. At June 30, 2023, loans held for sale also included one non-performing construction loan totaling $10.0 million, net of charge-offs, transferred from the loan portfolio during the second quarter 2023. Commercial and industrial loans increased $243.4 million to $9.3 billion at June 30, 2023 as compared to March 31, 2023. The organic and diverse growth was mainly a result of new loan volumes from our pre-existing long-term customer base. Commercial real estate loans (excluding construction loans) increased $742.0 million to $27.8 billion at June 30, 2023 from March 31, 2023 reflecting solid organic growth mainly within non-owner occupied and multi-family loans across our geographic market areas. At June 30, 2023 , commercial real estate loans collateralized by office buildings were approximately $3.2 billion of the $27.8 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 52 percent and debt service coverage ratio of 1.78. Construction loans increased only $89.8 million to $3.8 billion at June 30, 2023 from March 31, 2023 and was largely due to advances on pre-existing construction loan projects in New Jersey, New York and Florida. Residential mortgage loans increased $74.1 million, or 5.4 percent on an annualized basis, during the second 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 $188.0 million for the second quarter 2023 as compared to 76 $194.4 million and $540.7 million for the first quarter 2023 and second quarter 2022, respectively. Florida originations totaled $63.2 million and represented 33.61 percent of total residential mortgage loan originations in the quarter. During the second quarter 2023, we retained approximately 73.2 percent of the total residential mortgage originations in our held for investment loan portfolio. Of the total originations in the second quarter 2023, $50.4 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 . Additionally, the volume of both new and refinanced loan applicat ions has remained relatively low in the early stages of the third 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 $18.9 million to $535.5 million at June 30, 2023 compared to March 31, 2023 as a result of lower new originations and line utilization in an unfavorable high interest rate environment. Automobile loans decreased by $84.3 million, or 19.6 percent on an annualized basis, to $1.6 billion at June 30, 2023 as compared to March 31, 2023 largely due to continued low consumer demand for new and used vehicle financing because of the higher interest rate environment. During the second quarter 2023, the interest rates on new car loans reached the highest level since 2008. We originated $16.2 million in auto loans through our Florida dealership network during the second quarter 2023 as compared to $31.5 million in the first quarter 2023. Of the total originations, our Florida dealership network represented approximately 20 percent of new loans, during the second quarter 2023. Despite adequate 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 third quarter 2023. Other consumer loans increased $133.5 million to $1.3 billion at June 30, 2023 as compared to March 31, 2023 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. Annualized loan growth slowed to 10 percent during the second quarter 2023 from 16 percent in the first quarter 2023 as we worked through the majority of the strong loan pipeline that was present at the beginning of 2023. We will continue to be selective on the lending side and generally supportive of compelling projects led by our high quality and tenured customer base. Moving forward, we anticipate moderate levels of overall loan growth in the mid to high single digits on an annualized basis for the remainder of 2023. Non-performing Assets 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 June 30, 2023. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at lower of cost or fair value, less estimated cost to sell. Our NPAs increased $11.2 million to $256.1 million at June 30, 2023 as compared to March 31, 2023 mostly due to increases in both non-accrual commercial real estate loans and commercial and industrial loans, partially offset by decreases in construction loans and residential mortgage loans. NPAs as a percentage of total loans and NPAs totaled 0.51 percent and 0.50 percent at June 30, 2023 and March 31, 2023, respectively (as shown in the table below). Our total NPAs has remained relatively low as a percentage of the total loan portfolio and the level of NPAs, which is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements. 77 Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. During the six months ended June 30, 2023, our overall credit trends have remained stable, and our business and borrowers continued to demonstrate resilience and growth despite the recent challenges across the banking system, slower economic growth, elevated inflation and the overall uncertain economy . However, management cannot provide assurance that the non-performing assets will not materially increase from the levels reported at June 30, 2023 due to the aforementioned or other factors potentially impacting our lending customers. The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: June 30, 2023 March 31, 2023 December 31, 2022 ($ in thousands) Accruing past due loans: 30 to 59 days past due: Commercial and industrial $ 6,229 $ 20,716 $ 11,664 Commercial real estate 3,612 13,580 6,638 Residential mortgage 15,565 12,599 16,146 Total consumer 8,431 7,845 9,087 Total 30 to 59 days past due 33,837 54,740 43,535 60 to 89 days past due: Commercial and industrial 7,468 24,118 12,705 Commercial real estate — — 3,167 Residential mortgage 1,348 2,133 3,315 Total consumer 4,126 1,519 1,579 Total 60 to 89 days past due 12,942 27,770 20,766 90 or more days past due: Commercial and industrial 6,599 8,927 18,392 Commercial real estate 2,242 — 2,292 Construction 3,990 6,450 3,990 Residential mortgage 1,165 1,668 1,866 Total consumer 1,006 747 47 Total 90 or more days past due 15,002 17,792 26,587 Total accruing past due loans $ 61,781 $ 100,302 $ 90,888 Non-accrual loans: Commercial and industrial $ 84,449 $ 78,606 $ 98,881 Commercial real estate 82,712 67,938 68,316 Construction 63,043 68,649 74,230 Residential mortgage 20,819 23,483 25,160 Total consumer 3,068 3,318 3,174 Total non-accrual loans 254,091 241,994 269,761 Other real estate owned (OREO) 824 1,189 286 Other repossessed assets 1,230 1,752 1,937 Total non-performing assets (NPAs) $ 256,145 $ 244,935 $ 271,984 Total non-accrual loans as a % of loans 0.51 % 0.50 % 0.57 % Total NPAs as a % of loans and NPAs 0.51 0.50 0.58 Total accruing past due and non-accrual loans as a % of loans 0.63 0.70 0.77 Allowance for loan losses as a % of non-accrual loans 171.76 180.54 170.02 78 Loans past due 30 to 59 days decreased $20.9 million to $33.8 million at June 30, 2023 as compared to March 31, 2023 due, in part, to the commercial real estate loans totaling $10.2 million included in this delinquency category at March 31, 2023 that reclassified to non-accrual loans at June 30, 2023. Commercial and industrial loans 30 to 59 days past due decreased $14.5 million mainly due to improved performance during the second quarter 2023. Loans past due 60 to 89 days decreased $14.8 million to $12.9 million at June 30, 2023 as compared to March 31, 2023 largely due to a commercial and industrial loan relationship totaling $21.2 million included in this delinquency category at March 31, 2023 that became current to all its contractual payments at June 30, 2023. Loans 90 days or more past due and still accruing interest decreased $2.8 million to $15.0 million at June 30, 2023 as compared to March 31, 2023 mainly due to decreases in the commercial and industrial and construction loan categories, partially offset by one new matured commercial real estate loan of $2.2 million expected to be paid off in the near term. All loans 90 days or more past due and still accruing interest are well-secured and in the process of collection. Non-accrual loans increased $12.1 million to $254.1 million at June 30, 2023 as compared to $242.0 million at March 31, 2023 mostly driven by an increase in the commercial real estate loan category. Non-accrual commercial real estate loans increased $14.8 million to $82.7 million at June 30, 2023 due, in part, to the aforementioned migration of two loans totaling $10.2 million from the 30 to 59 days past due delinquency category at March 31, 2023 and one new $4.5 million non-performing loan at June 30, 2023. Non-accrual construction loans decreased $5.6 million to $63.0 million at June 30, 2023 from March 31, 2023 primarily due to the $4.2 million partial charge-off of one loan, which was transferred to loans held for sale at June 30, 2023. Although the timing of collection is uncertain, management believes that the majority of the non-accrual loans at June 30, 2023, are well secured and largely collectible based in part, on our quarterly review of collateral dependent loans and the valuation of the underlying collateral, if applicable. Any estimated shortfall in each collateral valuation results in an allocation of specific reserves within our allowance for credit losses for loans. Non-performing taxi medallion loans totaled $65.8 million of the $84.4 million non-accrual commercial and industrial loans at June 30, 2023. At June 30, 2023, all taxi medallion loans in the loan portfolio were on non-accrual status and had related reserves of $41.7 million, or 63.4 percent of such loans, within the allowance for loan losses. Potential further declines in the market valuation of taxi medallions and the c urrent operating environment mainly within New York City may negatively impact the performance of this portfolio. OREO properties totaled $824 thousand at June 30, 2023 and decreased $365 thousand as compared to March 31, 2023. Th e sales of OREO p roperties and net gains on sales of OREO during t he three and six months ended June 30, 2023 and 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 $454 thousand and $2.6 million at June 30, 2023 and December 31, 2022, respectively. Allowance for Credit Losses for Loans The allowance for credit losses (ACL) for loans includes the allowance for loan losses and the reserve for unfunded credit commitments. Under CECL, our methodology to establish the allowance for loan losses has two basic components: (i) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (ii) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit. Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis, we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating 79 probability of default and loss given default metrics. The metrics are based on the migration of loans within the commercial and industrial loan categories from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent that they do not exist in the historical loss information, and (iii) net expected recoveries of charged-off loan balances. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses. The expected lifetime loss rate is the life of loan loss percentage from the transition matrix model plus the impact of the adjustments for qualitative factors. The expected credit losses are the product of multiplying the model’s expected lifetime loss rate by the exposure at default at period end on an undiscounted basis. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan on a straight-line basis. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index. At June 30, 2023, Valley continued to maintain the majority of its probability weighting used in the economic forecast to the Moody’s Baseline scenario with less emphasis on the S-3 downside and S-4 adverse scenarios. However, the standalone Moody's Baseline scenario reflected a more pessimistic outlook as compared to March 31, 2023 in terms of GDP growth, unemployment levels and potential near term negative economic impacts given the present uncertain economic conditions. At June 30, 2023, the Moody's Baseline forecast included the following specific assumptions: • GDP expansion of approximately 0.6 percent in the third quarter 2023; • Unemployment of 3.6 percent in the third quarter 2023 and 3.8 to 4.3 percent over the remainder of the forecast period ending in the second quarter 2025; • Continued concerns about increased debt burden pushed by rising interest rates, high inflation, and elevated house prices; • Consumer spending remained a source of growth and its contribution grew to the largest in nearly two years, as the cost-of-living adjusted boosted after-tax income adding another 2.5 percent to growth; • The Federal Reserve opted to pause its rate hikes in June 2023, keeping the federal funds rate at 5 - 5.25 percent with possible additional reductions in 2023; and • Inflation remains elevated but continues to trend downward, while reporting at approximately 4 percent in May 2023. See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements. 80 The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated: Three Months Ended Six Months Ended June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 ($ in thousands) Allowance for credit losses for loans Beginning balance $ 460,969 $ 483,255 $ 379,252 $ 483,255 $ 375,702 Impact of the adoption of ASU No. 2022-02 (1) — (1,368) — (1,368) — Allowance for purchased credit deteriorated (PCD) loans, net (2) — — 70,319 — 70,319 Beginning balance, adjusted 460,969 481,887 449,571 481,887 446,021 Loans charged-off: Commercial and industrial (3,865) (26,047) (4,540) (29,912) (6,111) Commercial real estate (2,065) — — (2,065) (173) Construction (4,208) (5,698) — (9,906) — Residential mortgage (149) — (1) (149) (27) Total consumer (1,040) (828) (726) (1,868) (1,551) Total charge-offs (11,327) (32,573) (5,267) (43,900) (7,862) Charged-off loans recovered: Commercial and industrial 2,173 1,399 1,952 3,572 2,776 Commercial real estate 4 24 224 28 331 Residential mortgage 135 21 74 156 531 Total consumer 390 761 697 1,151 1,954 Total recoveries 2,702 2,205 2,947 4,907 5,592 Total net loan charge-offs (8,625) (30,368) (2,320) (38,993) (2,270) Provision charged for credit losses 6,332 9,450 43,712 15,782 47,212 Ending balance $ 458,676 $ 460,969 $ 490,963 $ 458,676 $ 490,963 Components of allowance for credit losses for loans: Allowance for loan losses $ 436,432 $ 436,898 $ 468,819 $ 436,432 $ 468,819 Allowance for unfunded credit commitments 22,244 24,071 22,144 22,244 22,144 Allowance for credit losses for loans $ 458,676 $ 460,969 $ 490,963 $ 458,676 $ 490,963 Components of provision for credit losses for loans: Provision for credit losses for loans $ 8,159 $ 9,979 $ 38,310 $ 18,138 $ 41,568 Provision for unfunded credit commitments (1,827) (529) 5,402 (2,356) 5,644 Total provision for credit losses for loans $ 6,332 $ 9,450 $ 43,712 $ 15,782 $ 47,212 Allowance for credit losses for loans as a % of total loans 0.92 % 0.95 % 1.13 % 0.92 % 1.13 % (1) Represents the opening adjustment for the adoption of ASU No. 2022-02 effective January 1, 2023. (2) Represents the allowance for acquired PCD loans, net of PCD loan charge-offs totaling $62.4 million in the second quarter 2022. 81 The following table presents the relationship among net loans charged-off and recoveries, and average loan balances outstanding for the periods indicated: Three Months Ended Six Months Ended June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 ($ in thousands) Net loan (charge-offs) recoveries Commercial and industrial $ (1,692) $ (24,648) $ (2,588) $ (26,340) $ (3,335) Commercial real estate (2,061) 24 224 (2,037) 158 Construction (4,208) (5,698) — (9,906) — Residential mortgage (14) 21 73 7 504 Total consumer (650) (67) (29) (717) 403 Total $ (8,625) $ (30,368) $ (2,320) $ (38,993) $ (2,270) Average loans outstanding Commercial and industrial $ 9,043,832 $ 8,754,853 $ 8,304,822 $ 8,304,822 $ 7,017,820 Commercial real estate 27,808,278 26,555,421 23,319,419 26,735,384 21,303,889 Construction 3,787,183 3,780,615 2,925,741 3,721,735 2,421,678 Residential mortgage 5,489,501 5,363,421 4,727,481 5,337,320 4,706,695 Total consumer 3,329,143 3,405,061 3,239,824 3,268,712 3,142,069 Total $ 49,457,937 $ 47,859,371 $ 42,517,287 $ 47,367,973 $ 38,592,151 Annualized net loan charge-offs (recoveries) to average loans outstanding Commercial and industrial 0.07% 1.13% 0.12% 0.63% 0.10% Commercial real estate 0.03 0.00 0.00 0.02 0.00 Construction 0.44 0.60 0.00 0.53 0.00 Residential mortgage 0.00 0.00 (0.01) 0.00 (0.02) Total consumer 0.08 0.01 0.00 0.04 (0.03) Total loans 0.07 0.25 0.02 0.16 0.01 Net loan charge-offs totaled $8.6 million for the second quarter 2023 as compared to $30.4 million and $2.3 million for the first quarter 2023 and the second quarter 2022, respectively. The decrease from the first quarter 2023 was mainly due to the elevated net loan charges-offs during the first quarter 2023 largely related to one commercial and industrial loan participation charged-off. Gross charge-offs totaled $11.3 million for the second quarter 2023 and included the $4.2 million partial charge-off related to the valuation of a non-performing construction loan transferred from the held for investment loan portfolio to loans held for sale at June 30, 2023. This construction loan had specific reserves of $5.2 million within the allowance for loan losses at March 31, 2023 and, as a result, the partial charge-off was fully reserved for prior to the second quarter 2023. The amount of net loan charge-offs (as presented in the above table) and the low level of individual loan charge-offs for the second quarter 2023 continued to trend within management's expectations for the credit quality of the loan portfolio at June 30, 2023. 82 The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category: June 30, 2023 March 31, 2023 June 30, 2022 Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category Allowance Allocation Allocation as a % of Loan Category ($ in thousands) Loan Category: Commercial and industrial loans $ 128,245 1.38 % $ 127,992 1.42 % $ 144,539 1.70 % Commercial real estate loans: Commercial real estate 194,177 0.70 190,420 0.70 227,457 0.97 Construction 45,518 1.19 52,912 1.42 49,770 1.47 Total commercial real estate loans 239,695 0.76 243,332 0.79 277,227 1.03 Residential mortgage loans 44,153 0.79 41,708 0.76 29,889 0.60 Consumer loans: Home equity 4,020 0.75 4,417 0.86 3,907 0.91 Auto and other consumer 20,319 0.70 19,449 0.69 13,257 0.49 Total consumer loans 24,339 0.71 23,866 0.71 17,164 0.55 Allowance for loan losses 436,432 0.88 436,898 0.90 468,819 1.08 Allowance for unfunded credit commitments 22,244 24,071 22,144 Total allowance for credit losses for loans $ 458,676 $ 460,969 $ 490,963 Allowance for credit losses for loans as a % total loans 0.92 % 0.95 % 1.13 % The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 0.92 percent at June 30, 2023 as compared to 0.95 percent and 1.13 percent at March 31, 2023 and June 30, 2022, respectively. During the second quarter 2023, the provision for credit losses for loans tota led $6.3 million as compared to $9.5 million and $43.7 million for the first quarter 2023 and second quarter 2022, respectively. At June 30, 2023, our allowance for credit losses for loans as a percentage of total loans decreased as compared to March 31, 2023 as higher economic forecast reserves driven by a more pessimistic Moody's Baseline outlook was more than offset by lower non-economic qualitative reserves for commercial loans . The net impact of other changes in quantitative reserves for each loan category was not significant to the total allowance for loan losses at June 30, 2023 . Capital Adequacy A significant measure of the strength of a financial institution is its shareholders’ equity. At June 30, 2023 and December 31, 2022, shareholders’ equity totaled approximately $6.6 billion and $6.4 billion, which represented 10.7 percent and 11.1 percent of total assets, respectively. During the six months ended June 30, 2023, total shareholders’ equity increased by approximately $174.4 million primarily due to the following: • net income of $285.6 million, • a $7.7 million in crease attributable to the effect of our stock incentive plan, • additional capital issued totaling $3.8 million, • a $990 thousand net cumulative effect adjustment to retained earnings for the adoption of ASU 2022-02, partially offset by • cash dividends declared on common and preferred stock totaling a combined $120.9 million, 83 • repurchases of $2.1 million of our common stock with these shares held in treasury stock and • other comprehensive loss of $745 thousand. 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 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 June 30, 2023 and December 31, 2022, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below). For regulatory capital purposes, in accordance with the Federal Reserve Board’s final interim rule as of April 3, 2020, we deferred 100 percent of the CECL Day 1 impact to shareholders' equity plus 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for a two-year period ending January 1, 2022. On January 1, 2022, the deferral amount totaling $47.3 million after-tax started to be phased-in by 25 percent and will increase 25 percent per year until fully phased-in on January 1, 2025. As of June 30, 2023, approximately $23.6 million of the $47.3 million deferral amount was recognized as a reduction to regulatory capital and, as a result, decreased our risk-based capital ratios by approximately 6 basis points. 84 The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at June 30, 2023 and December 31, 2022: Actual Minimum Capital Requirements To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio ($ in thousands) As of June 30, 2023 Total Risk-based Capital Valley $ 5,735,239 11.52 % $ 5,227,963 10.50 % N/A N/A Valley National Bank 5,824,996 11.70 5,225,830 10.50 $ 4,976,981 10.00 % Common Equity Tier 1 Capital Valley 4,497,984 9.03 3,485,309 7.00 N/A N/A Valley National Bank 5,446,582 10.94 3,483,887 7.00 3,235,038 6.50 Tier 1 Risk-based Capital Valley 4,712,825 9.47 4,232,161 8.50 N/A N/A Valley National Bank 5,446,582 10.94 4,230,434 8.50 3,981,585 8.00 Tier 1 Leverage Capital Valley 4,712,825 7.86 2,399,186 4.00 N/A N/A Valley National Bank 5,446,582 9.08 2,399,094 4.00 2,998,868 5.00 As of December 31, 2022 Total Risk-based Capital Valley $ 5,569,639 11.63 % $ 5,026,621 10.50 % N/A N/A Valley National Bank 5,659,511 11.84 5,018,129 10.50 $ 4,779,170 10.00 % Common Equity Tier 1 Capital Valley 4,315,659 9.01 3,351,080 7.00 N/A N/A Valley National Bank 5,284,372 11.06 3,345,419 7.00 3,106,461 6.50 Tier 1 Risk-based Capital Valley 4,530,500 9.46 4,069,169 8.50 N/A N/A Valley National Bank 5,284,372 11.06 4,062,295 8.50 3,823,336 8.00 Tier 1 Leverage Capital Valley 4,530,500 8.23 2,200,822 4.00 N/A N/A Valley National Bank 5,284,372 9.60 2,200,891 4.00 2,751,114 5.00 Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 60.0 percent for the six months ended June 30, 2023 as compared to 61.4 percent for the year ended December 31, 2022. Cash dividends declared amounted to $0.22 per common share for each of the six months ended June 30, 2023 and 2022. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2022 in the MD&A section - “Liquidity and Cash Requirements” and Notes 13 and 14 to the consolidated financial statements included in this report. 85 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See pa ge 69 for a discussion of interest rate risk.