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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2021
OR
☐ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 1-11277 
 Valley National Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2477875
(State or other jurisdiction of
Incorporation or Organization) 		(I.R.S. Employer
Identification Number)
One Penn Plaza
New York, NY 10119
(Address of principal executive office) (Zip code)
973-305-8800
(Registrant’s telephone number, including area code) 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbols Name of exchange on which registered
Common Stock, no par value VLY The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series A, no par value VLYPP The Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series B, no par value VLYPO The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ☒ Accelerated filer
☐
Smaller reporting company
☐
Non-accelerated filer
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock (no par value), of which 406,953,610 shares were outstanding as of November 5, 2021.


TABLE OF CONTENTS
 
    Page
Number
PART I
Item 1.
2
3
5
6
8
10
Item 2.
46
Item 3.
82
Item 4.
82
PART II
Item 1.
83
Item 1A.
83
Item 2.
84
Item 6.
85
86

1


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share data)
September 30,
2021 		December 31,
2020
Assets (Unaudited)
Cash and due from banks $ 304,912  $ 257,845 
Interest bearing deposits with banks 1,195,244  1,071,360 
Investment securities:
Equity securities 36,068  29,378 
Trading debt securities 4,797  — 
Available for sale debt securities 1,208,277  1,339,473 
Held to maturity debt securities (net of allowance for credit losses of $1,075 at September 30, 2021 and $1,428 at December 31, 2020)
2,583,328  2,171,583 
Total investment securities 3,832,470  3,540,434 
Loans held for sale, at fair value 157,084  301,427 
Loans 32,606,814  32,217,112 
Less: Allowance for loan losses (342,527) (340,243)
Net loans 32,264,287  31,876,869 
Premises and equipment, net 319,763  319,797 
Lease right of use assets 258,180  252,053 
Bank owned life insurance 537,301  535,209 
Accrued interest receivable 98,073  106,230 
Goodwill 1,382,442  1,382,442 
Other intangible assets, net 62,525  70,449 
Other assets 865,726  971,961 
Total Assets $ 41,278,007  $ 40,686,076 
Liabilities
Deposits:
Non-interest bearing $ 10,789,237  $ 9,205,266 
Interest bearing:
Savings, NOW and money market 18,883,085  16,015,658 
Time 3,960,283  6,714,678 
Total deposits 33,632,605  31,935,602 
Short-term borrowings 783,346  1,147,958 
Long-term borrowings 1,427,444  2,295,665 
Junior subordinated debentures issued to capital trusts 56,326  56,065 
Lease liabilities 282,034  276,675 
Accrued expenses and other liabilities 273,754  381,991 
Total Liabilities 36,455,509  36,093,956 
Shareholders’ Equity
Preferred stock, no par value; 50,000,000 authorized shares:
Series A (4,600,000 shares issued at September 30, 2021 and December 31, 2020)
111,590  111,590 
Series B (4,000,000 shares issued at September 30, 2021 and December 31, 2020)
98,101  98,101 
Common stock (no par value, authorized 650,000,000 shares; issued 407,317,006 shares at September 30, 2021 and 403,881,488 shares at December 31, 2020)
142,976  141,746 
Surplus 3,672,467  3,637,468 
Retained earnings 818,780  611,158 
Accumulated other comprehensive loss (21,375) (7,718)
Treasury stock, at cost (3,342 common shares at September 30, 2021 and 22,490 common shares at December 31, 2020)
(41) (225)
Total Shareholders’ Equity 4,822,498  4,592,120 
Total Liabilities and Shareholders’ Equity $ 41,278,007  $ 40,686,076 
See accompanying notes to consolidated financial statements.
2


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except for share data)
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
Interest Income
Interest and fees on loans $ 309,753  $ 315,788  $ 938,248  $ 970,739 
Interest and dividends on investment securities:
Taxable 14,292  14,845  40,174  56,225 
Tax-exempt 2,609  3,606  9,181  11,224 
Dividends 1,505  2,684  5,543  9,177 
Interest on federal funds sold and other short-term investments 642  420  1,101  2,296 
Total interest income 328,801  337,343  994,247  1,049,661 
Interest Expense
Interest on deposits:
Savings, NOW and money market 10,605  13,323  32,896  64,463 
Time 4,394  19,028  21,766  91,699 
Interest on short-term borrowings 1,464  2,588  4,390  9,275 
Interest on long-term borrowings and junior subordinated debentures 11,312  19,318  40,595  53,240 
Total interest expense 27,775  54,257  99,647  218,677 
Net Interest Income 301,026  283,086  894,600  830,984 
Provision (credit) for credit losses for held to maturity securities 35  (112) (353) 688 
Provision for credit losses for loans 3,496  31,020  21,287  106,059 
Net Interest Income After Provision for Credit Losses 297,495  252,178  873,666  724,237 
Non-Interest Income
Trust and investment services 3,550  3,068  10,411  9,307 
Insurance commissions 1,610  1,816  5,805  5,426 
Service charges on deposit accounts 5,428  3,952  15,614  13,189 
Gains (losses) on securities transactions, net 787  (46) 1,263  (127)
Fees from loan servicing 2,894  2,551  8,980  7,526 
Gains on sales of loans, net 6,442  13,366  20,016  26,253 
Gains on sales of assets, net 344  894  380  716 
Bank owned life insurance 2,018  (1,304) 6,824  7,661 
Other 19,358  24,975  47,497  65,548 
Total non-interest income 42,431  49,272  116,790  135,499 
Non-Interest Expense
Salary and employee benefits expense 93,992  83,626  273,190  247,886 
Net occupancy and equipment expense 32,402  31,116  97,112  96,774 
FDIC insurance assessment 3,644  4,847  10,294  14,858 
Amortization of other intangible assets 5,298  6,377  16,753  18,528 
Professional and legal fees 13,492  8,762  27,250  22,646 
Loss on extinguishment of debt —  2,353  8,406  2,353 
Amortization of tax credit investments 3,079  2,759  8,795  9,403 
Telecommunication expense 2,615  2,094  8,507  7,247 
Other 20,400  18,251  56,721  53,312 
Total non-interest expense 174,922  160,185  507,028  473,007 
Income Before Income Taxes 165,004  141,265  483,428  386,729 
Income tax expense 42,424  38,891  124,626  101,486 
Net Income 122,580  102,374  358,802  285,243 
Dividends on preferred stock 3,172  3,172  9,516  9,516 
Net Income Available to Common Shareholders $ 119,408  $ 99,202  $ 349,286  $ 275,727 
3



VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (continued)
(in thousands, except for share data)
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
Earnings Per Common Share:
Basic $ 0.29  $ 0.25  $ 0.86  $ 0.68 
Diluted 0.29  0.25  0.86  0.68 
Cash Dividends Declared per Common Share 0.11  0.11  0.33  0.33 
Weighted Average Number of Common Shares Outstanding:
Basic 406,824,160  403,833,469  405,986,114  403,714,701 
Diluted 409,238,001  404,788,526  408,509,767  404,912,126 
See accompanying notes to consolidated financial statements.
4


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
Net income $ 122,580  $ 102,374  $ 358,802  $ 285,243 
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net (losses) gains arising during the period (3,953) (1,262) (15,860) 27,819 
Less reclassification adjustment for net (gains) losses included in net income (613) 36  (493) 94 
Total (4,566) (1,226) (16,353) 27,913 
Unrealized gains and losses on derivatives (cash flow hedges)
Net (losses) gains on derivatives arising during the period (96) 83  (69) (2,254)
Less reclassification adjustment for net losses included in net income 743  1,127  1,928  1,257 
Total 647  1,210  1,859  (997)
Defined benefit pension plan
Amortization of actuarial net loss 279  171  837  515 
Total other comprehensive (loss) income (3,640) 155  (13,657) 27,431 
Total comprehensive income $ 118,940  $ 102,529  $ 345,145  $ 312,674 
See accompanying notes to consolidated financial statements.

5


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended September 30, 2021
Common Stock Accumulated
Preferred Stock Shares Amount Surplus Retained
Earnings 		Other
Comprehensive
Loss 		Treasury
Stock 		Total
Shareholders’
Equity
  (in thousands)
Balance - December 31, 2020 $ 209,691  403,859  $ 141,746  $ 3,637,468  $ 611,158  $ (7,718) $ (225) $ 4,592,120 
Net income —  —  —  —  115,710  —  —  115,710 
Other comprehensive loss, net of tax
—  —  —  —  —  (9,287) —  (9,287)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (45,281) —  —  (45,281)
Effect of stock incentive plan, net
—  1,939  689  14,480  (5,764) —  175  9,580 
Balance - March 31, 2021 $ 209,691  405,798  142,435  $ 3,651,948  $ 672,651  $ (17,005) $ (50) $ 4,659,670 
Net income —  —  —  —  120,512  —  —  120,512 
Other comprehensive loss, net of tax —  —  —  —  —  (730) —  (730)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (45,093) —  —  (45,093)
Effect of stock incentive plan, net
—  286  115  6,688  (130) —  (53) 6,620 
Balance - June 30, 2021 $ 209,691  406,084  142,550  $ 3,658,636  $ 744,768  $ (17,735) $ (103) $ 4,737,807 
Net income —  —  —  —  122,580  —  —  122,580 
Other comprehensive loss, net of tax —  —  —  —  —  (3,640) —  (3,640)
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (45,228) —  —  (45,228)
Effect of stock incentive plan, net
—  1,230  426  13,831  (168) —  62  14,151 
Balance - September 30, 2021 $ 209,691  407,314  142,976  $ 3,672,467  $ 818,780  $ (21,375) $ (41) $ 4,822,498 


6


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited) (continued)

For the Nine Months Ended September 30, 2020
Common Stock Accumulated
Preferred Stock Shares Amount Surplus Retained
Earnings 		Other
Comprehensive
Loss 		Treasury
Stock 		Total
Shareholders’
Equity
  (in thousands)
Balance - December 31, 2019 $ 209,691  403,278  $ 141,423  $ 3,622,208  $ 443,559  $ (32,214) $ (479) $ 4,384,188 
Adjustment due to the adoption of ASU No. 2016-13 —  —  —  —  (28,187) —  —  (28,187)
Balance - January 1, 2020 209,691  403,278  141,423  3,622,208  415,372  (32,214) (479) 4,356,001 
Net income —  —  —  —  87,268  —  —  87,268 
Other comprehensive income, net of tax —  —  —  —  —  25,648  —  25,648 
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (44,979) —  —  (44,979)
Effect of stock incentive plan, net —  466  190  1,828  (2,065) —  279  232 
Balance - March 31, 2020 $ 209,691  403,744  141,613  $ 3,624,036  $ 452,424  $ (6,566) $ (200) $ 4,420,998 
Net income —  —  —  —  95,601  —  —  95,601 
Other comprehensive income, net of tax —  —  —  —  —  1,628  —  1,628 
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (44,750) —  —  (44,750)
Effect of stock incentive plan, net —  52  54  4,756  (592) —  (35) 4,183 
Balance - June 30, 2020 $ 209,691  403,796  $ 141,667  $ 3,628,792  $ 499,511  $ (4,938) $ (235) $ 4,474,488 
Net income —  —  —  —  102,374  —  —  102,374 
Other comprehensive income, net of tax —  —  —  —  —  155  —  155 
Cash dividends declared:
Preferred stock, Series A, $0.39 per share
—  —  —  —  (1,797) —  —  (1,797)
Preferred stock, Series B, $0.34 per share
—  —  —  —  (1,375) —  —  (1,375)
Common stock, $0.11 per share
—  —  —  —  (44,770) —  —  (44,770)
Effect of stock incentive plan, net —  83  51  4,529  (117) —  225  4,688 
Balance - September 30, 2020 $ 209,691  403,879  $ 141,718  $ 3,633,321  $ 553,826  $ (4,783) $ (10) $ 4,533,763 

See accompanying notes to consolidated financial statements.
7


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

  Nine Months Ended
September 30,
  2021 2020
Cash flows from operating activities:
Net income $ 358,802  $ 285,243 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 40,799  43,975 
Stock-based compensation 15,852  12,001 
Provision for credit losses 20,934  106,747 
Net amortization of premiums and accretion of discounts on securities and borrowings 22,145  26,051 
Amortization of other intangible assets 16,753  18,528 
(Gains) losses on securities transactions, net (1,263) 127 
Proceeds from sales of loans held for sale 932,274  716,739 
Gains on sales of loans, net (20,016) (26,253)
Originations of loans held for sale (774,443) (829,252)
Gains on sales of assets, net (380) (716)
Loss on extinguishment of debt 8,406  2,353 
Net change in:
Trading debt securities (4,797) — 
Cash surrender value of bank owned life insurance (6,824) (7,661)
Accrued interest receivable 8,157  (30,421)
Other assets 97,341  (420,572)
Accrued expenses and other liabilities (130,698) 83,591 
Net cash provided by (used in) operating activities 583,042  (19,520)
Cash flows from investing activities:
Net loan originations and purchases (405,204) (2,686,137)
Equity securities:
Purchases (3,163) (7,616)
Sales 1,227  27,867 
Held to maturity debt securities:
Purchases (1,062,202) (381,606)
Maturities, calls and principal repayments 633,272  532,151 
Available for sale debt securities:
Purchases (367,866) (306,071)
Sales 91,978  — 
Maturities, calls and principal repayments 376,875  374,321 
Death benefit proceeds from bank owned life insurance 3,850  14,062 
Proceeds from sales of real estate property and equipment 4,982  16,136 
Proceeds from sales of loans held for investment 4,498  30,020 
Purchases of real estate property and equipment (19,805) (20,715)
Net cash used in investing activities (741,558) (2,407,588)
8


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands)
  Nine Months Ended
September 30,
  2021 2020
Cash flows from financing activities:
Net change in deposits $ 1,697,003  $ 2,002,145 
Net change in short-term borrowings (364,612) 337,446 
Proceeds from issuance of long-term borrowings, net 295,922  838,388 
Repayments of long-term borrowings (1,168,465) (108,446)
Cash dividends paid to preferred shareholders (9,516) (9,516)
Cash dividends paid to common shareholders (134,860) (133,536)
Purchase of common shares to treasury (699) (4,972)
Common stock issued, net 15,199  2,074 
Other, net (505) (451)
Net cash provided by financing activities 329,467  2,923,132 
Net change in cash and cash equivalents 170,951  496,024 
Cash and cash equivalents at beginning of year 1,329,205  434,687 
Cash and cash equivalents at end of period $ 1,500,156  $ 930,711 
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings $ 109,661  $ 229,987 
Federal and state income taxes 148,674  108,302 
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned $ 141  $ 3,716 
Transfer of loans to loans held for sale —  30,020 
Lease right of use assets obtained in exchange for operating lease liabilities 40,296  10,141 
See accompanying notes to consolidated financial statements.
9


VALLEY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited consolidated financial statements of Valley National Bancorp, a New Jersey corporation (Valley), include the accounts of its commercial bank subsidiary, Valley National Bank (the Bank), and all of Valley’s direct or indirect wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated. The accounting and reporting policies of Valley conform to U.S. generally accepted accounting principles (U.S. GAAP) and general practices within the financial services industry. In accordance with applicable accounting standards, Valley does not consolidate statutory trusts established for the sole purpose of issuing trust preferred securities and related trust common securities. Certain prior period amounts have been reclassified to conform to the current presentation.
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly Valley’s financial position, results of operations, changes in shareholders' equity and cash flows at September 30, 2021 and for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year or any subsequent interim period.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP and industry practice have been condensed or omitted pursuant to rules and regulations of the SEC. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2020.
Significant Estimates. In preparing the unaudited consolidated financial statements in conformity with U.S. GAAP, management has made estimates and assumptions 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. Material estimates that require application of management’s most difficult, subjective or complex judgment and are particularly susceptible to change include: the allowance for credit losses, the evaluation of goodwill and other intangible assets for impairment, and income taxes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are deemed necessary. While management uses its best judgment, actual amounts or results could differ significantly from those estimates. The current economic environment has increased the degree of uncertainty inherent in these material estimates. Actual results may differ from those estimates. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.
Note 2. Business Combinations
The Westchester Bank Holding Corporation. On June 29, 2021, Valley announced that it will acquire The Westchester Bank Holding Corporation (“Westchester”) and its principal subsidiary, The Westchester Bank which is headquartered in White Plains, New York. As of June 30, 2021, Westchester had total assets of $1.3 billion, total loans of $908 million, and total deposits of $1.1 billion. Westchester maintains a seven branch network in Westchester County, New York. The common shareholders of Westchester will receive 229.645 shares of Valley common stock for each Westchester share they own. Based on Valley’s closing stock price on June 28, 2021, Westchester’s stockholders will receive approximately $210 million in Valley common stock. Existing Westchester options will be cashed out for approximately $10 million in cash. Valley has received all the requisite regulatory approvals to complete the merger which is anticipated to close on December 1, 2021, pending the satisfaction of customary closing conditions.
Bank Leumi Le-Israel Corporation. On September 23, 2021, Valley announced that it will acquire Bank Leumi Le-Israel Corporation (“Leumi”), the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA (“Bank Leumi”). Bank Leumi maintains its headquarters in New York City and also has commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Florida. As of June 30, 2021, Leumi had total
10


assets of $8.4 billion, total deposits of $7.1 billion, and gross loans of $5.4 billion. The common stockholders of Leumi will receive 3.8025 shares of Valley common stock and $5.08 in cash (subject to specified adjustments) for each Leumi common share they own. Based on Valley’s closing stock price on September 22, 2021, the transaction is valued at an estimated $1.1 billion, inclusive of the value of options and upon completion of the acquisition, Leumi will own approximately 14 percent of Valley's common stock. The acquisition is expected to close in the first half of 2022, subject to standard regulatory approvals, approval of Valley shareholders, as well as other customary closing conditions.
Dudley Ventures. On October 8, 2021, Valley acquired Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits. The transaction includes the acquisition of DV's community development entity, DV Community Investment, as well as DV Fund Advisors and DV Advisory Services. The transaction price included $11.3 million of cash at the closing date, fixed future stock consideration totaling $3.8 million, and contingent cash earn-out payments based upon revenue growth of the acquired entities over a five-year period.
Merger expenses related to the above acquisitions totaled $1.3 million for the three and nine months ended September 30, 2021 and primarily consisted of professional and legal fees.
Note 3. Earnings Per Common Share
The following table shows the calculation of both basic and diluted earnings per common share for the three and nine months ended September 30, 2021 and 2020:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands, except for share data)
Net income available to common shareholders $ 119,408  $ 99,202  $ 349,286  $ 275,727 
Basic weighted average number of common shares outstanding
406,824,160  403,833,469  405,986,114  403,714,701 
Plus: Common stock equivalents 2,413,841  955,057  2,523,653  1,197,425 
Diluted weighted average number of common shares outstanding
409,238,001  404,788,526  408,509,767  404,912,126 
Earnings per common share:
Basic $ 0.29  $ 0.25  $ 0.86  $ 0.68 
Diluted 0.29  0.25  0.86  0.68 

Common stock equivalents represent the dilutive effect of additional common shares issuable upon the assumed vesting or exercise, if applicable, of restricted stock units and common stock options to purchase Valley’s common shares. Common stock options with exercise prices that exceed the average market price per share of Valley’s common stock during the periods presented may have an anti-dilutive effect on the diluted earnings per common share calculation and therefore are excluded from the diluted earnings per share calculation along with restricted stock units. Potential anti-dilutive weighted common shares were immaterial for the three and nine months ended September 30, 2021, respectively, as compared to 4.9 million and 2.2 million shares for the three and nine months ended September 30, 2020, respectively.

11


Note 4. Accumulated Other Comprehensive Loss
The following table presents the after-tax changes in the balances of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2021: 

  Components of Accumulated Other Comprehensive Loss Total
Accumulated
Other
Comprehensive
Loss
  Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities 		Unrealized Gains
and Losses on
Derivatives 		Defined
Benefit
Pension Plan
  (in thousands)
Balance at June 30, 2021 $ 21,503  $ (2,694) $ (36,544) $ (17,735)
Other comprehensive loss before reclassification (3,953) (96) —  (4,049)
Amounts reclassified from other comprehensive (loss) income (613) 743  279  409 
Other comprehensive (loss) income, net
(4,566) 647  279  (3,640)
Balance at September 30, 2021 $ 16,937  $ (2,047) $ (36,265) $ (21,375)

  Components of Accumulated Other Comprehensive Loss Total
Accumulated
Other
Comprehensive
Loss
  Unrealized Gains
and Losses on
Available for Sale
(AFS) Securities 		Unrealized Gains
and Losses on
Derivatives 		Defined
Benefit
Pension Plan
  (in thousands)
Balance at December 31, 2020 $ 33,290  $ (3,906) $ (37,102) $ (7,718)
Other comprehensive loss before reclassification (15,860) (69) —  (15,929)
Amounts reclassified from other comprehensive (loss) income (493) 1,928  837  2,272 
Other comprehensive (loss) income, net
(16,353) 1,859  837  (13,657)
Balance at September 30, 2021 $ 16,937  $ (2,047) $ (36,265) $ (21,375)

The following table presents amounts reclassified from each component of accumulated other comprehensive loss on a gross and net of tax basis for the three and nine months ended September 30, 2021 and 2020:
Amounts Reclassified from
Accumulated Other Comprehensive Loss
Three Months Ended
September 30, 		Nine Months Ended September 30,
Components of Accumulated Other Comprehensive Loss 2021 2020 2021 2020 Income Statement Line Item
  (in thousands)  
Unrealized gains (losses) on AFS securities before tax $ 825  $ (46) $ 663  $ (127) Gains (losses) on securities transactions, net
Tax effect (212) 10  (170) 33 
Total net of tax 613  (36) 493  (94)
Unrealized losses on derivatives (cash flow hedges) before tax (1,044) (1,586) (2,708) (1,763) Interest expense
Tax effect 301  459  780  506 
Total net of tax (743) (1,127) (1,928) (1,257)
Defined benefit pension plan:
Amortization of actuarial net loss (388) (234) (1,163) (699) *
Tax effect 109  63  326  184 
Total net of tax (279) (171) (837) (515)
Total reclassifications, net of tax $ (409) $ (1,334) $ (2,272) $ (1,866)
12


* Amortization of actuarial net loss is included in the computation of net periodic pension cost recognized within other non-interest expense.
Note 5. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2021
Accounting Standards Update (ASU) No. 2020-08, "Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs" provides clarification and affects the guidance previously issued by ASU No. 2017-08 “Receivables -Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU No. 2020-08 clarifies that an entity should reevaluate whether a debt security with multiple call dates is within the scope of paragraph 310-20-35-33. For each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the premium should be amortized to the next call date, unless the guidance to consider estimated prepayments is applied. Valley adopted ASU No. 2020-08 on January 1, 2021 and the new guidance did not have a significant impact on Valley’s consolidated financial statements.

New Accounting Guidance issued in 2021

ASU No. 2021-01 "Reference Rate Reform (Topic 848)" extends some of Accounting Standards Codification Topic 848’s optional expedients to derivative contracts impacted by the discounting transition, including for derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued. ASU No. 2021-01 is effective for all entities immediately upon issuance and may be elected retrospectively to eligible modifications as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications made on or after any date within the interim period including January 7, 2021 and it can be applied through December 31, 2022, similar to the other reference rate reform relief provided under Topic 848. The ASU No. 2021-01 is not expected to have a significant impact on Valley’s consolidated financial statements.

ASU No. 2021-05 "Lessors – Certain Leases with Variable Lease Payments". The ASU No. 2021-05 updates guidance in Accounting Standards Codification (ASC) 842, Leases and requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if: (i) the lease would have been classified as a sales-type lease or direct financing lease under ASC 842 classification criteria; and (ii) the lessor would have recognized a selling loss at lease commencement. ASU No. 2021-05 is effective for Valley for fiscal years and interim periods beginning after December 15, 2021, with early adoption permitted. The ASU No. 2021-05 is not expected to have a significant impact on Valley’s consolidated financial statements.
Note 6. Fair Value Measurement of Assets and Liabilities

ASC Topic 820, “Fair Value Measurements” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

•Level 1    - Unadjusted exchange quoted prices in active markets for identical assets or liabilities, or identical liabilities traded as assets that the reporting entity has the ability to access at the measurement date.
•Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly (i.e., quoted prices on similar assets) for substantially the full term of the asset or liability.
•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


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Assets and Liabilities Measured at Fair Value on a Recurring and Non-Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at September 30, 2021 and December 31, 2020. The assets presented under “non-recurring fair value measurements” in the tables below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized). 
  September 30,
2021 		Fair Value Measurements at Reporting Date Using:
  Quoted Prices
in Active Markets
for Identical
Assets (Level 1) 		Significant
Other
Observable Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
  (in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Equity securities (1)
$ 32,300  $ 20,890  $ —  $ — 
Trading debt securities 4,797  —  4,797  — 
Available for sale debt securities:
U.S. government agency securities 21,442  —  21,442  — 
Obligations of states and political subdivisions
83,149  —  83,149  — 
Residential mortgage-backed securities
992,828  —  992,828  — 
Corporate and other debt securities 110,858  —  110,858  — 
Total available for sale debt securities 1,208,277  —  1,208,277  — 
Loans held for sale (2)
157,084  —  157,084  — 
Other assets (3)
215,919  —  215,919  — 
Total assets $ 1,618,377  $ 20,890  $ 1,586,077  $ — 
Liabilities
Other liabilities (3)
$ 66,733  $ —  $ 66,733  $ — 
Total liabilities $ 66,733  $ —  $ 66,733  $ — 
Non-recurring fair value measurements:
Collateral dependent loans $ 68,162  $ —  $ —  $ 68,162 
Foreclosed assets 2,037  —  —  2,037 
Total $ 70,199  $ —  $ —  $ 70,199 
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    Fair Value Measurements at Reporting Date Using:
  December 31,
2020 		Quoted Prices
in Active Markets
for Identical
Assets (Level 1) 		Significant
Other
Observable Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
  (in thousands)
Recurring fair value measurements:
Assets
Investment securities:
Equity securities (1)
$ 26,379  $ 18,600  $ —  $ — 
Available for sale debt securities:
U.S. Treasury securities 51,393  51,393  —  — 
U.S. government agency securities 26,157  —  26,157  — 
Obligations of states and political subdivisions 79,950  —  79,135  815 
Residential mortgage-backed securities 1,090,022  —  1,090,022  — 
Corporate and other debt securities 91,951  —  91,951  — 
Total available for sale 1,339,473  51,393  1,287,265  815 
Loans held for sale (2)
301,427  —  301,427  — 
Other assets (3)
387,452  —  387,452  — 
Total assets $ 2,054,731  $ 69,993  $ 1,976,144  $ 815 
Liabilities
Other liabilities (3)
$ 156,281  $ —  $ 156,281  $ — 
Total liabilities $ 156,281  $ —  $ 156,281  $ — 
Non-recurring fair value measurements:
Collateral dependent impaired loans $ 35,228  $ —  $ —  $ 35,228 
Loan servicing rights 15,603  —  —  15,603 
Foreclosed assets 7,387  —  —  7,387 
Total $ 58,218  $ —  $ —  $ 58,218 
(1)Includes equity securities measured at net asset value (NAV) per share (or its equivalent) as a practical expedient totaling $11.4 million and $7.8 million at September 30, 2021 and December 31, 2020, respectively. These securities have not been classified in the fair value hierarchy.
(2)Represents residential mortgage loans held for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $152.4 million and $286.4 million at September 30, 2021 and December 31, 2020, respectively.
(3)Derivative financial instruments are included in this category.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following valuation techniques were used for financial instruments measured at fair value on a recurring basis. All the valuation techniques described below apply to the unpaid principal balance, excluding any accrued interest or dividends at the measurement date. Interest income and expense are recorded within the consolidated statements of income depending on the nature of the instrument using the effective interest method based on acquired discount or premium.

Equity securities. The fair value of equity securities consists of a publicly traded mutual fund, Community Reinvestment Act (CRA) investment fund and an investment related to the development of new financial technologies that are carried at quoted prices in active markets. Valley also has privately held CRA funds measured at NAV, which are excluded from fair value hierarchy levels in the tables above.

Trading debt securities. The fair value of trading debt securities, consisting of municipal bonds, is reported at fair value utilizing Level 2 inputs. The prices for these investments are derived from market quotations and matrix
15


pricing obtained through an independent pricing service. Management reviews the data and assumptions used in pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data.

Available for sale debt securities. When applicable, U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. The majority of other investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participants with whom Valley has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the data and assumptions used in pricing the securities by its third-party provider to ensure the highest level of significant inputs are derived from market observable data. In addition, Valley reviews the volume and level of activity for all available for sale securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.

Loans held for sale. Residential mortgage loans originated for sale are reported at fair value using Level 2 inputs. The fair values were calculated utilizing quoted prices for similar assets in active markets. The market prices represent a delivery price, which reflects the underlying price each institution would pay Valley for an immediate sale of an aggregate pool of mortgages. Non-performance risk did not materially impact the fair value of mortgage loans held for sale at September 30, 2021 and December 31, 2020 based on the short duration these assets were held, and the credit quality of these loans.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The fair values of Valley’s derivatives are determined using third-party prices that are based on discounted cash flow analysis using observed market inputs, such as the LIBOR, Overnight Index Swap and Secured Overnight Financing Rate (SOFR) curves for all cleared derivatives. The fair value of mortgage banking derivatives, consisting of interest rate lock commitments to fund residential mortgage loans and forward commitments for the future delivery of such loans (including certain loans held for sale at September 30, 2021 and December 31, 2020), is determined based on the current market prices for similar instruments. The fair values of most of the derivatives incorporate credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, to account for potential nonperformance risk of Valley and its counterparties. The credit valuation adjustments were not significant to the overall valuation of Valley’s derivatives at September 30, 2021 and December 31, 2020.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The following valuation techniques were used for certain non-financial assets measured at fair value on a non-recurring basis, including collateral dependent loans reported at the fair value of the underlying collateral, loan servicing rights and foreclosed assets, which are reported at fair value upon initial recognition or subsequent impairment as described below.

Collateral Dependent Loans. Collateral dependent loans are loans when foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and substantially all of the repayment is expected from the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs, consisting of individual third-party appraisals that may be adjusted based on certain discounting criteria. Certain real estate appraisals may be discounted based on specific market data by location and property type. At September 30, 2021, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for loan losses based on the fair value of the underlying collateral. At September 30, 2021, collateral dependent loans with a total amortized cost of $136.1 million, including our taxi medallion loan portfolio, were reduced by specific allowance for loan losses allocations totaling $67.9 million to a reported total net carrying amount of $68.2 million.

16


Loan servicing rights. Fair values for each risk-stratified group of loan servicing rights are calculated using a fair value model from a third-party vendor that requires inputs that are both significant to the fair value measurement and unobservable (Level 3). The fair value model is based on various assumptions, including but not limited to, prepayment speeds, internal rate of return (discount rate), servicing cost, ancillary income, float rate, tax rate, and inflation. The prepayment speed and the discount rate are considered two of the most significant inputs in the model. At September 30, 2021, the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 13.6 percent and a discount rate of 9.0 percent for the valuation of the loan servicing rights. A significant degree of judgment is involved in valuing the loan servicing rights using Level 3 inputs. The use of different assumptions could have a significant positive or negative effect on the fair value estimate. Impairment charges are recognized on loan servicing rights when the amortized cost of a risk-stratified group of loan servicing rights exceeds the estimated fair value. At September 30, 2021, there was no re-measurement of loan servicing rights at fair value. See Note 9 for additional information.

Foreclosed assets. Certain foreclosed assets (consisting of other real estate owned and other repossessed assets included in other assets), upon initial recognition and transfer from loans, are re-measured and reported at fair value using Level 3 inputs, consisting of a third-party appraisal less estimated cost to sell. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for loan losses. If further declines in the estimated fair value of the asset occur, an asset is re-measured and reported at fair value through a write-down recorded in non-interest expense. The adjustments to the appraisals of foreclosed assets ranged from 0.6 percent to 4.6 percent at September 30, 2021.

Other Fair Value Disclosures

ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented in the following table were based on pertinent market data and relevant information on the financial instruments available as of the valuation date. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire portfolio of financial instruments. Because no market exists for a portion of the financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For instance, Valley has certain fee-generating business lines (e.g., its mortgage servicing operation, trust and investment management departments) that were not considered in these estimates since these activities are not financial instruments. In addition, the tax implications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

17


The carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated statements of financial condition at September 30, 2021 and December 31, 2020 were as follows: 
  Fair Value
Hierarchy 		September 30, 2021 December 31, 2020
  Carrying
Amount 		Fair Value Carrying
Amount 		Fair Value
  (in thousands)
Financial assets
Cash and due from banks Level 1 $ 304,912  $ 304,912  $ 257,845  $ 257,845 
Interest bearing deposits with banks Level 1 1,195,244  1,195,244  1,071,360  1,071,360 
Equity securities (1)
Level 3 3,768  3,768  2,999  2,999 
Held to maturity debt securities:
U.S. Treasury securities Level 1 67,716  72,898  68,126  75,484 
U.S. government agency securities
Level 2 4,817  5,015  6,222  6,513 
Obligations of states and political subdivisions
Level 2 353,406  360,903  470,259  484,506 
Residential mortgage-backed securities
Level 2 2,072,700  2,076,597  1,550,306  1,589,655 
Trust preferred securities Level 2 37,014  31,507  37,348  30,033 
Corporate and other debt securities Level 2 48,750  49,391  40,750  41,421 
Total held to maturity debt securities (2)
2,584,403  2,596,311  2,173,011  2,227,612 
Net loans Level 3 32,264,287  32,113,934  31,876,869  31,635,060 
Accrued interest receivable Level 1 98,073  98,073  106,230  106,230 
Federal Reserve Bank and Federal Home Loan Bank stock (3)
Level 2 207,701  207,701  250,116  250,116 
Financial liabilities
Deposits without stated maturities Level 1 29,672,322  29,672,322  25,220,924  25,220,924 
Deposits with stated maturities Level 2 3,960,283  3,957,008  6,714,678  6,639,022 
Short-term borrowings Level 1 783,346  765,636  1,147,958  1,151,478 
Long-term borrowings Level 2 1,427,444  1,417,368  2,295,665  2,405,345 
Junior subordinated debentures issued to capital trusts
Level 2 56,326  46,057  56,065  57,779 
Accrued interest payable (4)
Level 1 8,824  8,824  18,839  18,839 
(1)Represents equity securities without a readily determinable fair value measured at cost less impairment, if any.
(2)The carrying amount is presented gross without the allowance for credit losses.
(3)Included in other assets.
(4)Included in accrued expenses and other liabilities.

Note 7. Investment Securities

Equity Securities

Equity securities carried at fair value totaled $36.1 million and $29.4 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, Valley's equity securities consisted of one publicly traded mutual fund, CRA investments and to a lesser extent, equity investments related to the development of new financial technologies. Our CRA and other equity investments are a mixture of both publicly traded entities and privately held entities without readily determinable fair market values.




18



Trading Debt Securities

The fair value of trading securities, consisting of municipal bonds, totaled $4.8 million at September 30, 2021. We had no trading debt securities at December 31, 2020. Net trading gains and losses are included in net gains and losses on securities transactions within non-interest income. We recorded net trading losses of $2 thousand and net trading gains of $705 thousand for three and nine months ended September 30, 2021, respectively.

Available for Sale Debt Securities

The amortized cost, gross unrealized gains and losses and fair value of available for sale debt securities at September 30, 2021 and December 31, 2020 were as follows: 
Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
  (in thousands)
September 30, 2021
U.S. government agency securities $ 20,408  $ 1,041  $ (7) $ 21,442 
Obligations of states and political subdivisions:
Obligations of states and state agencies 29,752  239  (39) 29,952 
Municipal bonds 53,186  440  (429) 53,197 
Total obligations of states and political subdivisions 82,938  679  (468) 83,149 
Residential mortgage-backed securities 973,543  21,761  (2,476) 992,828 
Corporate and other debt securities 107,901  3,262  (305) 110,858 
Total $ 1,184,790  $ 26,743  $ (3,256) $ 1,208,277 
December 31, 2020
U.S. Treasury securities $ 50,031  $ 1,362  $ —  $ 51,393 
U.S. government agency securities 25,067  1,103  (13) 26,157 
Obligations of states and political subdivisions:
Obligations of states and state agencies 40,861  970  (32) 41,799 
Municipal bonds 37,489  731  (69) 38,151 
Total obligations of states and political subdivisions 78,350  1,701  (101) 79,950 
Residential mortgage-backed securities 1,050,369  40,426  (773) 1,090,022 
Corporate and other debt securities 89,689  2,294  (32) 91,951 
Total $ 1,293,506  $ 46,886  $ (919) $ 1,339,473 

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The age of unrealized losses and fair value of the related available for sale debt securities at September 30, 2021 and December 31, 2020 were as follows: 
  Less than
Twelve Months 		More than
Twelve Months 		Total
  Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses 		Fair
Value 		Unrealized
Losses
  (in thousands)
September 30, 2021
U.S. government agency securities $ —  $ —  $ 1,355  $ (7) $ 1,355  $ (7)
Obligations of states and political subdivisions:
Obligations of states and state agencies
10,344  (39) —  —  10,344  (39)
Municipal bonds 25,100  (429) —  —  25,100  (429)
Total obligations of states and political subdivisions
35,444  (468) —  —  35,444  (468)
Residential mortgage-backed securities 264,495  (2,138) 12,058  (338) 276,553  (2,476)
Corporate and other debt securities 19,175  (305) —  —  19,175  (305)
Total $ 319,114  $ (2,911) $ 13,413  $ (345) $ 332,527  $ (3,256)
December 31, 2020
U.S. government agency securities $ —  $ —  $ 1,479  $ (13) $ 1,479  $ (13)
Obligations of states and political subdivisions:
Obligations of states and state agencies
—  —  1,010  (32) 1,010  (32)
Municipal bonds 6,777  (69) —  —  6,777  (69)
Total obligations of states and political subdivisions
6,777  (69) 1,010  (32) 7,787  (101)
Residential mortgage-backed securities 41,418  (500) 27,911  (273) 69,329  (773)
Corporate and other debt securities 12,517  (32) —  —  12,517  (32)
Total $ 60,712  $ (601) $ 30,400  $ (318) $ 91,112  $ (919)
Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position was 111 and 58 at September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, the fair value of available for sale debt securities that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $547.5 million.
The contractual maturities of available for sale debt securities at September 30, 2021 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
  September 30, 2021
  Amortized
Cost 		Fair
Value
  (in thousands)
Due in one year $ 10,183  $ 10,294 
Due after one year through five years 31,000  31,750 
Due after five years through ten years 84,781  87,587 
Due after ten years 85,283  85,818 
Residential mortgage-backed securities 973,543  992,828 
Total $ 1,184,790  $ 1,208,277 
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Actual maturities of available for sale debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted average remaining expected life for residential mortgage-backed securities available for sale was 4.9 years at September 30, 2021.
Impairment Analysis of Available For Sale Debt Securities

Valley's available for sale debt securities portfolio includes corporate bonds and revenue bonds, among other securities. These types of securities may pose a higher risk of future impairment charges by Valley as a result of the unpredictable nature of the U.S. economy and its potential negative effect on the future performance of the security issuers, including due to the economic effects of the COVID-19 pandemic.

Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. Valley has evaluated available for sale debt securities that are in an unrealized loss position as of September 30, 2021 included in the table above and has determined that the declines in fair value are mainly attributable to market volatility, not credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment during the three and nine months ended September 30, 2021 and 2020. There was no allowance for credit losses for available for sale debt securities at September 30, 2021 and December 31, 2020.

Held to Maturity Debt Securities

The amortized cost, gross unrealized gains and losses and fair value of debt securities held to maturity at September 30, 2021 and December 31, 2020 were as follows: 
Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
  (in thousands)
September 30, 2021
U.S. Treasury securities $ 67,716  $ 5,182  $ —  $ 72,898 
U.S. government agency securities 4,817  198  —  5,015 
Obligations of states and political subdivisions:
Obligations of states and state agencies 161,929  3,866  (293) 165,502 
Municipal bonds 191,477  4,066  (142) 195,401 
Total obligations of states and political subdivisions 353,406  7,932  (435) 360,903 
Residential mortgage-backed securities 2,072,700  21,898  (18,001) 2,076,597 
Trust preferred securities 37,014  4  (5,511) 31,507 
Corporate and other debt securities 48,750  650  (9) 49,391 
Total $ 2,584,403  $ 35,864  $ (23,956) $ 2,596,311 
December 31, 2020
U.S. Treasury securities $ 68,126  $ 7,358  $ —  $ 75,484 
U.S. government agency securities 6,222  291  —  6,513 
Obligations of states and political subdivisions:
Obligations of states and state agencies 262,762  8,060  (105) 270,717 
Municipal bonds 207,497  6,292  —  213,789 
Total obligations of states and political subdivisions 470,259  14,352  (105) 484,506 
Residential mortgage-backed securities 1,550,306  39,603  (254) 1,589,655 
Trust preferred securities 37,348  50  (7,365) 30,033 
Corporate and other debt securities 40,750  672  (1) 41,421 
Total $ 2,173,011  $ 62,326  $ (7,725) $ 2,227,612 
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The age of unrealized losses and fair value of related debt securities held to maturity at September 30, 2021 and December 31, 2020 were as follows: 
  Less than
Twelve Months 		More than
Twelve Months 		Total
  Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses 		Fair Value Unrealized
Losses
  (in thousands)
September 30, 2021
Obligations of states and political subdivisions:
Obligations of states and state agencies
$ 10,541  $ (218) $ 5,519  $ (75) $ 16,060  $ (293)
Municipal bonds 14,917  (142) —  —  14,917  (142)
Total obligations of states and political subdivisions
25,458  (360) 5,519  (75) 30,977  (435)
Residential mortgage-backed securities
1,292,965  (17,978) 2,546  (23) 1,295,511  (18,001)
Trust preferred securities —  —  30,503  (5,511) 30,503  (5,511)
Corporate and other debt securities 6,991  (9) —  —  6,991  (9)
Total $ 1,325,414  $ (18,347) $ 38,568  $ (5,609) $ 1,363,982  $ (23,956)
December 31, 2020
Obligations of states and state agencies $ 5,546  $ (105) $ —  $ —  $ 5,546  $ (105)
Residential mortgage-backed securities
21,599  (245) 2,470  (9) 24,069  (254)
Trust preferred securities —  —  28,630  (7,365) 28,630  (7,365)
Corporate and other debt securities
10,749  (1) —  —  10,749  (1)
Total $ 37,894  $ (351) $ 31,100  $ (7,374) $ 68,994  $ (7,725)

Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 62 and 13 at September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, the fair value of debt securities held to maturity that were pledged to secure public deposits, repurchase agreements, lines of credit, and for other purposes required by law, was $955.9 million.
The contractual maturities of investments in debt securities held to maturity at September 30, 2021 are set forth in the table below. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.  
  September 30, 2021
  Amortized
Cost 		Fair
Value
  (in thousands)
Due in one year $ 22,683  $ 22,845 
Due after one year through five years 231,112  239,893 
Due after five years through ten years 66,064  67,333 
Due after ten years 191,844  189,643 
Residential mortgage-backed securities 2,072,700  2,076,597 
Total $ 2,584,403  $ 2,596,311 
Actual maturities of held to maturity debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturity without penalty.
The weighted-average remaining expected life for residential mortgage-backed securities held to maturity was 5.9 years at September 30, 2021.
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Credit Quality Indicators
Valley monitors the credit quality of the held to maturity debt securities through the use of the most current credit ratings from external rating agencies. The following table summarizes the amortized cost of held to maturity debt securities by external credit rating at September 30, 2021 and December 31, 2020.
AAA/AA/A Rated BBB rated Non-investment grade rated Non-rated Total
  (in thousands)
September 30, 2021
U.S. Treasury securities $ 67,716  $ —  $ —  $ —  $ 67,716 
U.S. government agency securities 4,817  —  —  —  4,817 
Obligations of states and political subdivisions:
Obligations of states and state agencies 135,122  —  5,595  21,212  161,929 
Municipal bonds 150,468  —  —  41,009  191,477 
Total obligations of states and political subdivisions
285,590  —  5,595  62,221  353,406 
Residential mortgage-backed securities 2,072,700  —  —  —  2,072,700 
Trust preferred securities —  —  —  37,014  37,014 
Corporate and other debt securities 2,000  6,000  —  40,750  48,750 
Total $ 2,432,823  $ 6,000  $ 5,595  $ 139,985  $ 2,584,403 
December 31, 2020
U.S. Treasury securities $ 68,126  $ —  $ —  $ —  $ 68,126 
U.S. government agency securities 6,222  —  —  —  6,222 
Obligations of states and political subdivisions:
Obligations of states and state agencies 228,286  —  5,650  28,826  262,762 
Municipal bonds 166,408  —  —  41,089  207,497 
Total obligations of states and political subdivisions
394,694  —  5,650  69,915  470,259 
Residential mortgage-backed securities 1,550,306  —  —  —  1,550,306 
Trust preferred securities —  —  —  37,348  37,348 
Corporate and other debt securities —  5,000  —  35,750  40,750 
Total $ 2,019,348  $ 5,000  $ 5,650  $ 143,013  $ 2,173,011 

Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations. At September 30, 2021, most of the obligations of states and political subdivisions were rated investment grade and a large portion of the "non-rated" category included TEMS securities secured by Ginnie Mae securities. Trust preferred securities consist of non-rated single-issuer securities, issued by bank holding companies. Corporate bonds consist of debt primarily issued by banks.

Allowance for Credit Losses for Held to Maturity Debt Securities

Valley has a zero loss expectation for certain securities within the held to maturity portfolio, and therefore it is not required to estimate an allowance for credit losses related to these securities under the CECL standard. After an evaluation of qualitative factors, Valley identified the following securities types which it believes qualify for this exclusion: U.S. Treasury securities, U.S. government agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds called TEMS.

At September 30, 2021, held to maturity debt securities were carried net of allowance for credit losses totaling $1.1 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively. There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2021 and 2020.
23


Note 8. Loans and Allowance for Credit Losses for Loans

The detail of the loan portfolio as of September 30, 2021 and December 31, 2020 was as follows: 
  September 30, 2021 December 31, 2020
  (in thousands)
Loans:
Commercial and industrial:
Commercial and industrial $ 4,761,227  $ 4,709,569 
Commercial and industrial PPP loans * 874,033  2,152,139 
Total commercial and industrial loans 5,635,260  6,861,708 
Commercial real estate:
Commercial real estate 17,912,070  16,724,998 
Construction 1,804,580  1,745,825 
Total commercial real estate loans 19,716,650  18,470,823 
Residential mortgage 4,332,422  4,183,743 
Consumer:
Home equity 402,658  431,553 
Automobile 1,563,698  1,355,955 
Other consumer 956,126  913,330 
Total consumer loans 2,922,482  2,700,838 
Total loans $ 32,606,814  $ 32,217,112 
*Represents SBA Paycheck Protection Program (PPP) loans, net of unearned fees totaling $27.6 million and $43.2 million at September 30, 2021 and December 31, 2020, respectively.

Total loans includes net unearned discounts and deferred loan fees of $73.0 million and $95.8 million at September 30, 2021 and December 31, 2020, respectively. Net unearned discounts and deferred loan fees include the non-credit discount on purchased credit deterioration (PCD) loans and net unearned fees related to PPP loans at September 30, 2021 and December 31, 2020.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $83.4 million and $90.2 million at September 30, 2021 and December 31, 2020, respectively, and is presented separately in the consolidated statements of financial condition.

Valley transferred and sold approximately $30.0 million of residential mortgage loans from the loan portfolio to loans held for sale during the nine months ended September 30, 2020. Excluding the loan transfers, there were no other material sales of loans from the held for investment portfolio during the three and nine months ended September 30, 2021 and 2020.

Credit Risk Management

For all of its loan types, Valley adheres to a credit policy designed to minimize credit risk while generating the maximum income given the level of risk appetite. Management reviews and approves these policies and procedures on a regular basis with subsequent approval by the Board of Directors annually. Credit authority relating to a significant dollar percentage of the overall portfolio is centralized and controlled by the Credit Risk Management Division and by the Credit Committee. A reporting system supplements the management review process by providing management with frequent reports concerning loan production, loan quality, internal loan classification, concentrations of credit, loan delinquencies, non-performing, and potential problem loans. Loan portfolio diversification is an important factor utilized by Valley to manage its risk across business sectors and through cyclical economic circumstances. See Valley’s Annual Report on Form 10-K for the year ended December 31, 2020 for further details.
24



Credit Quality

The following table presents past due, current and non-accrual loans without an allowance for credit losses by loan portfolio class at September 30, 2021 and December 31, 2020:
Past Due and Non-Accrual Loans
  30-59  Days 
Past Due Loans 		60-89  Days 
Past Due Loans 		90 Days or More
Past Due Loans 		Non-Accrual Loans
Total Past Due Loans
Current Loans
Total Loans 		Non-Accrual Loans Without Allowance for Credit Losses
  (in thousands)
September 30, 2021
Commercial and industrial
$ 2,677  $ 985  $ 2,083  $ 100,614  $ 106,359  $ 5,528,901  $ 5,635,260  $ 10,407 
Commercial real estate:
Commercial real estate
22,956  5,897  1,942  95,843  126,638  17,785,432  17,912,070  55,621 
Construction —  —  —  17,653  17,653  1,786,927  1,804,580  — 
Total commercial real estate loans 22,956  5,897  1,942  113,496  144,291  19,572,359  19,716,650  55,621 
Residential mortgage 9,293  974  1,002  33,648  44,917  4,287,505  4,332,422  21,032 
Consumer loans:
Home equity 606  225  —  3,541  4,372  398,286  402,658  5 
Automobile 4,218  555  233  420  5,426  1,558,272  1,563,698  — 
Other consumer 639  837  92  112  1,680  954,446  956,126  — 
Total consumer loans
5,463  1,617  325  4,073  11,478  2,911,004  2,922,482  5 
Total $ 40,389  $ 9,473  $ 5,352  $ 251,831  $ 307,045  $ 32,299,769  $ 32,606,814  $ 87,065 

25


  Past Due and Non-Accrual Loans    
 
30-59
Days
Past Due Loans 		60-89 
Days
Past Due Loans 		90 Days or More
Past Due Loans 		Non-Accrual Loans
Total Past Due Loans
Current Loans 		Total Loans Non-Accrual Loans Without Allowance for Credit Losses
(in thousands)
December 31, 2020
Commercial and industrial $ 6,393  $ 2,252  $ 9,107  $ 106,693  $ 124,445  $ 6,737,263  $ 6,861,708  $ 4,075 
Commercial real estate:
Commercial real estate 35,030  1,326  993  46,879  84,228  16,640,770  16,724,998  32,416 
Construction 315  —  —  84  399  1,745,426  1,745,825  — 
Total commercial real estate loans 35,345  1,326  993  46,963  84,627  18,386,196  18,470,823  32,416 
Residential mortgage 17,717  10,351  3,170  25,817  57,055  4,126,688  4,183,743  11,610 
Consumer loans:
Home equity 953  492  —  4,936  6,381  425,172  431,553  50 
Automobile 8,056  1,107  245  338  9,746  1,346,209  1,355,955  — 
Other consumer 1,248  224  26  535  2,033  911,297  913,330  — 
Total consumer loans 10,257  1,823  271  5,809  18,160  2,682,678  2,700,838  50 
Total $ 69,712  $ 15,752  $ 13,541  $ 185,282  $ 284,287  $ 31,932,825  $ 32,217,112  $ 48,151 

Credit quality indicators. Valley utilizes an internal loan classification system as a means of reporting problem loans within commercial and industrial, commercial real estate, and construction loan portfolio classes. Under Valley’s internal risk rating system, loan relationships could be classified as "Pass," "Special Mention," "Substandard," "Doubtful," and "Loss." Substandard loans include loans that exhibit well-defined weakness and are characterized by the distinct possibility that Valley will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged-off immediately to the allowance for loan losses, and, therefore, not presented in the table below. Loans that do not currently pose a sufficient risk to warrant classification in one of the aforementioned categories but pose weaknesses that deserve management’s close attention are deemed Special Mention. Loans rated as Pass do not currently pose any identified risk and can range from the highest to average quality, depending on the degree of potential risk. Risk ratings are updated any time the situation warrants.
26


The following table presents the internal loan classification risk by loan portfolio class by origination year based on the most recent analysis performed at September 30, 2021 and December 31, 2020:
  Term Loans    
Amortized Cost Basis by Origination Year
September 30, 2021 2021 2020 2019 2018 2017 Prior to 2017 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total
  (in thousands)
Commercial and industrial
Risk Rating:
Pass $ 1,526,393  $ 840,868  $ 462,843  $ 388,482  $ 149,991  $ 328,289  $ 1,716,736  $ 269  $ 5,413,871 
Special Mention 1,809  1,558  1,342  10,770  1,930  14,950  59,905  53  92,317 
Substandard 4,587  6,507  3,972  7,853  886  2,532  15,066  288  41,691 
Doubtful —  —  2,736  5  16,364  68,276  —  —  87,381 
Total commercial and industrial $ 1,532,789  $ 848,933  $ 470,893  $ 407,110  $ 169,171  $ 414,047  $ 1,791,707  $ 610  $ 5,635,260 
Commercial real estate
Risk Rating:
Pass $ 3,178,182  $ 2,936,284  $ 2,801,710  $ 1,851,162  $ 1,498,151  $ 4,716,223  $ 170,763  $ 12,753  $ 17,165,228 
Special Mention 1,988  45,305  44,596  43,593  51,875  169,460  38,594  —  395,411 
Substandard 743  33,817  39,817  40,568  68,190  165,574  2,531  —  351,240 
Doubtful —  —  —  —  —  191  —  —  191 
Total commercial real estate $ 3,180,913  $ 3,015,406  $ 2,886,123  $ 1,935,323  $ 1,618,216  $ 5,051,448  $ 211,888  $ 12,753  $ 17,912,070 
Construction
Risk Rating:
Pass $ 160,031  $ 109,843  $ 62,330  $ 65,581  $ 6,181  $ 28,498  $ 1,329,163  $ —  $ 1,761,627 
Special Mention 4,131  —  1,018  —  —  —  9,497  —  14,646 
Substandard —  23  13  646  —  17,842  9,783  —  28,307 
Total construction $ 164,162  $ 109,866  $ 63,361  $ 66,227  $ 6,181  $ 46,340  $ 1,348,443  $ —  $ 1,804,580 

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  Term Loans    
Amortized Cost Basis by Origination Year
December 31, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total
  (in thousands)
Commercial and industrial
Risk Rating:
Pass $ 3,058,596  $ 605,112  $ 556,284  $ 212,215  $ 162,483  $ 337,484  $ 1,677,559  $ 350  $ 6,610,083 
Special Mention 819  10,236  2,135  9,502  10,228  14,165  49,883  51  97,019 
Substandard 5,215  3,876  12,481  1,798  4,215  12,965  18,913  462  59,925 
Doubtful —  5,203  1  17,010  2,596  69,871  —  —  94,681 
Total commercial and industrial $ 3,064,630  $ 624,427  $ 570,901  $ 240,525  $ 179,522  $ 434,485  $ 1,746,355  $ 863  $ 6,861,708 
Commercial real estate
Risk Rating:
Pass $ 3,096,549  $ 3,052,076  $ 2,230,047  $ 1,767,528  $ 1,798,137  $ 3,916,990  $ 199,145  $ 15,532  $ 16,076,004 
Special Mention 50,193  68,203  44,336  48,813  66,845  109,295  1,705  —  389,390 
Substandard 18,936  17,049  30,997  59,618  11,541  118,725  2,531  —  259,397 
Doubtful —  —  —  —  —  207  —  —  207 
Total commercial real estate $ 3,165,678  $ 3,137,328  $ 2,305,380  $ 1,875,959  $ 1,876,523  $ 4,145,217  $ 203,381  $ 15,532  $ 16,724,998 
Construction
Risk Rating:
Pass $ 145,246  $ 120,800  $ 111,174  $ 15,497  $ 47,971  $ 20,029  $ 1,199,034  $ —  $ 1,659,751 
Special Mention —  1,043  —  —  9,996  17,414  47,311  —  75,764 
Substandard —  26  246  2,628  17  380  7,013  —  10,310 
Total construction $ 145,246  $ 121,869  $ 111,420  $ 18,125  $ 57,984  $ 37,823  $ 1,253,358  $ —  $ 1,745,825 
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For residential mortgages, automobile, home equity and other consumer loan portfolio classes, Valley also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in those loan classes based on payment activity by origination year as of September 30, 2021 and December 31, 2020.
  Term Loans    
Amortized Cost Basis by Origination Year
September 30, 2021 2021 2020 2019 2018 2017 Prior to 2017 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total
  (in thousands)
Residential mortgage
Performing $ 1,084,533  $ 661,418  $ 619,942  $ 467,876  $ 405,847  $ 1,019,676  $ 60,510  $ —  $ 4,319,802 
90 days or more past due —  234  2,093  4,072  3,150  3,071  —  —  12,620 
Total residential mortgage $ 1,084,533  $ 661,652  $ 622,035  $ 471,948  $ 408,997  $ 1,022,747  $ 60,510  $ —  $ 4,332,422 
Consumer loans
Home equity
Performing $ 11,096  $ 6,593  $ 8,055  $ 8,745  $ 6,031  $ 14,327  $ 303,235  $ 43,502  $ 401,584 
90 days or more past due —  —  —  —  —  68  542  464  1,074 
Total home equity 11,096  6,593  8,055  8,745  6,031  14,395  303,777  43,966  402,658 
Automobile
Performing 611,329  342,584  315,330  182,973  89,463  21,302  —  —  1,562,981 
90 days or more past due 73  52  130  162  179  121  —  —  717 
Total automobile 611,402  342,636  315,460  183,135  89,642  21,423  —  —  1,563,698 
Other Consumer
Performing 6,518  6,794  6,543  7,231  1,017  9,017  918,946  —  956,066 
90 days or more past due —  —  —  —  —  —  60  —  60 
Total other consumer 6,518  6,794  6,543  7,231  1,017  9,017  919,006  —  956,126 
Total consumer $ 629,016  $ 356,023  $ 330,058  $ 199,111  $ 96,690  $ 44,835  $ 1,222,783  $ 43,966  $ 2,922,482 

29


  Term Loans    
Amortized Cost Basis by Origination Year
December 31, 2020 2020 2019 2018 2017 2016 Prior to 2016 Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Total
  (in thousands)
Residential mortgage
Performing $ 730,764  $ 778,161  $ 684,761  $ 582,650  $ 380,723  $ 943,616  $ 64,798  $ —  $ 4,165,473 
90 days or more past due —  3,085  4,212  3,464  4,144  3,365  —  —  18,270 
Total residential mortgage $ 730,764  $ 781,246  $ 688,973  $ 586,114  $ 384,867  $ 946,981  $ 64,798  $ —  $ 4,183,743 
Consumer loans
Home equity
Performing $ 8,580  $ 10,634  $ 11,756  $ 8,886  $ 5,340  $ 15,393  $ 318,869  $ 50,879  $ 430,337 
90 days or more past due —  —  —  —  25  83  378  730  1,216 
Total home equity 8,580  10,634  11,756  8,886  5,365  15,476  319,247  51,609  431,553 
Automobile
Performing 426,121  438,181  272,075  151,523  50,853  16,550  —  —  1,355,303 
90 days or more past due 19  108  173  223  35  94  —  —  652 
Total automobile 426,140  438,289  272,248  151,746  50,888  16,644  —  —  1,355,955 
Other Consumer
Performing 12,271  5,558  6,815  1,112  1,077  5,314  880,748  —  912,895 
90 days or more past due —  —  —  —  —  22  5  408  435 
Total other consumer 12,271  5,558  6,815  1,112  1,077  5,336  880,753  408  913,330 
Total consumer $ 446,991  $ 454,481  $ 290,819  $ 161,744  $ 57,330  $ 37,456  $ 1,200,000  $ 52,017  $ 2,700,838 
Troubled debt restructured loans. From time to time, Valley may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers who may be experiencing financial difficulties. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a troubled debt restructured loan (TDR).
Generally the concessions made for TDRs involve lowering the monthly payments on loans through either a reduction in interest rate below a market rate, an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these two methods. The concessions may also involve payment deferrals but rarely result in the forgiveness of principal or accrued interest. In addition, Valley frequently obtains additional collateral or guarantor support when modifying such loans. If the borrower has demonstrated performance under the previous terms of the loan and Valley’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.
Performing TDRs (not reported as non-accrual loans) totaled $64.8 million and $57.4 million as of September 30, 2021 and December 31, 2020, respectively. Non-performing TDRs totaled $116.7 million and $92.8 million as of September 30, 2021 and December 31, 2020, respectively.

30


The following table presents the pre- and post-modification amortized cost of loans by loan class modified as TDRs during the three and nine months ended September 30, 2021 and 2020. Post-modification amounts are presented as of September 30, 2021 and 2020.
Three Months Ended September 30,
2021 2020
Troubled Debt Restructurings Number
of
Contracts 		Pre-Modification
Amortized Carrying Amount 		Post-Modification
Amortized Carrying Amount 		Number
of
Contracts 		Pre-Modification
Amortized Carrying Amount 		Post-Modification
Amortized Carrying Amount
  ($ in thousands)
Commercial and industrial 4  $ 2,446  $ 2,414  28  $ 31,237  $ 30,938 
Commercial real estate:
Commercial real estate 5  14,473  14,539  2  4,249  4,240 
Construction 2  17,599  17,599  —  —  — 
Total commercial real estate
7  32,072  32,138  2  4,249  4,240 
Residential mortgage 4  356  350  1  247  247 
Consumer —  —  —  1  72  72 
Total 15  $ 34,874  $ 34,902  32  $ 35,805  $ 35,497 
Nine Months Ended September 30,
2021 2020
Troubled Debt Restructurings Number
of
Contracts 		Pre-Modification
Amortized Carrying Amount 		Post-Modification
Amortized Carrying Amount 		Number
of
Contracts 		Pre-Modification
Amortized Carrying Amount 		Post-Modification
Amortized Carrying Amount
  ($ in thousands)
Commercial and industrial 16  $ 21,822  $ 19,060  33  $ 40,537  $ 38,204 
Commercial real estate:
Commercial real estate 11  26,710  26,730  4  8,996  9,000 
Construction 2  17,599  17,599  —  —  — 
Total commercial real estate 13  44,309  44,329  4  8,996  9,000 
Residential mortgage 12  2,974  2,909  1  247  247 
Consumer 1  170  163  1  72  72 
Total 42  $ 69,275  $ 66,461  39  $ 49,852  $ 47,523 

The total TDRs presented in the above table had allocated allowance for loan losses of $8.2 million and $18.7 million at September 30, 2021 and 2020, respectively. There were $206 thousand and $6.0 million of charge-offs related to TDRs for the three and nine months ended September 30, 2021, respectively. There were $1.9 million and $5.6 million of charge-offs related to TDRs for the three and nine months ended September 30, 2020, respectively. Valley did not extend any commitments to lend additional funds to borrowers whose loans have been modified as TDRs during the three and nine months ended September 30, 2021 and 2020.









31


Loans modified as TDRs within the previous 12 months and for which there was a payment default (90 or more days past due) for the three and nine months ended September 30, 2021 and 2020 were as follows:
  Three Months Ended September 30,
2021 2020
Troubled Debt Restructurings Subsequently Defaulted Number of
Contracts 		Recorded Investment Number of
Contracts 		Recorded
Investment
  ($ in thousands)
Commercial and industrial —  $ —  30  $ 17,496 
Commercial real estate 1  419  —  — 
Residential mortgage 1  129  —  — 
Total 2  $ 548  30  $ 17,496 

  Nine Months Ended September 30,
2021 2020
Troubled Debt Restructurings Subsequently Defaulted Number of
Contracts 		Recorded Investment Number of
Contracts 		Recorded
Investment
  ($ in thousands)
Commercial and industrial —  $ —  35  $ 20,099 
Commercial real estate 1  419  —  — 
Residential mortgage 1  129  —  — 
Consumer —  —  1  18 
Total 2  $ 548  36  $ 20,117 

Forbearance. In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment, when requested by customers, all of which were insignificant. As of September 30, 2021, Valley had approximately $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications as compared to $361.0 million of loans in deferral at December 31, 2020. Under the applicable guidance, none of these loans were classified as TDRs at September 30, 2021 and December 31, 2020.

Loans in Process of Foreclosure. Other real estate owned (OREO) totaled $4.0 million and $5.1 million at September 30, 2021 and December 31, 2020, respectively. OREO included foreclosed residential real estate properties which were immaterial at September 30, 2021 and totaled $1.0 million at December 31, 2020. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.0 million and $1.9 million at September 30, 2021 and December 31, 2020, respectively.

Collateral dependent loans. Loans are collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When Valley determines that foreclosure is probable, the collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process.






32


The following table presents collateral dependent loans by class as of September 30, 2021 and December 31, 2020:
  September 30,
2021 		December 31,
2020
  (in thousands)
Commercial and industrial * $ 95,509  $ 106,239 
Commercial real estate 117,609  41,562 
Residential mortgage 35,047  28,176 
Home equity 5  50 
Total $ 248,170  $ 176,027 

*    Commercial and industrial loans are primarily collateralized by taxi medallions.

Allowance for Credit Losses for Loans
The following table summarizes the allowance for credit losses for loans at September 30, 2021 and December 31, 2020: 
September 30,
2021 		December 31,
2020
  (in thousands)
Components of allowance for credit losses for loans:
Allowance for loan losses $ 342,527  $ 340,243 
Allowance for unfunded credit commitments 14,400  11,111 
Total allowance for credit losses for loans $ 356,927  $ 351,354 

The following table summarizes the provision for credit losses for loans for the periods indicated:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands)
Components of provision for credit losses for loans:
Provision for loan losses $ 3,496  $ 30,833  $ 17,998  $ 105,709 
Provision for unfunded credit commitments —  187  3,289  350 
Total provision for credit losses for loans $ 3,496  $ 31,020  $ 21,287  $ 106,059 







33


The following table details the activity in the allowance for loan losses by loan portfolio segment for the three and nine months ended September 30, 2021 and 2020: 
Commercial
and Industrial 		Commercial
Real Estate 		Residential
Mortgage 		Consumer Total
  (in thousands)
Three Months Ended
September 30, 2021
Allowance for loan losses:
Beginning balance $ 109,689  $ 189,139  $ 25,303  $ 15,193  $ 339,324 
Loans charged-off (1,248) —  —  (771) (2,019)
Charged-off loans recovered 514  29  228  955  1,726 
Net (charge-offs) recoveries (734) 29  228  184  (293)
(Credit) provision for loan losses (5,078) 10,553  (799) (1,180) 3,496 
Ending balance $ 103,877  $ 199,721  $ 24,732  $ 14,197  $ 342,527 
Three Months Ended
September 30, 2020
Allowance for losses:
Beginning balance $ 132,039  $ 131,702  $ 29,630  $ 16,243  $ 309,614 
Loans charged-off (13,965) (695) (7) (2,458) (17,125)
Charged-off loans recovered 428  100  31  1,151  1,710 
Net (charge-offs) recoveries (13,537) (595) 24  (1,307) (15,415)
Provision (credit) for loan losses 11,907  13,543  (1,040) 6,423  30,833 
Ending balance $ 130,409  $ 144,650  $ 28,614  $ 21,359  $ 325,032 
Commercial
and Industrial 		Commercial
Real Estate 		Residential
Mortgage 		Consumer Total
  (in thousands)
Nine Months Ended
September 30, 2021
Allowance for loan losses:
Beginning balance $ 131,070  $ 164,113  $ 28,873  $ 16,187  $ 340,243 
Loans charged-off (19,283) (382) (139) (3,389) (23,193)
Charged-off loans recovered 2,781  763  576  3,359  7,479 
Net (charge-offs) recoveries (16,502) 381  437  (30) (15,714)
(Credit) provision for loan losses (10,691) 35,227  (4,578) (1,960) 17,998 
Ending balance $ 103,877  $ 199,721  $ 24,732  $ 14,197  $ 342,527 
Nine Months Ended
September 30, 2020
Allowance for losses:
Beginning balance $ 104,059  $ 45,673  $ 5,060  $ 6,967  $ 161,759 
Impact of ASU 2016-13 adoption* 15,169  49,797  20,575  6,990  92,531 
Beginning balance, adjusted 119,228  95,470  25,635  13,957  254,290 
Loans charged-off (31,349) (766) (348) (7,624) (40,087)
Charged-off loans recovered 1,796  244  626  2,454  5,120 
Net (charge-offs) recoveries (29,553) (522) 278  (5,170) (34,967)
Provision for loan losses 40,734  49,702  2,701  12,572  105,709 
Ending balance $ 130,409  $ 144,650  $ 28,614  $ 21,359  $ 325,032 
*    Includes a $61.6 million increase representing the estimated expected credit losses for PCD loans as a result of the ASU 2016-13 adoption on January 1, 2020.
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The following table represents the allocation of the allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the allowance measurement methodology at September 30, 2021 and December 31, 2020.
Commercial
and Industrial 		Commercial
Real Estate 		Residential
Mortgage 		Consumer Total
  (in thousands)
September 30, 2021
Allowance for loan losses:
Individually evaluated for credit losses
$ 62,661  $ 8,093  $ 489  $ 574  $ 71,817 
Collectively evaluated for credit losses
41,216  191,628  24,243  13,623  270,710 
Total $ 103,877  $ 199,721  $ 24,732  $ 14,197  $ 342,527 
Loans:
Individually evaluated for credit losses
$ 117,656  $ 143,181  $ 42,441  $ 3,264  $ 306,542 
Collectively evaluated for credit losses
5,517,604  19,573,469  4,289,981  2,919,218  32,300,272 
Total $ 5,635,260  $ 19,716,650  $ 4,332,422  $ 2,922,482  $ 32,606,814 
December 31, 2020
Allowance for loan losses:
Individually evaluated for credit losses
$ 73,063  $ 1,338  $ 1,206  $ 264  $ 75,871 
Collectively evaluated for credit losses
58,007  162,775  27,667  15,923  264,372 
Total $ 131,070  $ 164,113  $ 28,873  $ 16,187  $ 340,243 
Loans:
Individually evaluated for credit losses
$ 131,057  $ 61,754  $ 35,151  $ 1,631  $ 229,593 
Collectively evaluated for credit losses
6,730,651  18,409,069  4,148,592  2,699,207  31,987,519 
Total $ 6,861,708  $ 18,470,823  $ 4,183,743  $ 2,700,838  $ 32,217,112 

Note 9. Goodwill and Other Intangible Assets

Goodwill totaled $1.4 billion at both September 30, 2021 and December 31, 2020. There were no changes to the carrying amounts of goodwill allocated to Valley’s business segments, or reporting units thereof, for goodwill impairment analysis (as reported in Valley’s Annual Report on Form 10-K for the year ended December 31, 2020).

During the second quarter 2021, Valley performed the annual goodwill impairment test at its normal assessment
date. There was no impairment of goodwill recognized during the three and nine months ended September 30, 2021 and 2020.














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The following table summarizes other intangible assets as of September 30, 2021 and December 31, 2020: 
Gross
Intangible
Assets 		Accumulated
Amortization 		Valuation
Allowance 		Net
Intangible
Assets
  (in thousands)
September 30, 2021
Loan servicing rights $ 111,978  $ (89,039) $ —  $ 22,939 
Core deposits 101,160  (62,511) —  38,649 
Other 3,945  (3,008) —  937 
Total other intangible assets $ 217,083  $ (154,558) $ —  $ 62,525 
December 31, 2020
Loan servicing rights $ 103,150  $ (80,340) $ (865) $ 21,945 
Core deposits 101,160  (53,747) —  47,413 
Other 3,945  (2,854) —  1,091 
Total other intangible assets $ 208,255  $ (136,941) $ (865) $ 70,449 

Loan servicing rights are accounted for using the amortization method. Under this method, Valley amortizes the loan servicing assets over the period of the economic life of the assets arising from estimated net servicing revenues. On a quarterly basis, Valley stratifies its loan servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. Impairment charges on loan servicing rights are recognized in earnings when the book value of a stratified group of loan servicing rights exceeds its estimated fair value. Valley recorded net recoveries of impairment charges on its loan servicing rights totaling $32 thousand and $864 thousand for the three and nine months ended September 30, 2021, respectively. Valley recorded net impairment charges totaling $188 thousand and $966 thousand for the three and nine months ended September 30, 2020, respectively. See the “Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis” section of Note 6 for additional information regarding the fair valuation.

Core deposits are amortized using an accelerated method and have a weighted average amortization period of 8.9 years. The line item labeled “Other” included in the table above primarily consists of customer lists and covenants not to compete, which are amortized over their expected lives generally using a straight-line method and have a weighted average amortization period of approximately 7.6 years. Valley evaluates core deposits and other intangibles for impairment when an indication of impairment exists. No impairment was recognized during the three and nine months ended September 30, 2021 and 2020.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2021 through 2025: 
Loan Servicing
Rights 		Core
Deposits 		Other
  (in thousands)
2021 $ 1,063  $ 2,843  $ 51 
2022 3,705  9,876  191 
2023 3,015  8,146  131 
2024 2,473  6,537  117 
2025 2,047  4,929  103 

Valley recognized amortization expense on other intangible assets, including net (recoveries of) impairment charges on loan servicing rights, totaling approximately $5.3 million and $6.4 million for the three months ended September 30, 2021 and 2020, respectively, and $16.8 million and $18.5 million for the nine months ended September 30, 2021 and 2020, respectively.


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Note 10. Borrowed Funds

Short-Term Borrowings

Short-term borrowings at September 30, 2021 and December 31, 2020 consisted of the following:

September 30, 2021 December 31, 2020
  (in thousands)
FHLB advances $ 600,000  $ 1,000,000 
Securities sold under agreements to repurchase 183,346  147,958 
Total short-term borrowings $ 783,346  $ 1,147,958 
The weighted average interest rate for short-term FHLB advances was 0.35 percent and 0.38 percent at September 30, 2021 and December 31, 2020, respectively. The interest payments on the FHLB advances totaling $600 million were hedged with interest rate swaps at September 30, 2021. See Note 12 for additional details.

Long-Term Borrowings

Long-term borrowings at September 30, 2021 and December 31, 2020 consisted of the following:

September 30, 2021 December 31, 2020
  (in thousands)
FHLB advances, net (1)
$ 789,185  $ 1,592,252 
Subordinated debt, net (2)
638,259  403,413 
Securities sold under agreements to repurchase —  300,000 
Total long-term borrowings $ 1,427,444  $ 2,295,665 
(1)
FHLB advances is presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $2.6 million at December 31, 2020. The prepayment penalties and other purchase accounting adjustments were fully amortized at September 30, 2021.
(2)
Subordinated debt is presented net of unamortized debt issuance costs totaling $6.1 million and $2.7 million at September 30, 2021 and December 31, 2020, respectively.

FHLB Advances. Long-term FHLB advances had a weighted average interest rate of 1.88 percent and 2.02 percent at September 30, 2021 and December 31, 2020, respectively. FHLB advances are secured by pledges of certain eligible collateral, including but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans.

In June 2021, Valley prepaid approximately $248 million of long-term FHLB advances with maturities scheduled through 2025 and a weighted average effective interest rate of 1.82 percent. The transaction was funded with excess cash liquidity and accounted for as an early debt extinguishment resulting in a loss of $8.4 million reported within non-interest expense for the nine months ended September 30, 2021.
The long-term FHLB advances at September 30, 2021 are scheduled for contractual balance repayments as follows:
Year Amount
  (in thousands)
2023 $ 350,000 
2024 165,000 
2025 273,000 
Total long-term FHLB advances $ 788,000 

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There are no FHLB advances with scheduled repayments in years 2023 and thereafter, reported in the table above, which are callable for early redemption by the FHLB during the next 12 months.

Subordinated debt. On April 1, 2021, Valley redeemed, at par value, $60 million of its callable 6.25 percent subordinated notes originally due April 1, 2026. No gain or loss was incurred on this transaction.

On May 25, 2021, Valley issued $300 million of 3.00 percent Fixed-to-Floating Rate subordinated notes due June 15, 2031. The subordinated notes are callable in whole or in part on or after June 15, 2026 or upon the occurrence of certain events. Interest on the subordinated notes during the initial five year term through June 15, 2026 is payable semi-annually on June 15 and December 15. Thereafter, interest is expected to be set based on three-month Secured Overnight Financing Rate (SOFR) plus 236 basis points and paid quarterly through maturity of the notes. At September 30, 2021, the subordinated notes had a carrying value of $296.2 million, net of unamortized debt issuance costs. During June 2021, Valley entered into an interest rate swap transaction used to hedge the change in the fair value of the $300 million in subordinated notes. See Note 12 for additional details.

Valley also had the following subordinated debt outstanding at September 30, 2021:

•$125 million aggregate principal amount of 5.125 percent subordinated notes due September 27, 2023 with no call dates or prepayments allowed except upon the occurrence of certain events;

•$100 million aggregate principal amount of 4.55 percent subordinated notes due June 30, 2025 with no call dates or prepayments allowed except upon the occurrence of certain events;

•$115 million aggregate principal amount of 5.25 percent subordinated notes due June 15, 2030 and callable in whole or in part on or after June 15, 2025 or upon the occurrence of certain events.

Long-term securities sold under agreements to repurchase (repos). The long-term repos had a weighted average interest rate of 3.37 percent at December 31, 2020. Long-term repos outstanding as of December 31, 2020 were repaid upon their respective contractual maturity dates during the third quarter 2021.

Note 11. Stock–Based Compensation
On April 19, 2021, Valley's shareholders approved the Valley National Bancorp 2021 Incentive Compensation Plan (the 2021 Plan) administered by the Compensation and Human Resources Committee (the Committee) as appointed by Valley's Board of Directors. The purposes of the 2021 Plan are to provide additional incentives to officers and key employees of Valley and its subsidiaries, whose substantial contributions are essential to the continued growth and success of Valley, and to attract and retain officers, other employees and non-employee directors whose efforts will result in the continued and long-term growth of Valley's business. Upon shareholder approval of the 2021 Plan, Valley ceased granting new awards under the Valley National Bancorp 2016 Long-Term Stock Incentive Plan (the 2016 Plan).
Under the 2021 Plan, Valley may issue awards to its officers, employees and non-employee directors in amounts up to 9 million shares of common stock (less one share for every share granted after December 31, 2020 under the 2016 Plan) in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs). If after December 31, 2020 any award granted under the 2016 Plan is forfeited, expires, settled for cash, withheld for tax obligations, or otherwise does not result in the issuance of all or a portion of the shares subject to such award, the shares will be added to the 2021 Plan's share reserve. As of September 30, 2021, 7.4 million shares of common stock were available for issuance under the 2021 Plan. The essential features of each award are described in the award agreement relating to that award. The grant, exercise, vesting, settlement or payment of an award may be based upon the fair value of Valley's common stock on the last sale price reported for Valley's common stock on such date or the last sale price reported preceding such date, except for performance-based awards with a market condition. The grant date fair values of performance-based awards that vest based on a market condition are determined by a third-party specialist using a Monte Carlo valuation model.
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Valley granted 30 thousand and 26 thousand of time-based RSUs during the three months ended September 30, 2021 and 2020, respectively, and 1.2 million for both the nine months ended September 30, 2021 and 2020. Generally, time-based RSUs vest ratably over a three-year period. The average grant date fair value of the RSUs granted during the nine months ended September 30, 2021 and 2020 was $11.98 per share and $10.41 per share, respectively.
Valley granted 604 thousand and 589 thousand of performance-based RSUs to certain executive officers for the nine months ended September 30, 2021 and 2020, respectively. There were no grants of performance-based RSUs during the three months ended September 30, 2021 and 2020, respectively. The performance-based RSU awards include RSUs with vesting conditions based upon certain levels of growth in Valley's tangible book value per share plus dividends and RSUs with vesting conditions based upon Valley's total shareholder return as compared to its peer group. The RSUs “cliff” vest after three years based on the cumulative performance of Valley during that time period. The RSUs earn dividend equivalents (equal to cash dividends paid on Valley's common stock) over the applicable performance period. Dividend equivalents are accumulated and paid to the grantee at the vesting date or forfeited if the performance conditions are not met. The grant date fair value of the performance-based RSUs granted during the nine months ended September 30, 2021 and 2020 was $11.75 per share and $10.82 per share, respectively.

Valley recorded total stock-based compensation expense of $5.2 million and $4.1 million for the three months ended September 30, 2021 and 2020, respectively, and $15.9 million and $12.3 million for the nine months ended September 30, 2021 and 2020, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of September 30, 2021, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $23.9 million and will be recognized over an average remaining vesting period of approximately two years.
Note 12. Derivative Instruments and Hedging Activities

Valley enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Fair Value Hedges of Fixed Rate Assets and Liabilities. Valley is exposed to changes in the fair value of fixed-rate subordinated debt due to changes in interest rates. From time to time, Valley uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for Valley making fixed rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the loss or gain on the hedged item attributable to the hedged risk are recognized in earnings.

In June 2021, Valley entered into a $300 million forward-starting interest rate swap agreement with a notional amount of $300 million, maturing in June 2026, to hedge the change in the fair value of the 3.00 percent subordinated debt issued on May 28, 2021. Under the swap agreement, beginning in January 2022, Valley will receive fixed rate payments and pay variable rate amounts based on SOFR plus 2.187 percent.

Cash Flow Hedges of Interest Rate Risk. Valley’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Valley uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively.

Non-designated Hedges. Derivatives not designated as hedges may be used to manage Valley’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. Derivatives not designated as hedges are not entered into for speculative purposes.

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Valley executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Valley executes with a third party, such that Valley minimizes its net risk exposure resulting from such transactions. As these interest rate swaps do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Valley sometimes enters into risk participation agreements with external lenders where the banks are sharing their risk of default on the interest rate swaps on participated loans. Valley either pays or receives a fee depending on the participation type. Risk participation agreements are credit derivatives not designated as hedges. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. At September 30, 2021, Valley had 27 credit swaps with an aggregate notional amount of $263.9 million related to risk participation agreements. 

At September 30, 2021, Valley had two “steepener” swaps, each with a current notional amount of $10.4 million where the receive rate on the swap mirrors the pay rate on the brokered deposits and the rates paid on these types of hybrid instruments are based on a formula derived from the spread between the long and short ends of the constant maturity swap (CMS) rate curve. Although these types of instruments do not meet the hedge accounting requirements, the change in fair value of both the bifurcated derivative and the stand alone swap tend to move in opposite directions with changes in the three-month LIBOR rate and therefore provide an effective economic hedge.

Valley regularly enters into mortgage banking derivatives which are non-designated hedges. These derivatives include interest rate lock commitments provided to customers to fund certain residential mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. Valley enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rate on Valley's commitments to fund the loans as well as on its portfolio of mortgage loans held for sale.

Amounts included in the consolidated statements of financial condition related to the fair value of Valley’s derivative financial instruments were as follows: 
  September 30, 2021 December 31, 2020
  Fair Value Fair Value
Other Assets Other Liabilities Notional Amount Other Assets Other Liabilities Notional Amount
  (in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swaps
$ —  $ 273  $ 800,000  $ —  $ 179  $ 1,100,000 
Fair value hedge interest rate swaps —  316  300,000  —  —  — 
Total derivatives designated as hedging instruments $ —  $ 589  $ 1,100,000  $ —  $ 179  $ 1,100,000 
Derivatives not designated as hedging instruments:
Interest rate swaps and other derivatives *
$ 215,046  $ 64,623  $ 10,296,468  $ 387,008  $ 154,025  $ 8,889,557 
Mortgage banking derivatives 873  1,521  327,116  444  2,077  321,486 
Total derivatives not designated as hedging instruments
$ 215,919  $ 66,144  $ 10,623,584  $ 387,452  $ 156,102  $ 9,211,043 
*    Other derivatives include risk participation agreements.
The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the cash flow hedges and over-the-counter (OTC) non-designated derivative instruments. As a result, the fair value of the applicable derivative assets and liabilities are reported net of variation margin at September 30, 2021 and December 31, 2020 in the table above.
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Gains (losses) included in the consolidated statements of income and other comprehensive income (loss), on a pre-tax basis, related to interest rate derivatives designated as hedges of cash flows were as follows: 
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense $ (1,044) $ (1,586) $ (2,708) $ (1,763)
Amount of (loss) gain recognized in other comprehensive income (144) 95  (125) 3,158 
The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $2.0 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively.
Amounts reported in accumulated other comprehensive loss related to cash flow interest rate derivatives are reclassified to interest expense as interest payments are made on the hedged variable interest rate liabilities. Valley estimates that $1.8 million will be reclassified as an increase to interest expense over the next 12 months.
Gains (losses) included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows: 
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
  (in thousands)
Derivative - interest rate swap:
Interest income $ —  $ 88  $ —  $ 170 
Interest expense (396) —  (316) — 
Hedged item - subordinated debt and loans:
Interest income $ —  $ (88) $ —  $ (170)
Interest expense 405  —  322  — 
The changes in the fair value of the hedged item designated as a qualifying hedge are captured as an
adjustment to the carrying amount of the hedged item (basis adjustment). The following table presents the hedged item related to interest rate derivatives designated as fair value hedges and the cumulative basis fair value adjustment included in the net carrying amount of the hedged item at September 30, 2021.
Line Item in the Statement of Financial Position in Which the Hedged Item is Included Carrying Amount of the Hedged Liability Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
(in thousands)
Long-term borrowings $ (299,678) $ 322 
The net (gains) losses included in the consolidated statements of income related to derivative instruments not designated as hedging instruments were as follows: 
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands)
Non-designated hedge interest rate swaps and credit derivatives
Other non-interest expense $ 216  $ 600  $ (209) $ 2,105 
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Other non-interest income included fee income related to non-designated hedge derivative interest rate swaps (not designated as hedging instruments) executed with commercial loan customers totaling $8.8 million and $19.2 million for the three months ended September 30, 2021 and 2020, respectively, and $22.6 million and $48.1 million for the nine months ended September 30, 2021 and 2020, respectively.

Credit Risk Related Contingent Features. By using derivatives, Valley is exposed to credit risk if counterparties to the derivative contracts do not perform as expected. Management attempts to minimize counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral where appropriate. Credit risk exposure associated with derivative contracts is managed at Valley in conjunction with Valley’s consolidated counterparty risk management process. Valley’s counterparties and the risk limits monitored by management are periodically reviewed and approved by the Board of Directors.

Valley has agreements with its derivative counterparties providing that if Valley defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Valley could also be declared in default on its derivative counterparty agreements. Additionally, Valley has an agreement with several of its derivative counterparties that contains provisions that require Valley’s debt to maintain an investment grade credit rating from each of the major credit rating agencies from which it receives a credit rating. If Valley’s credit rating is reduced below investment grade, or such rating is withdrawn or suspended, then the counterparty could terminate the derivative positions and Valley would be required to settle its obligations under the agreements. As of September 30, 2021, Valley was in compliance with all of the provisions of its derivative counterparty agreements. As of September 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $60.5 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.
Note 13. Balance Sheet Offsetting

Certain financial instruments, including certain OTC derivatives (mostly interest rate swaps) and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated statements of financial condition and/or subject to master netting arrangements or similar agreements. OTC derivatives include interest rate swaps executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house (presented in the table below). The credit risk associated with bilateral OTC derivatives is managed through obtaining collateral and enforceable master netting agreements.

Valley is party to master netting arrangements with its financial institution counterparties; however, Valley does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable investment securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Master repurchase agreements which include “right of set-off” provisions generally have a legally enforceable right to offset recognized amounts. In such cases, the collateral would be used to settle the fair value of the swap or repurchase agreement should Valley be in default. The total amount of collateral held or pledged cannot exceed the net derivative fair values with the counterparty.









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The table below presents information about Valley’s financial instruments eligible for offset in the consolidated statements of financial condition as of September 30, 2021 and December 31, 2020.
        Gross Amounts Not Offset  
  Gross Amounts
Recognized 		Gross Amounts
Offset 		Net Amounts
Presented 		Financial
Instruments
Cash
Collateral (1)
Net
Amount
  (in thousands)
September 30, 2021
Assets:
Interest rate swaps $ 215,046  $ —  $ 215,046  $ —  $ —  $ 215,046 
Liabilities:
Interest rate swaps $ 65,212  $ —  $ 65,212  $ —  $ (60,177) $ 5,035 
Total $ 65,212  $ —  $ 65,212  $ —  $ (60,177) $ 5,035 
December 31, 2020
Assets:
Interest rate swaps $ 150,487  $ —  $ 150,487  $ —  $ —  $ 150,487 
Liabilities:
Interest rate swaps $ 150,487  $ —  $ 150,487  $ —  $ (150,487) $ — 
Repurchase agreements 300,000  —  300,000  (300,000)
(2)
—  — 
Total $ 450,487  $ —  $ 450,487  $ (300,000) $ (150,487) $ — 
(1)    Cash collateral pledged to our counterparties in relation to market value exposures of OTC derivative contacts in a liability position.
(2)    Represents the fair value of non-cash pledged investment securities.

Note 14. Tax Credit Investments

Valley’s tax credit investments are primarily related to investments promoting qualified affordable housing projects, and other investments related to community development and renewable energy sources. Some of these tax-advantaged investments support Valley’s regulatory compliance with the Community Reinvestment Act (CRA). Valley’s investments in these entities generate a return primarily through the realization of federal income tax credits, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction of income tax expense.

Valley’s tax credit investments are carried in other assets on the consolidated statements of financial condition. Valley’s unfunded capital and other commitments related to the tax credit investments are carried in accrued expenses and other liabilities on the consolidated statements of financial condition. Valley recognizes amortization of tax credit investments, including impairment losses, within non-interest expense in the consolidated statements of income using the equity method of accounting. After initial measurement, the carrying amounts of tax credit investments with non-readily determinable fair values are increased to reflect Valley's share of income of the investee and are reduced to reflect its share of losses of the investee, dividends received and impairments, if applicable.









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The following table presents the balances of Valley’s affordable housing tax credit investments, other tax credit investments, and related unfunded commitments at September 30, 2021 and December 31, 2020:
September 30,
2021 		December 31,
2020
(in thousands)
Other Assets:
Affordable housing tax credit investments, net $ 17,231  $ 20,074 
Other tax credit investments, net 46,880  47,301 
Total tax credit investments, net
$ 64,111  $ 67,375 
Other Liabilities:
Unfunded affordable housing tax credit commitments $ 1,379  $ 1,379 
    Total unfunded tax credit commitments $ 1,379  $ 1,379 

The following table presents other information relating to Valley’s affordable housing tax credit investments and other tax credit investments for the three and nine months ended September 30, 2021 and 2020: 

Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits $ 948  $ 1,352  $ 2,744  $ 3,979 
Other tax credit investment credits and tax benefits 2,702  1,727  8,130  5,567 
Total reduction in income tax expense
$ 3,650  $ 3,079  $ 10,874  $ 9,546 
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses $ 681  $ 642  $ 1,684  $ 1,733 
Affordable housing tax credit investment impairment losses
387  585  1,159  1,668 
Other tax credit investment losses 256  12  780  1,235 
Other tax credit investment impairment losses 1,755  1,520  5,172  4,767 
Total amortization of tax credit investments recorded in non-interest expense $ 3,079  $ 2,759  $ 8,795  $ 9,403 
Note 15. Business Segments

Valley has four business segments that it monitors and reports on to manage Valley’s business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Valley’s reportable segments have been determined based upon its internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with Valley’s operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.
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The following tables represent the financial data for Valley’s four business segments for the three and nine months ended September 30, 2021 and 2020:
  Three Months Ended September 30, 2021
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets
$ 7,373,897  $ 25,324,485  $ 5,634,492  $ — $ 38,332,874 
Interest income $ 58,887  $ 250,866  $ 19,766  $ (718) $ 328,801 
Interest expense 4,032  13,795  3,228  6,720 27,775 
Net interest income (loss) 54,855  237,071  16,538  (7,438) 301,026 
Provision (credit) for credit losses (4,614) 8,110  35  — 3,531 
Net interest income (loss) after provision for credit losses
59,469  228,961  16,503  (7,438) 297,495 
Non-interest income 11,845  11,611  2,018  16,957 42,431 
Non-interest expense 13,520  27,504  (150) 134,048 174,922 
Internal transfer expense (income) 20,662  71,141  15,825  (107,628) — 
Income (loss) before income taxes $ 37,132  $ 141,927  $ 2,846  $ (16,901) $ 165,004 
Return on average interest earning assets (pre-tax)
2.01  % 2.24  % 0.20  % N/A 1.72  %
  Three Months Ended September 30, 2020
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets
$ 7,126,157  $ 25,389,107  $ 5,252,446  $ — $ 37,767,710 
Interest income $ 63,956  $ 251,920  $ 22,513  $ (1,046) $ 337,343 
Interest expense 9,048  33,330  6,728  5,151 54,257 
Net interest income (loss) 54,908  218,590  15,785  (6,197) 283,086 
Provision (credit) for credit losses 5,383  25,637  (112) — 30,908 
Net interest income (loss) after provision for credit losses
49,525  192,953  15,897  (6,197) 252,178 
Non-interest income 23,531  20,421  (1,304) 6,624 49,272 
Non-interest expense 19,877  25,633  (186) 114,861 160,185 
Internal transfer expense (income) 18,614  66,390  13,713  (98,717) — 
Income (loss) before income taxes $ 34,565  $ 121,351  $ 1,066  $ (15,717) $ 141,265 
Return on average interest earning assets (pre-tax)
1.94  % 1.91  % 0.08  % N/A 1.50  %

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  Nine Months Ended September 30, 2021
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets
$ 7,176,086  $ 25,465,276  $ 5,261,185  $ — $ 37,902,547 
Interest income $ 179,151  $ 759,097  $ 58,514  $ (2,515) $ 994,247 
Interest expense 15,639  55,497  11,466  17,045 99,647 
Net interest income (loss) 163,512  703,600  47,048  (19,560) 894,600 
(Credit) provision for credit losses (6,538) 27,825  (353) — 20,934 
Net interest income (loss) after provision for credit losses
170,050  675,775  47,401  (19,560) 873,666 
Non-interest income 47,445  29,144  6,824  33,377 116,790 
Non-interest expense 53,161  80,276  1,370  372,221 507,028 
Internal transfer expense (income) 60,026  212,931  43,706  (316,663) — 
Income (loss) before income taxes $ 104,308  $ 411,712  $ 9,149  $ (41,741) $ 483,428 
Return on average interest earning assets (pre-tax)
1.94  % 2.16  % 0.23  % N/A 1.70  %

  Nine Months Ended September 30, 2020
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets
$ 7,187,839  $ 24,334,429  $ 5,221,538  $ — $ 36,743,806 
Interest income $ 199,018  $ 771,947  $ 81,905  $ (3,209) $ 1,049,661 
Interest expense 40,217  136,156  29,216  13,088 218,677 
Net interest income (loss) 158,801  635,791  52,689  (16,297) 830,984 
Provision for credit losses 15,274  90,785  688  — 106,747 
Net interest income (loss) after provision for credit losses
143,527  545,006  52,001  (16,297) 724,237 
Non-interest income 55,383  52,192  7,661  20,263 135,499 
Non-interest expense 60,188  73,041  843  338,935 473,007 
Internal transfer expense (income) 58,355  197,444  42,393  (298,192) — 
Income (loss) before income taxes $ 80,367  $ 326,713  $ 16,426  $ (36,777) $ 386,729 
Return on average interest earning assets (pre-tax)
1.49  % 1.79  % 0.42  % N/A 1.40  %
Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

The following MD&A should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part 1, Item 1 of this report. The words "Valley," the "Company," "we," "our" and "us" refer to Valley National Bancorp and its wholly owned subsidiaries, unless we indicate otherwise. Additionally, Valley’s principal subsidiary, Valley National Bank, is commonly referred to as the “Bank” in this MD&A.

The MD&A contains supplemental financial information, described in the sections that follow, which has been determined by methods other than U.S. generally accepted accounting principles (U.S. GAAP) that management uses in its analysis of our performance. Management believes these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance, our business and performance trends and facilitate comparisons with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to
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financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies.
Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about our business, new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations, including the potential effects of the COVID-19 pandemic on our businesses and financial results and conditions. These statements may be identified by such forward-looking terminology as “should,” “expect,” “believe,” “view,” “will,” “opportunity,” “allow,” “continues,” “would,” “could,” “typically,” “usually,” “anticipate,” "may," "estimate," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, include, but are not limited to:

•failure to obtain shareholder or regulatory approval for the acquisition of Bank Leumi USA (Bank Leumi) on the anticipated terms and within the anticipated timeframe;
•the inability to realize expected cost savings and synergies from the Westchester and Bank Leumi acquisitions in amounts or in the timeframe anticipated;
•costs or difficulties relating to Westchester and Bank Leumi integration matters might be greater than expected;
•the inability to retain customers and qualified employees of the Westchester and Bank Leumi;
•changes in estimates of non-recurring charges related to Westchester and Bank Leumi acquisitions;
•the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;
•the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets;
•the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;
•the risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and litigation and the effectiveness of hedging strategies;
•damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;
•a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;
•higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;
•the inability to grow customer deposits to keep pace with loan growth;
•a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
•the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;
•greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;
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•the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;
•cyber-attacks, 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;
•results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
•our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
•unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events; 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 of our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of this Quarterly Report.
Critical Accounting Policies and Estimates

Valley’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. At September 30, 2021, we identified our policies on the allowance for credit losses, goodwill and other intangible assets, and income taxes to be critical accounting policies because management has to make subjective and/or complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Management has reviewed the application of these policies with the Audit Committee of Valley’s Board of Directors. Our critical accounting policies are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2020.
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.

Executive Summary

Company Overview. At September 30, 2021, Valley had consolidated total assets of approximately $41.3 billion, total net loans of $32.3 billion, total deposits of $33.6 billion and total shareholders’ equity of $4.8 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama. Of our current 226 branch network, 58 percent, 17 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions.
The Westchester Bank Holding Corporation. On June 29, 2021, Valley announced that it will acquire The Westchester Bank Holding Corporation (“Westchester”) and its principal subsidiary, The Westchester Bank which is headquartered in White Plains, New York. As of June 30, 2021, Westchester had total assets of $1.3 billion, total loans of $908 million, and total deposits of $1.1 billion. Westchester maintains a seven branch network in Westchester County, New York. The common shareholders of Westchester will receive 229.645 shares of Valley
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common stock for each Westchester share they own. Based on Valley’s closing stock price on June 28, 2021, Westchester’s stockholders will receive approximately $210 million in Valley common stock. Existing Westchester options will be cashed out for approximately $10 million in cash. The acquisition is anticipated to close on December 1, 2021, pending the satisfaction of customary closing conditions.

Bank Leumi Le-Israel Corporation Merger. On September 23, 2021, Valley announced a merger with Bank Leumi Le-Israel Corporation (Leumi) whereby Valley will acquire Leumi, the U.S. subsidiary of Bank Leumi Le-Israel B.M., and parent company of Bank Leumi USA (Bank Leumi). The merger will enable Valley to greatly expand its commercial banking and venture capital banking businesses, as well as help Valley increase its revenue diversity and expand into new geographies. Bank Leumi has its headquarters in New York City and also operates commercial banking offices in Chicago, Los Angeles, Palo Alto, and Aventura, Fl. As of June 30, 2021, Bank Leumi had total assets of $8.4 billion, total deposits of $7.1 billion, and gross loans of $5.4 billion. The acquisition is expected to close in the first half of 2022, subject to standard regulatory approvals, approval of Valley shareholders, as well as other customary closing conditions.
Dudley Ventures Acquisition. On October 8, 2021, Valley acquired Arizona-based Dudley Ventures (DV), an advisory firm specializing in the investment and management of tax credits. The transaction includes the acquisition of DV's community development entity, DV Community Investment, as well as DV Fund Advisors and DV Advisory Services. The transaction price included $11.3 million of cash at the closing date, fixed future stock consideration totaling $3.8 million, and contingent cash earn-out payments based upon revenue growth of the acquired entities over a five-year period. The acquisition of Dudley Ventures is expected to support our efforts to build differentiated sources of non-interest income.

Impact of COVID-19. Economic activity and businesses continued to rebound in the third quarter 2021. However, the U.S. is experiencing significant global supply chain disruptions and labor shortages which have also increased inflation. We continue to monitor the impact of COVID-19 closely, including its impact on our employees, customers, communities and results of operations and other government stimulus or Federal Reserve actions. The extent to which the COVID-19 pandemic will impact our operations and financial results during the fourth quarter 2021 and beyond is highly uncertain. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant and will follow proper protocols designed to ensure safety of our employees and customers. See the "Operating Environment" section of MD&A for more details.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and additional legislation that followed including the Consolidated Appropriations Act and the American Rescue Plan Act of 2021 provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. Valley extended a total of $3.2 billion PPP loans under the program, of which $2.3 billion of these loans have received forgiveness from the SBA, including $476.7 million during the third quarter 2021. As of September 30, 2021, we had $874.0 million of PPP loans still outstanding.

In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the CARES Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. As of September 30, 2021, Valley had $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications representing approximately 0.3 percent of our total loan portfolio at September 30, 2021 as compared to $361 million, or 1.1 percent of total loans at December 31, 2020.

Quarterly Results. Net income for the third quarter 2021 was $122.6 million, or $0.29 per diluted common share, compared to $102.4 million, or $0.25 per diluted common share, for the third quarter 2020. The $20.2 million increase in quarterly net income as compared to the same quarter one year ago was largely due to:

•a $17.9 million increase in net interest income mainly due to (i) lower rates on our deposit products combined with a continued customer shift to deposits without stated maturities, (ii) run-off of higher cost time deposits, (iii) lower average other borrowings and related costs driven by normal maturities of FHLB
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advances and long-term repos, as well as our prepayments of $534 million and $248 million of long-term FHLB borrowings in December 2020 and June 2021, respectively; and

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

partially offset by:

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

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

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

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

Operating Environment. During the third quarter 2021, real gross domestic product expanded 0.5 percent, compared to 6.7 percent growth in the second quarter 2021. The deceleration in growth was driven by personal consumption and business fixed investment as inflation remained elevated, partly offset by inventory restocking and government spending.

The Federal Reserve continued to maintain an accommodative stance on monetary policy to keep interest rates low and promote liquidity. At their meeting in September 2021, the Federal Open Market Committee (the "Committee") maintained the target range for the federal funds rate between 0.00 and 0.25 percent. Additionally, the Committee decided to maintain several programs, including purchasing U.S. Treasury and mortgage backed securities to support the flow of credit to households and businesses in order to promote its maximum employment and price stability goals. Notwithstanding this, the Committee indicated that a moderation in the pace of asset purchases may soon be warranted.

The 10-year U.S. Treasury note yield ended the third quarter at 1.52 percent, 7 basis points higher, as compared with June 30, 2021. The spread between the 2- and 10-year U.S. Treasury note yields ended the third quarter 2021 at 1.24 percent, 4 basis points higher, as compared to the end of the second quarter 2021 and 68 basis points higher, as compared to June 30, 2020.

For all commercial banks in the U.S., loans and leases increased approximately 0.9 percent in the third quarter 2021, as compared to the previous quarter. For the industry, banks reported more relaxed credit standards for most loan types. Additionally, banks reported that demand had firmed or increased during the third quarter which finally translated into stronger loan growth. In the third quarter 2021, Valley continued to see strong organic growth demand for commercial real estate loans and several other loan types across its geographic footprint. Inflation has been elevated, which could adversely impact companies if they cannot pass along higher input costs to their customers. Should inflation pressures persist, this dynamic, among other external factors, could challenge our business operations as highlighted throughout the remaining MD&A discussion below.

Loans. Total loans increased $149.4 million to $32.6 billion at September 30, 2021 from June 30, 2021 in spite of a $476.7 million decrease in PPP loans within the commercial and industrial loan category. Our non-PPP loan portfolio increased $626.0 million, or 8.0 percent on an annualized basis, to $31.7 billion at September 30, 2021 from $31.1 billion at June 30, 2021. The increase in non-PPP loans was largely driven by increases of $399.9 million, $51.7 million and $105.4 million in the commercial real estate, construction and residential mortgage categories, respectively. Additionally, our third quarter 2021 new and refinanced loan originations included
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approximately $233 million of residential mortgage loans originated for sale. Net gains on sales of residential loans were $6.4 million and $10.1 million in the third quarter 2021 and second quarter 2021, respectively. See further details on our loan activities under the “Loan Portfolio” section below.
Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), and other repossessed assets increased $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021. Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to June 30, 2021 mainly due to the $33.1 million increase in non-accrual commercial real estate loans from three loan relationships which have $3.7 million of related allowance reserves as of September 30, 2021. Non-accrual loans represented 0.77 percent of total loans at September 30, 2021, as compared to 0.68 percent at June 30, 2021.
Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $25.0 million to $55.2 million, or 0.17 percent of total loans, at September 30, 2021 as compared to $80.2 million, or 0.25 percent of total loans, at June 30, 2021. The decrease was driven by the transition of the aforementioned three commercial real estate loan delinquencies from accruing past due loans to non-accrual loan status.
See further details in the "Non-performing Assets" section below.
Deposits and Other Borrowings. Overall, average deposits increased by $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021 due to continued growth in both commercial and retail customer balances. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 2021, respectively. Our mix of average deposits for the third quarter 2021 also continued to shift away from time deposits into the non-maturity deposit categories as compared to the second quarter 2021, as some funding from maturing retail CDs migrate to the more liquid deposit products and normal growth in such categories.
Actual ending balances for deposits increased $437.8 million to approximately $33.6 billion at September 30, 2021 from June 30, 2021 largely due to increases of $524.8 million and $260.3 million in the non-maturity interest bearing deposit and non-interest bearing deposit categories, respectively, partially offset by a $347.3 million decrease in time deposits. The decrease of $347.3 million in time deposits was driven by normal run-off of maturing retail CDs with the aforementioned migration of some retail balances to more liquid, lower cost deposit product categories. Total brokered deposits (within money market deposit accounts) decreased approximately $315 million to $1.7 billion at September 30, 2021 as compared to $2.0 billion at June 30, 2021, as our funding profile has benefited from the surge in commercial and retail deposit balances. Non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 32 percent, 56 percent and 12 percent of total deposits as of September 30, 2021, respectively. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at September 30, 2021.
Average short-term borrowings decreased $13.5 million to $860.5 million for the third quarter 2021 as compared to the second quarter 2021 due to normal debt maturities funded with excess cash liquidity. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) decreased by $605.0 million to $1.6 billion for the third quarter 2021 as compared to the second quarter 2021 largely due to combination of (i) the $248 million of FHLB advances which were prepaid in late June 2021, (ii) repayments upon maturities of FHLB advances and (iii) $300 million of long-term repurchase agreements which matured during the third quarter 2021, with these decreases partially offset by (iv) the $300 million subordinated notes issued in late May 2021 which were outstanding for the full quarter in third quarter 2021.
Actual ending balances for short-term borrowings decreased by $71.0 million to $783.3 million at September 30, 2021 as compared to June 30, 2021 largely due to repayments of FHLB advances. Long-term borrowings decreased by $458.2 million to $1.4 billion at September 30, 2021 as compared to June 30, 2021 mainly due to the maturity of $300 million of long-term repurchase agreements and $158 million of FHLB advances which were repaid with excess liquidity during the third quarter 2021. See Note 10 to the consolidated financial statements for additional information.
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Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
Return on average assets 1.18  % 0.99  % 1.16  % 0.94  %
Return on average assets, as adjusted 1.20  1.01  1.19  0.95 
Return on average shareholders’ equity 10.23  9.04  10.14  8.50 
Return on average shareholders’ equity, as adjusted 10.41  9.20  10.37  8.59 
Return on average tangible shareholders’ equity (ROATE) 14.64  13.30  14.63  12.61 
ROATE, as adjusted 14.90  13.53  14.97  12.75 

Adjusted return on average assets, adjusted return on average shareholders' equity, ROATE and adjusted ROATE included in the table above are non-GAAP measures. Management believes these measures provide information useful to management and investors in understanding our underlying operational performance, business and performance trends, and the measures facilitate comparisons of our prior performance with the performance of others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. These non-GAAP financial measures may also be calculated differently from similar measures disclosed by other companies. The non-GAAP measure reconciliations are presented below.

Adjusted net income is computed as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
(in thousands)
Net income, as reported $ 122,580  $ 102,374  $ 358,802  $ 285,243 
Add: Loss on extinguishment of debt (net of tax) —  1,691  6,024  1,691 
Add: (Gains) losses on available for sale and held to maturity securities transactions (net of tax) (a)
(565) 33  (399) 91 
Add: Merger related expenses (net of tax) (b)
1,207  76  1,207  1,275 
Add: Litigation reserves (net of tax) (b)
1,505  —  1,505  — 
Net income, as adjusted $ 124,727  $ 104,174  $ 367,139  $ 288,300 
(a)    Included in gains on securities transactions, net.
(b)    Included in professional and legal fees.

In addition to the items used to calculate net income, as adjusted, in the table above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. 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 and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details.




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Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
($ in thousands)
Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300
Average assets $ 41,543,930 $ 41,356,737 $ 41,144,375 $ 40,304,956
Annualized return on average assets, as adjusted 1.20  % 1.01  % 1.19  % 0.95  %

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
($ in thousands)
Net income, as adjusted $ 124,727 $ 104,174 $ 367,139 $ 288,300
Average shareholders' equity $ 4,794,843 $ 4,530,671 $ 4,718,960 $ 4,472,447
Annualized return on average shareholders' equity, as adjusted 10.41  % 9.20  % 10.37  % 8.59  %

ROATE and adjusted ROATE are computed by dividing net income and adjusted net income, respectively, by average shareholders’ equity less average goodwill and average other intangible assets, as follows:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  ($ in thousands)
Net income $ 122,580 $ 102,374 $ 358,802 $ 285,243
Net income, as adjusted 124,727 104,174 $ 367,139 $ 288,300
Average shareholders’ equity $ 4,794,843 $ 4,530,671 $ 4,718,960 $ 4,472,447
Less: Average goodwill and other intangible assets
1,446,760 1,451,889 1,449,285 1,456,536
Average tangible shareholders’ equity $ 3,348,083 $ 3,078,782 $ 3,269,675 $ 3,015,911
Annualized ROATE 14.64  % 13.30  % 14.63  % 12.61  %
Annualized ROATE, as adjusted 14.90  % 13.53  % 14.97  % 12.75  %

Net Interest Income

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

Net interest income on a tax equivalent basis totaling $301.7 million for the third quarter 2021 decreased $43 thousand as compared to the second quarter 2021 and increased $17.6 million from the third quarter 2020. Interest expense of $27.8 million for the third quarter 2021 decreased $5.0 million as compared to the second quarter 2021 as we continue to reduce our cost of funding from both deposits and our repayment of other borrowings, primarily FHLB advances. Interest income on a tax equivalent basis in the third quarter 2021 decreased by $5.0 million to $329.5 million as compared to the second quarter 2021 largely due to a $9.4 million decline in PPP loan related interest and fees caused by lower levels of loan forgiveness (prepayments) in the third quarter 2021 and lower yields on non-PPP new and renewed loans.

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Average interest earning assets increased $565.2 million to $38.3 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to higher levels of excess liquidity held in overnight investments with banks caused by the surge in customer deposit balances and fluctuations in the timing of loan and investment funding. As compared to the second quarter 2021, average interest earning assets increased by $425.5 million from $37.9 billion, mostly driven by higher levels of excess overnight liquidity and purchases of new taxable investments, partially offset by principal repayments in both the taxable and non-taxable investment portfolios.

Average interest bearing liabilities decreased $1.7 billion to $25.4 billion for the third quarter 2021 as compared to the third quarter 2020 primarily due to the repayment of borrowings with excess cash liquidity over the last 12-month period. As compared to the second quarter 2021, average interest bearing liabilities decreased by $115.4 million in the third quarter 2021 mainly due to repayments of short-term and long-term borrowings, which were largely offset by the surge in both commercial and retail customer deposits. Total average deposits increased $876.6 million to $33.6 billion for the third quarter 2021 as compared to the second quarter 2021. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of 3.15 percent for the third quarter 2021 decreased by 3 basis points and increased by 14 basis points from 3.18 percent and 3.01 percent for the second quarter 2021 and third quarter 2020, respectively. The yield on average interest earning assets decreased by 9 basis points on a linked quarter basis mostly due to the lower yield on new and renewed loans, partially offset by one additional day in the third quarter 2021 as compared to the second quarter 2021. The yield on average loans decreased by 8 basis points to 3.79 percent for the third quarter 2021 as compared to the second quarter 2021. The overall cost of average interest bearing liabilities decreased 7 basis points to 0.44 percent for the third quarter 2021 as compared to the second quarter 2021. The decrease was mainly due to: (i) the continued run-off of maturing higher cost time deposits, (ii) repayment of maturing FHLB advances and other borrowings during the third quarter 2021, (iii) the prepayment of $248 million of long-term FHLB advances in June 2021 and (iv) the overall lower cost of deposits. Our cost of total average deposits was 0.18 percent for the third quarter 2021 as compared to 0.21 percent for the second quarter 2021.

Looking forward, we expect moderate ongoing interest rate pressures on our net interest margin for the fourth quarter 2021 and beyond due to the low level of market rates and the potential negative impact on the overall yield on new and refinanced loan originations. However, we are also encouraged by the continued potential opportunity to selectively redeploy low yielding excess cash liquidity into new loans and investments during the fourth quarter 2021, as well as repay or reprice (at low costs) stated maturity deposits totaling approximately $3.3 billion with an average cost of 31 basis points scheduled to mature over the next 12-month period.
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The following table reflects the components of net interest income for the three months ended September 30, 2021, June 30, 2021 and September 30, 2020:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
  Three Months Ended
  September 30, 2021 June 30, 2021 September 30, 2020
  Average
Balance 		Interest Average
Rate 		Average
Balance 		Interest Average
Rate 		Average
Balance 		Interest Average
Rate
  ($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)
$ 32,698,382  $ 309,778  3.79  % $ 32,635,298  $ 315,339  3.87  % $ 32,515,264  $ 315,863  3.89  %
Taxable investments (3)
3,302,803  15,797  1.91  3,159,842  14,883  1.88  3,354,373  17,529  2.09 
Tax-exempt investments (1)(3)
429,941  3,302  3.07  498,971  4,071  3.26  542,450  4,564  3.37 
Interest bearing deposits with banks 1,901,748  642  0.14  1,613,303  235  0.06  1,355,623  420  0.12 
Total interest earning assets 38,332,874  329,519  3.44  37,907,414  334,528  3.53  37,767,710  338,376  3.58 
Allowance for credit losses (346,437) (350,388) (309,382)
Cash and due from banks 213,452  335,083  291,803 
Other assets 3,314,308  3,237,689  3,558,927 
Unrealized gains on securities available for sale, net 29,733  31,661  47,679 
Total assets $ 41,543,930  $ 41,161,459  $ 41,356,737 
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits $ 18,771,619  $ 10,605  0.23  % $ 17,784,985  $ 11,166  0.25  % $ 14,542,470  $ 13,323  0.37  %
Time deposits 4,126,253  4,394  0.43  4,609,778  6,279  0.54  8,027,346  19,028  0.95 
Total interest bearing deposits 22,897,872  14,999  0.26  22,394,763  17,445  0.31  22,569,816  32,351  0.57 
Short-term borrowings 860,474  1,464  0.68  873,927  1,168  0.53  1,533,246  2,588  0.68 
Long-term borrowings (4)
1,595,814  11,312  2.84  2,200,836  14,128  2.57  2,959,728  19,318  2.61 
Total interest bearing liabilities 25,354,160  27,775  0.44  25,469,526  32,741  0.51  27,062,790  54,257  0.80 
Non-interest bearing deposits 10,701,948  10,328,412  8,820,877 
Other liabilities 692,979  654,724  942,399 
Shareholders’ equity 4,794,843  4,708,797  4,530,671 
Total liabilities and shareholders’ equity $ 41,543,930  $ 41,161,459  $ 41,356,737 
Net interest income/interest rate spread (5)
$ 301,744  3.00  % $ 301,787  3.02  % $ 284,119  2.78  %
Tax equivalent adjustment (718) (880) (1,033)
Net interest income, as reported $ 301,026  $ 300,907  $ 283,086 
Net interest margin (6)
3.14  % 3.18  % 3.00  %
Tax equivalent effect 0.01  —  0.01 
Net interest margin on a fully tax equivalent basis (6)
3.15  % 3.18  % 3.01  %


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The following table reflects the components of net interest income for the nine months ended September 30, 2021 and 2020:
  Nine Months Ended
  September 30, 2021 September 30, 2020
  Average
Balance 		Interest Average
Rate 		Average
Balance 		Interest Average
Rate
  ($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)
$ 32,641,362  $ 938,323  3.83  % $ 31,522,268  $ 970,814  4.11  %
Taxable investments (3)
3,191,930  45,717  1.91  3,527,823  65,402  2.47 
Tax-exempt investments (1)(3)
480,599  11,621  3.22  563,459  14,207  3.36 
Interest bearing deposits with banks 1,588,656  1,101  0.09  1,130,257  2,296  0.27 
Total interest earning assets 37,902,547  996,762  3.51  36,743,807  1,052,719  3.82 
Allowance for credit losses (348,011) (283,508)
Cash and due from banks 263,910  318,370 
Other assets 3,290,439  3,492,846 
Unrealized gains on securities available for sale, net 35,490  33,441 
Total assets $ 41,144,375  $ 40,304,956 
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits $ 17,730,438  $ 32,896  0.25  % $ 13,834,930  $ 64,463  0.62  %
Time deposits 4,853,891  21,766  0.60  8,501,949  91,699  1.44 
Total interest bearing deposits 22,584,329  54,662  0.32  22,336,879  156,162  0.93 
Short-term borrowings 966,544  4,390  0.61  1,723,947  9,275  0.72 
Long-term borrowings (4)
2,037,312  40,595  2.66  2,873,912  53,240  2.47 
Total interest bearing liabilities 25,588,185  99,647  0.52  26,934,738  218,677  1.08 
Non-interest bearing deposits 10,147,130  7,995,759 
Other liabilities 690,100  902,012 
Shareholders’ equity 4,718,960  4,472,447 
Total liabilities and shareholders’ equity $ 41,144,375  $ 40,304,956 
Net interest income/interest rate spread (5)
$ 897,115  2.99  % $ 834,042  2.74  %
Tax equivalent adjustment (2,515) (3,058)
Net interest income, as reported $ 894,600  $ 830,984 
Net interest margin (6)
3.15  % 3.02  %
Tax equivalent effect 0.01  % 0.01  %
Net interest margin on a fully tax equivalent basis (6)
3.16  % 3.03  %
_____________

(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.





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The following table demonstrates the relative impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in volume and rates are allocated to the categories in proportion to the absolute dollar amounts of the change in each category.

Change in Net Interest Income on a Tax Equivalent Basis
  Three Months Ended September 30, 2021
Compared to September 30, 2020 		Nine Months Ended September 30, 2021 Compared to September 30, 2020
  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* $ 1,771  $ (7,856) $ (6,085) $ 33,667  $ (66,158) $ (32,491)
Taxable investments (266) (1,466) (1,732) (5,809) (13,876) (19,685)
Tax-exempt investments* (889) (373) (1,262) (2,022) (564) (2,586)
Interest bearing deposits with banks 182  40  222  697  (1,892) (1,195)
Total increase (decrease) in interest income 798  (9,655) (8,857) 26,533  (82,490) (55,957)
Interest Expense:
Savings, NOW and money market deposits 3,234  (5,952) (2,718) 14,669  (46,236) (31,567)
Time deposits (6,860) (7,774) (14,634) (29,613) (40,320) (69,933)
Short-term borrowings (1,144) 20  (1,124) (3,606) (1,279) (4,885)
Long-term borrowings and junior subordinated debentures (9,548) 1,542  (8,006) (16,428) 3,783  (12,645)
Total decrease in interest expense (14,318) (12,164) (26,482) (34,978) (84,052) (119,030)
Total increase in net interest income $ 15,116  $ 2,509  $ 17,625  $ 61,511  $ 1,562  $ 63,073 
*Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate.
Non-Interest Income

Non-interest income decreased $6.8 million and $18.7 million for the three and nine months ended September 30, 2021 as compared to the same periods of 2020. The following table presents the components of non-interest income for the three and nine months ended September 30, 2021 and 2020:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands)
Trust and investment services $ 3,550  $ 3,068  $ 10,411  $ 9,307 
Insurance commissions 1,610  1,816  5,805  5,426 
Service charges on deposit accounts 5,428  3,952  15,614  13,189 
Gains (losses) on securities transactions, net 787  (46) 1,263  (127)
Fees from loan servicing 2,894  2,551  8,980  7,526 
Gains on sales of loans, net 6,442  13,366  20,016  26,253 
Gains on sales of assets, net 344  894  380  716 
Bank owned life insurance 2,018  (1,304) 6,824  7,661 
Other 19,358  24,975  47,497  65,548 
Total non-interest income $ 42,431  $ 49,272  $ 116,790  $ 135,499 


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

Net gains on sales of loans decreased $6.9 million and $6.2 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. Net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. The net losses from the change in the fair value of loans held for sale totaled $403 thousand and $10.4 million for the three and nine months ended September 30, 2021, respectively, as compared to net gains of $4.3 million and $8.3 million for the three and nine months ended September 30, 2020, respectively. During the third quarter 2021, we sold approximately $234.6 million of residential mortgage loans as compared to $301.2 million during the third quarter 2020. See further discussion of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Bank owned life insurance income increased $3.3 million for the three months ended September 30, 2021 as compared to the same period in 2020. The increase was attributable to a mortality contingency reserve adjustment recorded in third quarter 2020.

Other non-interest income decreased $5.6 million and $18.1 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020 primarily due to lower fee income related to derivative interest rate swaps executed with commercial lending customers caused by lower transaction volumes. Swap fee income totaled $8.8 million and $19.2 million for the three months ended September 30, 2021 and 2020, respectively, and $22.6 million and $48.1 million for the nine months ended September 30, 2021 and 2020, respectively.

Non-Interest Expense

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

  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  (in thousands)
Salary and employee benefits expense $ 93,992  $ 83,626  $ 273,190  $ 247,886 
Net occupancy and equipment expense 32,402  31,116  97,112  96,774 
FDIC insurance assessment 3,644  4,847  10,294  14,858 
Amortization of other intangible assets 5,298  6,377  16,753  18,528 
Professional and legal fees 13,492  8,762  27,250  22,646 
Loss on extinguishment of debt —  2,353  8,406  2,353 
Amortization of tax credit investments 3,079  2,759  8,795  9,403 
Telecommunications expense 2,615  2,094  8,507  7,247 
Other 20,400  18,251  56,721  53,312 
Total non-interest expense $ 174,922  $ 160,185  $ 507,028  $ 473,007 

Salary and employee benefits expense increased $10.4 million and $25.3 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020 primarily due to strategic increases in our headcount to enhance lending and operations and increases in our branch compensation to preserve staffing and service levels, and to keep pace with the increases in wage demand across the industry. In addition,
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higher cash and stock-based incentive compensation accruals and health insurance costs also contributed to the increases in both periods.

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

Professional and legal fees increased $4.7 million and $4.6 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. The increases were largely attributable to a $2.1 million accrual for general litigation reserves, $1.3 million of merger related fees, as well as increased consulting expenses during the three and nine months ended September 30, 2021. Higher consulting expenses mostly related to our technology transformation efforts and new product initiatives.

Loss on extinguishment of debt totaled $8.4 million for the nine months ended September 30, 2021 reflecting the prepayment of approximately $248 million of long-term FHLB advances during the second quarter 2021. The loss on extinguishment of debt totaling $2.4 million during the three and nine months ended September 30, 2020 was
related to the prepayment of $50 million of long-term institutional repo borrowings. All the prepayments were funded by excess cash liquidity at the Bank. See Note 10 to the consolidated financial statements for additional information regarding our borrowed funds.

Other non-interest expense increased $2.1 million and $3.4 million for the three and nine months ended September 30, 2021, respectively, as compared to the same periods of 2020. These increases were largely due to higher data processing costs, OREO related expenses as well as incrementally higher operating expenses in several categories due to the expansion of our operations.

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

Efficiency Ratio
The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted primarily by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, including, but not limited to loss on extinguishment of debt, litigation reserves and merger related expenses.

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The following table presents our efficiency ratio and a reconciliation of the efficiency ratio adjusted for certain items during the three and nine months ended September 30, 2021 and 2020:
  Three Months Ended
September 30, 		Nine Months Ended
September 30,
  2021 2020 2021 2020
  ($ in thousands)
Total non-interest expense $ 174,922  $ 160,185  $ 507,028  $ 473,007 
Less: Loss on extinguishment of debt (pre-tax) —  2,353  8,406  2,353 
Less: Amortization of tax credit investments (pre-tax) 3,079  2,759  8,795  9,403 
Less: Litigation reserve (a)
2,100  —  2,100  — 
Less: Merger related expenses (pre-tax) (a)
1,287  106  1,287  1,774 
Total non-interest expense, adjusted $ 168,456  $ 154,967  $ 486,440  $ 459,477 
Net interest income $ 301,026  $ 283,086  $ 894,600  $ 830,984 
Total non-interest income 42,431  49,272  116,790  135,499 
Add: (Gains) losses on available for sale and held to maturity securities transactions, net (pre-tax) (b)
(788) 46  (557) 127 
Total net interest income and non-interest income $ 342,669  $ 332,404  $ 1,010,833  $ 966,610 
Efficiency ratio 50.93  % 48.20  % 50.13  % 48.94  %
Efficiency ratio, adjusted 49.16  % 46.62  % 48.12  % 47.53  %
(a)    Included in professional and legal fees.
(b)    Included in gains on securities transactions, net.

Income Taxes

Income tax expense totaled $42.4 million for the third quarter 2021 as compared to $42.9 million and $38.9 million for the second quarter 2021 and third quarter 2020, respectively, and $124.6 million and $101.5 million for the nine months ended September 30, 2021 and 2020, respectively. Our effective tax rate was 25.7 percent, 26.2 percent and 27.5 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively. The decrease in the effective tax rate in the third quarter 2021 as compared to the second quarter 2021 and the third quarter 2020 was mainly due to the increase in excess stock compensation benefit.

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

We have four business segments that we monitor and report on to manage our business operations. These segments are consumer lending, commercial lending, investment management, and corporate and other adjustments. Our reportable segments have been determined based upon Valley’s internal structure of operations and lines of business. Each business segment is reviewed routinely for its asset growth, contribution to income before income taxes and return on average interest earning assets and impairment (if events or circumstances indicate a possible inability to realize the carrying amount). Expenses related to the branch network, all other components of retail banking, along with the back office departments of the Bank are allocated from the corporate and other adjustments segment to each of the other three business segments. Interest expense and internal transfer expense (for general corporate expenses) are allocated to each business segment utilizing a transfer pricing methodology, which
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involves the allocation of operating and funding costs based on each segment's respective mix of average earning assets and/or liabilities outstanding for the period. The financial reporting for each segment contains allocations and reporting in line with our operations, which may not necessarily be comparable to any other financial institution. The accounting for each segment includes internal accounting policies designed to measure consistent and reasonable financial reporting and may result in income and expense measurements that differ from amounts under U.S. GAAP. Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data.

The following tables present the financial data for each business segment for the three months ended September 30, 2021 and 2020:
  Three Months Ended September 30, 2021
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets $ 7,373,897 $ 25,324,485 $ 5,634,492 $ — $ 38,332,874
Income (loss) before income taxes 37,132 141,927 2,846 (16,901) 165,004
Annualized return on average interest earning assets (before tax)
2.01  % 2.24  % 0.20  % N/A 1.72  %
 
  Three Months Ended September 30, 2020
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets $ 7,126,157 $ 25,389,107 $ 5,252,446 $ — $ 37,767,710
Income (loss) before income taxes 34,565 121,351 1,066 (15,717) 141,265
Annualized return on average interest earning assets (before tax)
1.94  % 1.91  % 0.08  % N/A 1.50  %

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

This consumer lending segment represented 22.3 percent of our loan portfolio at September 30, 2021, and was mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 13.3 percent of our loan portfolio at September 30, 2021) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 4.8 percent of total loans at September 30, 2021) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased $247.7 million to $7.4 billion for the three months ended September 30, 2021 as compared to the third quarter 2020. The increase was largely due to loan growth from origination of new residential mortgage loans and automobile loans over most of the last 12-month period.

Income before income taxes generated by the consumer lending segment increased $2.6 million to $37.1 million for the third quarter 2021 as compared to the third quarter 2020 largely due to a $10.0 million decrease in the provision for loan losses and lower non-interest expense, partially offset by a $11.7 million decrease in non-interest income
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coupled with a $2.0 million increase in the internal transfer expense. The decrease of $11.7 million in non-interest income was partly due to a $6.9 million decrease in net gains on sales of loans for the three months ended September 30, 2021. The decrease in the provision for loan losses was mainly due to the improvement in the economic forecast component of the allowance for loan losses at September 30, 2021 as compared to September 30, 2020. See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio decreased 11 basis points to 2.97 percent for the third quarter 2021 as compared to the third quarter 2020 mainly due to a 40 basis point decrease in the yield on average loans, partially offset by a 29 basis point decrease in the costs associated with our funding sources. The 40 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments. The decrease in our funding costs was mainly due to continued runoff of higher cost time deposits, some customer migration to lower cost deposits without stated maturities and lower rates offered on deposit products. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.
Commercial Lending

The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $5.6 billion and represented 17.3 percent of the total loan portfolio at September 30, 2021. Commercial real estate loans and construction loans totaled $19.7 billion and represented 60.4 percent of the total loan portfolio at September 30, 2021.

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

For the three months ended September 30, 2021, income before income taxes for the commercial lending segment increased $20.6 million to $141.9 million as compared to the third quarter 2020 mainly driven by a $18.5 million increase in net interest income and a $17.5 million decrease in the provision for loan losses, partially offset by lower non-interest income and higher internal expense. Net interest income for this segment increased to $237.1 million for the third quarter 2021 as compared to the same period in 2020 primarily due to lower funding costs. The provision for loan losses decreased by $17.5 million mainly due to the improvement in the economic forecast component of the allowance for loan losses as compared to September 30, 2020. Non-interest income decreased $8.8 million to $11.6 million for the three months ended September 30, 2021 as compared to the third quarter 2020 mainly due to a $10.4 million decrease in swap fee income related to derivative interest rate swaps executed with commercial loan customers. Internal transfer expense increased $4.8 million for the third quarter 2021 as compared to the third quarter 2020 partly due to general increases related to organic growth in our business.

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

The investment management segment generates a large portion of our income through investments in various types of securities and interest-bearing deposits with other banks. These investments are mainly comprised of fixed rate securities and, depending on our liquid cash position, federal funds sold and interest-bearing deposits with banks (primarily the Federal Reserve Bank of New York) as part of our asset/liability management strategies. The fixed
rate investments are one of Valley’s least sensitive assets to changes in market interest rates. However, a portion of the investment portfolio is invested in shorter-duration securities to maintain the overall asset sensitivity of our balance sheet. See the “Asset/Liability Management” section below for further analysis.
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Average interest earning assets in this segment increased $382.0 million during the third quarter 2021 as compared to the third quarter 2020 due to a $546.1 million increase in average interest bearing deposits with banks, partially offset by a $164.1 million decrease in average investment securities. The increase in overnight investments and deposits with other banks was largely due to our higher levels of excess liquidity during the third quarter 2021 as we continued to experience a surge in customer deposits. The decrease in average investment securities was mainly driven by principal repayments on securities with a slower rate of reinvestment activity due to the low interest rate environment and our preference to fund loan growth. However, average investments did increase $73.9 million as compared to the linked second quarter 2021 as we modestly increased our investment purchases in the third quarter 2021.

During the second quarter 2021, income before income taxes for the investment management segment increased $1.8 million to $2.8 million as compared to $1.1 million for the third quarter 2020 mostly due to an increase in both net interest income and non-interest income, partially offset by higher internal transfer expense. The increase in net interest income totaled $753 thousand and was mainly due to the decreased cost of funding, partially offset by lower yields on our investments securities and lower average investment balances. Non-interest income increased $3.3 million in the third quarter 2021 as compared to the third quarter 2020 mainly due to higher bank owned life insurance income. See the "Non-Interest Income" section for more details.

The net interest margin for this segment decreased 2 basis points to 1.18 percent for the third quarter 2021 as compared to the same quarter in 2020 largely due to a 31 basis point decrease in the yield on average investments, partially offset by a 29 basis point decrease in our cost of funding. The decrease in the yield on average investments as compared to the third quarter 2020 was largely driven by the lower yielding investment securities and the higher average holdings in low yielding overnight cash investments.
Corporate and other adjustments

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

The corporate segment recognized pre-tax losses of $16.9 million and $15.7 million for the three months ended September 30, 2021 and 2020, respectively. The $1.2 million increase in the pre-tax loss for the third quarter 2021 was mainly driven by the $19.2 million increase in non-interest expense largely caused by higher salaries and employee benefits expense, and professional and legal fees for the three months ended September 30, 2021. These items were partially offset by increases of $10.3 million and $8.9 million in non-interest income and internal transfer income, respectively. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.


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The following tables present the financial data for each business segment for the nine months ended September 30, 2021 and 2020:
  Nine Months Ended September 30, 2021
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets $ 7,176,086 $ 25,465,276 $ 5,261,185 $ — $ 37,902,547
Income (loss) before income taxes 104,308 411,712 9,149 (41,741) 483,428
Annualized return on average interest earning assets (before tax)
1.94  % 2.16  % 0.23  % N/A 1.70  %
  Nine Months Ended September 30, 2020
  Consumer
Lending 		Commercial
Lending 		Investment
Management 		Corporate
and Other
Adjustments 		Total
  ($ in thousands)
Average interest earning assets $ 7,187,839 $ 24,334,429 $ 5,221,538 $ — $ 36,743,806
Income (loss) before income taxes 80,367 326,713 16,426 (36,777) 386,729
Annualized return on average interest earning assets (before tax)
1.49  % 1.79  % 0.42  % N/A 1.40  %

Consumer Lending

Average interest earning assets in this segment decreased $11.8 million to $7.2 billion for the nine months ended September 30, 2021 as compared to the same period in 2020. The decrease was largely due to runoff from principal repayments with a higher percentage of new and refinanced mortgage loans originated for sale rather than held for investment over the last 12 month period. However, automobile loan demand, which was tempered during much of 2020 due to the onset of the COVID-19 pandemic, was strong during the nine months ended September 30, 2021 due to built up demand for auto purchases by consumers.

Income before income taxes generated by the consumer lending segment increased $23.9 million to $104.3 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to a lower provision for loan losses and non-interest expense, and an increase in net interest income. The provision for loan losses decreased $21.8 million to a credit (negative) provision of $6.5 million for the nine months ended September 30, 2021 from a $15.3 million provision for the same period of 2020. The lower provision was mainly due to the improved economic forecast component of the allowance for loan losses as compared to September 30, 2020, as well as better actual loan performance within these loan categories. See further details in the "Allowance for Credit Losses" section of this MD&A. Net interest income increased $4.7 million primarily due to the lower funding costs, which were partially offset by lower loan yields, as well as the modest decline in average interest earning assets. The higher net interest income was partially offset by a $7.9 million decrease in non-interest income, which was largely attributable to lower net gains on sales of loans for the nine months ended September 30, 2021 as compared to the same period in 2020.

The net interest margin on the consumer lending portfolio increased 10 basis points to 3.04 percent for the nine months ended September 30, 2021 as compared to the same period one year ago mainly due to a 46 basis point decrease in the costs associated with our funding sources, partially offset by a 36 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to a greater mix of non-interest bearing deposits, deposits continuing to reprice at lower interest rates and the repayment of maturing higher cost borrowings. The 36 basis point decrease in loan yield was largely due to lower yielding new loan volumes and normal loan repayments.

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Commercial Lending

Average interest earning assets in this segment increased $1.1 billion to $25.5 billion for the nine months ended September 30, 2021 as compared to the same period in 2020. This increase was mainly due to PPP loan originations during the last 12 months, as well as organic commercial real estate loan growth during the nine months ended September 30, 2021.

For the nine months ended September 30, 2021, income before income taxes for the commercial lending segment increased $85.0 million to $411.7 million as compared to the same period in 2020 mainly driven by an increase in net interest income and a lower provision for loan losses. Net interest income increased $67.8 million to $703.6 million for the nine months ended September 30, 2021 as compared to the same period in 2020 largely due to lower funding costs and the higher average commercial loan balances during the current period. The provision for credit losses decreased $63.0 million to $27.8 million during the nine months ended September 30, 2021 as compared to $90.8 million for the same period in 2020. The decrease in the provision for loan losses was mainly due to an improvement in the economic forecast component of the allowance for loan losses and other qualitative factors related to the COVID-19 pandemic as compared to September 30, 2020. See the "Allowance for Credit Losses" section below for further details. The positive impact of the aforementioned items was partially offset by a decrease in non-interest income, as well as higher non-interest expense and internal transfer expense. Non-interest income decreased $23.0 million for the nine months ended September 30, 2021 as compared to the same period in 2020 primarily due to a $25.5 million decrease in fee income related to derivative interest rate swaps executed with commercial loan customers. Internal transfer expense increased $15.5 million to $212.9 million for the nine months ended September 30, 2021 as compared to the same period in 2020.

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

Average interest earning assets in this segment increased $39.6 million during the nine months ended September 30, 2021 as compared to the same period in 2020. Within the category, a $458.4 million increase in average interest bearing deposits with banks was largely offset by $418.8 million decrease in average investment securities. The increase in our excess liquidity held in overnight interest bearing deposits with banks was mainly caused by strong deposits growth over the 12-month period and management's lower rate of reinvestment in investment securities for most of the same period.

For the nine months ended September 30, 2021, income before income taxes for the investment management segment decreased $7.3 million to $9.1 million as compared to the same period in 2020 mainly due to decreases in the net interest income and non-interest income and a higher internal expense transfer. The negative impact of these items was partially offset by a decline in the provision for credit losses for held to maturity debt securities from a $688 thousand provision for the nine months ended September 30, 2020 to a credit of $353 thousand for the nine months ended September 30, 2021.

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

The pre-tax net loss for the corporate segment totaled $41.7 million for the nine months ended September 30, 2021 as compared to $36.8 million for the same period in 2020. The negative change of $5.0 million was mainly due to an increase in non-interest expense, partially offset by higher internal transfer income and greater non-interest
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income. Non-interest expense increased $33.3 million to $372.2 million for the nine months ended September 30, 2021 as compared to the same period in 2020 partially due to increases in salaries and employee benefits expenses, professional and legal fees and the loss on extinguishment of debt during the current period as compared to prior. Internal transfer income increased $18.5 million to $316.7 million for the nine months ended September 30, 2021 as compared to the same period in 2020.
ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

Our success is largely dependent upon our ability to manage interest rate risk. Interest rate risk can be defined as the exposure of our interest rate sensitive assets and liabilities to the movement in interest rates. Our Asset/Liability Management Committee is responsible for managing such risks and establishing policies that monitor and coordinate our sources and uses of funds. Asset/Liability management is a continuous process due to the constant change in interest rate risk factors. In assessing the appropriate interest rate risk levels for us, management weighs the potential benefit of each risk management activity within the desired parameters of liquidity, capital levels and management’s tolerance for exposure to income fluctuations. Many of the actions undertaken by management utilize fair value analysis and attempt to achieve consistent accounting and economic benefits for financial assets and their related funding sources. We have predominantly focused on managing our interest rate risk by attempting to match the inherent risk and cash flows of financial assets and liabilities. Specifically, management employs multiple risk management activities such as optimizing the level of new residential mortgage originations retained in our mortgage portfolio through increasing or decreasing loan sales in the secondary market, product pricing levels, the desired maturity levels for new originations, the composition levels of both our interest earning assets and interest bearing liabilities, as well as several other risk management activities.

We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 2021. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of September 30, 2021. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2021. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2021 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the third quarter 2021. The model also utilizes an immediate parallel shift in market interest rates at September 30, 2021.

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

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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)
+200 $ 104,613  8.88  %
+100 52,462  4.45 
–100 (54,113) (4.59)
–200 (78,513) (6.66)

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 month period by 4.45 percent. Management believes the interest rate sensitivity remains within an acceptable tolerance range at September 30, 2021. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in our balance sheet strategies, the slope of the yield curve and projected cash flows.
Liquidity and Cash Requirements

Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Liquidity management is carefully performed and routinely reported by our Treasury Department to two board committees. Among other actions, Treasury reviews historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient liquidity to cover current and potential funding requirements.

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at September 30, 2021.

Valley's short and long-term cash requirements include contractual obligations under borrowings, deposits, payment related to leases, capital expenditures and other purchase commitments. In the ordinary course of operations, the Bank also enters into various financial obligations, including contractual obligations that may require future cash payments. Management believes the Bank has the ability to generate and obtain adequate amounts of cash to meet its short-term and long-term obligations as they come due by utilizing various cash resources described below.

On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment
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securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities classified as trading and available for sale, loans held for sale, and from time to time, federal funds sold and receivables related to unsettled securities transactions. Total liquid assets were approximately $3.0 billion, representing 7.9 percent of earning assets at September 30, 2021 and $3.1 billion, representing 8.3 percent of earning assets at December 31, 2020. Of the $3.0 billion of liquid assets at September 30, 2021, approximately $547.5 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $747 million in principal payments from securities in the total investment portfolio over the next 12 month period due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at September 30, 2021) are projected in accordance with their scheduled contractual terms to be approximately $10.4 billion over the next 12 month period. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $29.2 billion and $25.8 billion for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively, representing 77.6 percent and 69.8 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous banks. While these lending lines are uncommitted, management believes that the Bank could borrow approximately $1.5 billion from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Letters of Credit (MULOC) to collateralize certain municipal deposits held by Valley. At September 30, 2021, Valley had $1.0 billion of MULOCs outstanding for this purpose. Furthermore, we can obtain overnight borrowings from the Federal Reserve Bank of New York via the discount window as a contingency for additional liquidity. At September 30, 2021, our borrowing capacity (excluding added capacity available to us by pledging PPP loans) under the Federal Reserve Bank's discount window was $1.8 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) decreased approximately $364.6 million to $783.3 million at September 30, 2021 as compared to December 31, 2020 due to normal FHLB advance repayments.
Corporation Liquidity

Valley’s recurring cash requirements primarily consist of dividends to preferred and common shareholders and interest expense on subordinated notes and junior subordinated debentures issued to capital trusts. As part of our on-going asset/liability management strategies, Valley could also use cash to repurchase shares of its outstanding common stock under its share repurchase program or redeem its callable junior subordinated debentures and subordinated notes. 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
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expense payable to subordinated note holders and capital trusts, given the current capital levels and current profitable operations of the Bank. In addition to dividends received from the Bank, Valley can satisfy its cash requirements by utilizing its own cash and potential new funds borrowed from outside sources or capital issuances. Valley also has the right to defer interest payments on the junior subordinated debentures, and therefore distributions on its trust preferred securities for consecutive quarterly periods up to five years, but not beyond the stated maturity dates, and subject to other conditions.

During the second quarter 2021, Valley redeemed $60 million of callable subordinated notes and issued $300 million of 3.00 percent subordinated notes. See Note 10 to the consolidated financial statements for additional information.
Investment Securities Portfolio

As of September 30, 2021, we had $36.1 million, $4.8 million, $1.2 billion and $2.6 billion in equity, trading debt, available for sale and held to maturity debt securities, respectively. Our trading securities portfolio wholly consists of investment grade municipal bonds. The equity securities consisted of one publicly traded mutual fund, CRA investments and several other equity investments we have made in companies that develop new financial technologies and in a partnership that invests in such companies. Our CRA and other equity investments are a mixture of both publicly traded entities and privately held entities. Held to maturity and available for sale debt securities portfolios include U.S. Treasury securities, U.S. 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, that 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.

There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. Certain securities with limited marketability and/or restrictions, such as Federal Home Loan Bank and Federal Reserve Bank stocks, are carried at cost and are included in other assets.
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 the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2021 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and nine months ended September 30, 2021 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2021. There was no allowance for credit losses for available for sale debt securities at December 31, 2020.

Held to maturity debt securities. 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
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collateralized municipal bonds, which are excluded from the model. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. Held to maturity debt securities were carried net of allowance for credit losses totaling $1.1 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively. There were no net charge-offs of held to maturity debt securities for the three and nine months ended September 30, 2021 and 2020.

Investment grades. The investment grades in the table below reflect the most current independent analysis performed by third parties of each security as of the date presented and not necessarily the investment grades at the date of our purchase of the securities. For many securities, the rating agencies may not have performed an independent analysis of the tranches owned by us, but rather an analysis of the entire investment pool. For this and other reasons, we believe the assigned investment grades may not accurately reflect the actual credit quality of each security and should not be viewed in isolation as a measure of the quality of our investment portfolio.

The following table presents the held to maturity and available for sale debt securities portfolios by investment grades at September 30, 2021:
  September 30, 2021
  Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair Value
(in thousands)
Available for sale investment grades: *
AAA Rated $ 1,016,325  $ 23,138  $ (2,483) $ 1,036,980 
AA Rated 63,001  339  (722) 62,618 
A Rated 6,173  89  —  6,262 
BBB Rated 29,313  891  —  30,204 
Non-investment grade 4,996  42  —  5,038 
Not rated 64,982  2,244  (51) 67,175 
Total $ 1,184,790  $ 26,743  $ (3,256) $ 1,208,277 
Held to maturity investment grades: *
AAA Rated $ 2,260,843  $ 30,971  $ (18,015) $ 2,273,799 
AA Rated 159,468  3,862  (129) 163,201 
A Rated 12,512  389  —  12,901 
BBB Rated 6,000  418  —  6,418 
Non-investment grade 5,595  —  (75) 5,520 
Not rated 139,985  224  (5,737) 134,472 
Total $ 2,584,403  $ 35,864  $ (23,956) $ 2,596,311 
* 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 rated category of the held to maturity debt securities (in the above table) are mainly related to residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. The investment securities held to maturity portfolio included $140.0 million of investments not rated by the rating agencies with aggregate unrealized losses of $5.7 million at September 30, 2021 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.
See Note 7 to the consolidated financial statements for additional information regarding our investments securities portfolio.

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Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:
September 30,
2021 		June 30,
2021 		March 31,
2021 		December 31,
2020 		September 30,
2020
  ($ in thousands)
Loans
Commercial and industrial:
Commercial and industrial $ 4,761,227  $ 4,733,771  $ 4,784,017  $ 4,709,569  $ 4,625,880 
Commercial and industrial PPP loans 874,033  1,350,684  2,364,627  2,152,139  2,277,465 
Total commercial and industrial * 5,635,260  6,084,455  7,148,644  6,861,708  6,903,345 
Commercial real estate:
Commercial real estate 17,912,070  17,512,142  16,923,627  16,724,998  16,815,587 
Construction 1,804,580  1,752,838  1,786,331  1,745,825  1,720,775 
Total commercial real estate 19,716,650  19,264,980  18,709,958  18,470,823  18,536,362 
Residential mortgage 4,332,422  4,226,975  4,060,492  4,183,743  4,284,595 
Consumer:
Home equity 402,658  410,856  409,576  431,553  457,083 
Automobile 1,563,698  1,531,262  1,444,883  1,355,955  1,341,659 
Other consumer 956,126  938,926  912,863  913,330  892,542 
Total consumer loans 2,922,482  2,881,044  2,767,322  2,700,838  2,691,284 
Total loans*
$ 32,606,814  $ 32,457,454  $ 32,686,416  $ 32,217,112  $ 32,415,586 
As a percent of total loans:
Commercial and industrial 17.3  % 18.7  % 21.9  % 21.3  % 21.3  %
Commercial real estate 60.4  59.4  57.2  57.3  57.2 
Residential mortgage 13.3  13.0  12.4  13.0  13.2 
Consumer loans 9.0  8.9  8.5  8.4  8.3 
Total 100.0  % 100.0  % 100.0  % 100.0  % 100.0  %
*     Includes net unearned discount and deferred loan fees of $73.0 million, $86.1 million, $108.6 million, $95.8 million, and $116.2 million at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively. Net unearned discounts and deferred loan fees included $27.6 million, $40.9 million, $57.2 million, $43.2 million and $54.4 million of net unearned fees related to PPP loans at September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, respectively.

Commercial and industrial loans decreased $449.2 million, or 29.5 percent on an annualized basis, to $5.6 billion at September 30, 2021 as compared to June 30, 2021 mostly due to $476.7 million of PPP loans that were forgiven (i.e., repaid) during the third quarter 2021. As of September 30, 2021, nearly 100 percent of the PPP loan balances from the first two rounds of our funding under the SBA program have been forgiven. Valley expects the majority of the remaining $874 million of PPP loans on September 30, 2021 to qualify for forgiveness under the guidelines of the SBA program, which is expected to negatively impact our ability to grow the commercial and industrial loan portfolio. Non-PPP commercial and industrial loans modestly increased by $27.5 million at September 30, 2021 as compared to June 30, 2021.
Commercial real estate loans (excluding construction loans) increased $399.9 million, or 9.1 percent on an annualized basis, to $17.9 billion at September 30, 2021 from June 30, 2021 reflecting solid organic growth mainly due to strong demand for non-owner occupied loans across our geographic footprint driven by low interest rates. Construction loans increased $51.7 million to $1.8 billion at September 30, 2021 from June 30, 2021 partially due to higher demand for commercial and residential construction projects.
Residential mortgage loans increased $105.4 million, or 10.0 percent on an annualized basis during the third quarter 2021 due to continued strong origination of new and refinanced residential mortgage loans totaling $622.1 million for the third quarter 2021 as compared to $753.2 million and $540.2 million for the second quarter 2021 and third
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quarter 2020, respectively. Florida originations totaled approximately $163 million and represented 26 percent of total originations. Of the total originations in the third quarter 2021, approximately $232.8 million of residential mortgage loans were originated for sale rather than held for investment as compared to $253.9 million during the second quarter 2021. During the third quarter 2021 we retained over 60 percent of the total residential mortgages originations in our held for investment loan portfolio. We sold approximately $235 million of residential mortgage loans held for sale during the third quarter 2021 and may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the fourth quarter 2021 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.
Home equity loans decreased by $8.2 million to $402.7 million at September 30, 2021 from June 30, 2021. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest, despite the favorable low interest rate environment.
Automobile loans increased by $32.4 million, or 8.5 percent on an annualized basis, to $1.6 billion at September 30, 2021 as compared to June 30, 2021. Consumer demand seen across the auto industry was solid during the first half of 2021 but started to slow in the third quarter 2021. We originated $201 million in auto loans through our dealership network during the third quarter 2021 as compared to $251 million in the second quarter 2021. Of the total originations our Florida dealership network contributed $30.4 million in auto loan originations, representing approximately 15 percent of new loans, during the third quarter 2021. Strong auto loan originations experienced in the first half of 2021 slowed during the third quarter 2021 due to inventory and auto part shortages caused by supply chain disruptions affecting auto industry. In the early stages of the fourth quarter 2021, vehicle inventories are near record lows, driving prices higher. This trend may negatively impact our auto loan growth in fourth quarter 2021 and beyond.
Other consumer loans increased $17.2 million to $956.1 million at September 30, 2021 as compared to $938.9 million at June 30, 2021 mainly due to higher new loan originations and consumer usage of collateralized personal lines of credit.
Most of our lending is in northern and central New Jersey, New York City, Long Island, Florida and Alabama, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan to guard against a potential downward turn in any one economic sector.
For the remainder of 2021, we continue to believe that our non-PPP loan growth will remain strong. In the early stages of the fourth quarter 2021, we are encouraged that our loan origination pipelines remain robust. During the third quarter 2021, approximately 57 percent of our commercial real estate loan growth came from the New York and New Jersey market area. However, there can be no assurance that those positive trends will continue, or balances will not decline from September 30, 2021 given the effects of the COVID-19 pandemic and the potential for unforeseen changes in consumer confidence and the economy, and other market conditions and supply chain issues. We believe that many of our SBA PPP loans will continue to be forgiven in the fourth quarter 2021 in accordance with the rules of this program resulting in further reduction in these loan balances.

Non-performing Assets

Non-performing assets (NPA) include non-accrual loans, other real estate owned (OREO), and other repossessed assets (which primarily consists of automobiles and taxi medallions) at September 30, 2021. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell.

Our NPAs increased $31.1 million to $257.7 million at September 30, 2021 as compared to June 30, 2021 mainly due to a $37.0 million increase in non-accrual commercial real estate loans (see table below). NPAs as a percentage of total loans and NPAs totaled 0.78 percent and 0.69 percent at September 30, 2021 and June 30, 2021, respectively (as shown in the table below). We believe our total NPAs has remained relatively low as a percentage
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of the total loan portfolio over the past 12 months, despite the uptick in non-accrual borrowers mainly caused by COVID-19 pandemic. The level of NPAs is reflective of our consistent approach to the loan underwriting criteria for both Valley originated loans and loans purchased from third parties. For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the uncertain path of the recovery from the COVID -19 pandemic and some of our borrowers that are still performing under forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at September 30, 2021.


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The following table sets forth by loan category accruing past due and non-performing assets at the dates indicated in conjunction with our asset quality ratios: 
September 30,
2021 		June 30,
2021 		March 31,
2021 		December 31,
2020 		September 30,
2020
  ($ in thousands)
Accruing past due loans:
30 to 59 days past due:
Commercial and industrial $ 2,677  $ 3,867  $ 3,763  $ 6,393  $ 6,587 
Commercial real estate 22,956  40,524  11,655  35,030  26,038 
Construction —  —  —  315  142 
Residential mortgage 9,293  8,479  16,004  17,717  22,528 
Total Consumer 5,463  6,242  5,480  10,257  8,979 
Total 30 to 59 days past due 40,389  59,112  36,902  69,712  64,274 
60 to 89 days past due:
Commercial and industrial 985  1,361  1,768  2,252  3,954 
Commercial real estate 5,897  11,451  5,455  1,326  610 
Residential mortgage 974  1,608  2,233  10,351  3,760 
Total Consumer 1,617  985  1,021  1,823  1,352 
Total 60 to 89 days past due 9,473  15,405  10,477  15,752  9,676 
90 or more days past due:
Commercial and industrial 2,083  2,351  2,515  9,107  6,759 
Commercial real estate 1,942  1,948  —  993  1,538 
Residential mortgage 1,002  956  2,472  3,170  891 
Total Consumer 325  463  417  271  753 
Total 90 or more days past due 5,352  5,718  5,404  13,541  9,941 
Total accruing past due loans $ 55,214  $ 80,235  $ 52,783  $ 99,005  $ 83,891 
Non-accrual loans:
Commercial and industrial $ 100,614  $ 102,594  $ 108,988  $ 106,693  $ 115,667 
Commercial real estate 95,843  58,893  54,004  46,879  41,627 
Construction 17,653  17,660  71  84  2,497 
Residential mortgage 33,648  35,941  33,655  25,817  23,877 
Total Consumer 4,073  4,924  7,292  5,809  7,441 
Total non-accrual loans 251,831  220,012  204,010  185,282  191,109 
Other real estate owned (OREO) 3,967  4,523  4,521  5,118  7,746 
Other repossessed assets 1,896  2,060  1,857  3,342  3,988 
Non-accrual debt securities —  —  129  815  783 
Total non-performing assets (NPAs) $ 257,694  $ 226,595  $ 210,517  $ 194,557  $ 203,626 
Performing troubled debt restructured loans
$ 64,832  $ 64,080  $ 67,102  $ 57,367  $ 58,090 
Total non-accrual loans as a % of loans 0.77  % 0.68  % 0.62  % 0.58  % 0.59  %
Total NPAs as a % of loans and NPAs 0.78  0.69  0.64  0.60  0.62 
Total accruing past due and non-accrual loans as a % of loans
0.94  0.93  0.79  0.88  0.85 
Allowance for loan losses as a % of non-accrual loans
136.01  154.23  168.07  183.64  170.08 
    
Loans past due 30 to 59 days decreased $18.7 million to $40.4 million at September 30, 2021 as compared to June 30, 2021. Commercial real estate loans past due 30 to 59 days decreased $17.6 million to $23.0 million at September 30, 2021 as compared to June 30, 2021 largely due to two loan relationships totaling $22.2 million that migrated to non-accrual loan status at September 30, 2021.

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Loans past due 60 to 89 days decreased $5.9 million to $9.5 million at September 30, 2021 as compared to June 30, 2021. Commercial real estate loans in this delinquency category decreased $5.6 million to $5.9 million at September 30, 2021 mainly as a result of one $10.9 million loan negatively impacted by the COVID-19 pandemic that migrated to non-accrual status at September 30, 2021, partially offset by the addition of a $5.5 million matured commercial real estate loan in the process of renewal in this delinquency category at September 30, 2021.

Loans past due 90 days or more and still accruing interest totaled $5.4 million at September 30, 2021 as compared to $5.7 million at June 30, 2021. All of the loans past due 90 days or more and still accruing reported at September 30, 2021 are considered to be well secured and in the process of collection.

Non-accrual loans increased $31.8 million to $251.8 million at September 30, 2021 as compared to $220.0 million at June 30, 2021 mostly driven by a $37.0 million increase in the commercial real estate loans. This increase was caused by two loans totaling $22.2 million and one loan totaling $10.9 million that migrated to non-accrual status from the 30-59 days and 60 to 89 days past due categories reported at June 30, 2021, respectively. These non-accrual loans totaling $33.1 million have allocated reserves of $3.7 million within our allowance for loan losses at September 30, 2021.

We continue to closely monitor our non-performing New York City and Chicago taxi medallion loans totaling $86.3 million and $577 thousand, respectively, within the commercial and industrial loan category at September 30, 2021.
Due to continued negative trends in estimated fair valuations of the underlying taxi medallion collateral, a weak operating environment for ride services and uncertain borrower performance, all of the taxi medallion loans are on non-accrual status. At September 30, 2021, the taxi medallion loans totaling $86.9 million had related reserves of $58.6 million, or 67.4 percent of such loans. The related reserves were relatively unchanged as compared to June 30, 2021.

Potential declines in the market valuation of taxi medallions and the stressed operating environment mainly within New York City due to the COVID-19 pandemic could negatively impact the future performance of this portfolio. For example, a 25 percent further decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $5.9 million within the allowance for loan losses based upon the taxi medallion loan balances at September 30, 2021. See the "Allowance for Credit Losses" section below for further details on our reserves.

OREO properties totaled $4.0 million at September 30, 2021 and declined $556 thousand as compared to June 30, 2021. Net losses and gains from the sales of OREO properties totaled a $67 thousand loss and a $268 thousand net gain for the three and nine months ended September 30, 2021, respectively, and net gains totaling $109 thousand and $540 thousand for the three and nine months ended September 30, 2020, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.0 million and $1.9 million at September 30, 2021 and December 31, 2020, respectively.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) totaled $64.8 million at September 30, 2021 as compared to $64.1 million at June 30, 2021. Performing TDRs consisted of 96 loans at September 30, 2021. On an aggregate basis, the $64.8 million in performing TDRs at September 30, 2021 had a modified weighted average interest rate of approximately 4.36 percent as compared to a pre-modification weighted average interest rate of 4.60 percent.
Loan Forbearance. In response to the COVID-19 pandemic and its economic impact on certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment, when requested by customers, all of which were insignificant. Under the applicable guidance, none of these loans were classified as TDRs at September 30, 2021 and December 31, 2020.


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The following table presents the outstanding loan balances and number of loans in an active payment deferral period under short-term modifications as of September 30, 2021:
September 30, 2021
  Amount Number of loans
  ($ in thousands)
Commercial and industrial $ 2,579  4 
Commercial real estate 64,927  17 
Residential mortgage 29,485  63 
Consumer 1,603  76 
Total $ 98,594  160 
As of September 30, 2021, Valley had approximately $98.6 million of outstanding loans remaining in their payment deferral period under short-term modifications as compared to $142.0 million of loans in deferral at June 30, 2021. Commercial real estate forbearances representing approximately 66 percent of the active deferrals at September 30, 2021 decreased $28.6 million from $93.6 million at June 30, 2021 mainly due to loans being returned to normal interest accrual status following the end of their forebearance periods during the third quarter 2021.
Allowance for Credit Losses for Loans

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: (1) a collective reserve component for estimated expected credit losses for pools of loans that share common risk characteristics and (2) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial standby letters of credit.

Valley estimated the collective ACL using a current expected credit losses methodology which is based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the loan balances. In estimating the component of the allowance on a collective basis we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) the impact of the reasonable and supportable economic forecast, relative probability weightings and reversion period, (ii) other asset specific risks to the extent they do not exist in the historical loss information, and (iii) net expected recoveries of charged off loan balances. 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.
For the third quarter 2021, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-1 scenarios. At September 30, 2021, Valley maintained the majority of its
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weighting to the Moody’s Baseline scenario and modestly reduced its combined emphasis on the Moody’s S-3 downside and S-1 upside scenarios as compared to June 30, 2021. The Baseline weighting and the S-1 scenario reflect the positive economic developments including federal stimulus and increasing vaccination levels that are expected to improve labor market conditions and promote stronger economic growth during the remainder of 2021. However, this positive outlook could still be tempered by, among other factors, the uncertain ongoing impact of the COVID-19 pandemic on the economic recovery, as well as supply chain constrains contributing to inventory shortages and longer than anticipated elevated levels of inflation.
At September 30, 2021, the Moody's Baseline forecast included the following specific assumptions:
•GDP expansion by over 7.5 percent in the fourth quarter 2021;
•Unemployment of 4.5 percent in the fourth quarter 2021 and improving to 3.4 percent by the third quarter 2022; and
•Strong U.S. economic growth driven by continued consumer spending and congressional passage of another fiscal stimulus package.
See more details regarding our allowance for credit losses for loans in Note 8 to the consolidated financial statements.





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The table below summarizes the relationship among loans, loans charged-off, loan recoveries, the provision for credit losses and the allowance for credit losses for loans for the periods indicated.
  Three Months Ended Nine Months Ended
September 30,
2021 		June 30,
2021 		September 30,
2020 		September 30,
2021 		September 30,
2020
  ($ in thousands)
Average loans outstanding $ 32,698,382 $ 32,635,298 $ 32,515,264 $ 32,641,362 $ 31,522,268
Beginning balance - Allowance for credit losses for loans
353,724 354,313 319,723 351,354 164,604
Impact of ASU No. 2016-13 adoption on January 1, 2020 *
— — — — 37,989
Allowance for purchased credit deteriorated (PCD) loans *
— — — — 61,643
Beginning balance, adjusted 353,724 354,313 319,723 351,354 264,236
Loans charged-off:
Commercial and industrial (1,248) (10,893) (13,965) (19,283) (31,349)
Commercial real estate — — (695) (382) (766)
Residential mortgage — (1) (7) (139) (348)
Total consumer (771) (1,480) (2,458) (3,389) (7,624)
Total charge-offs (2,019) (12,374) (17,125) (23,193) (40,087)
Charged-off loans recovered:
Commercial and industrial 514 678 428 2,781 1,796
Commercial real estate 29 665 60 759 164
Construction — — 40 4 80
Residential mortgage 228 191 31 576 626
Total consumer 955 1,474 1,151 3,359 2,454
Total recoveries 1,726 3,008 1,710 7,479 5,120
Net charge-offs (293) (9,366) (15,415) (15,714) (34,967)
Provision charged for credit losses 3,496 8,777 31,020 21,287 106,059
Ending balance - Allowance for credit losses for loans $ 356,927 $ 353,724 $ 335,328 $ 356,927 $ 335,328
Components of allowance for credit losses for loans:
Allowance for loan losses $ 342,527 $ 339,324 $ 325,032 $ 342,527 $ 325,032
Allowance for unfunded credit commitments
14,400 14,400 10,296 14,400 10,296
Allowance for credit losses for loans $ 356,927 $ 353,724 $ 335,328 $ 356,927 $ 335,328
Components of provision for credit losses for loans:
Provision for credit losses for loans $ 3,496 $ 5,810 $ 30,833 $ 17,998 $ 105,709
Provision for unfunded credit commitments — 2,967 187 3,289 350
Total provision for credit losses for loans $ 3,496 $ 8,777 $ 31,020 $ 21,287 $ 106,059
Annualized ratio of net charge-offs to average loans outstanding
0.00  % 0.11  % 0.19  % 0.06  % 0.15  %
*    The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU No. 2016-13 effective January 1, 2020.

Net loan charge-offs totaled $293 thousand for the third quarter 2021 as compared to $9.4 million and $15.4 million for the second quarter 2021 and third quarter 2020, respectively. The decrease in net loan charge-offs for the third quarter 2021 was mainly due to lower commercial and industrial loan charge-offs. The partial gross charge-offs of
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taxi medallion loans within the commercial and industrial loan category totaled $143 thousand for the third quarter 2021 as compared to $1.4 million and $6.1 million for the second quarter 2021 and third quarter 2020, respectively. The overall level of loan charge-offs (as presented in the above table) continued to trend within management's expectations for the credit quality of the loan portfolio for the third quarter 2021.
The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:
  September 30, 2021 June 30, 2021 September 30, 2020
  Allowance
Allocation 		Allocation
as a % of
Loan
Category 		Allowance
Allocation 		Allocation
as a % of
Loan
Category 		Allowance
Allocation 		Allocation
as a % of
Loan
Category
  ($ in thousands)
Loan Category:
Commercial and Industrial loans $ 103,877  1.84  % $ 109,689  1.80  % $ 130,409  1.89  %
Commercial real estate loans:
Commercial real estate 178,206  0.99  168,220  0.96  128,699  0.77 
Construction 21,515  1.19  20,919  1.19  15,951  0.93 
Total commercial real estate loans 199,721  1.01  189,139  0.98  144,650  0.78 
Residential mortgage loans 24,732  0.57  25,303  0.60  28,614  0.67 
Consumer loans:
Home equity 4,110  1.02  4,602  1.12  5,972  1.31 
Auto and other consumer 10,087  0.40  10,591  0.43  15,387  0.69 
Total consumer loans 14,197  0.49  15,193  0.53  21,359  0.79 
Total allowance for loan losses 342,527  1.05  339,324  1.05  325,032  1.00 
Allowance for unfunded credit commitments
14,400  14,400  10,296 
Total allowance for credit losses for loans
$ 356,927  $ 353,724  $ 335,328 
Allowance for credit losses for loans as a % loans
1.09  % 1.09  % 1.03  %
The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments (including standby letters of credit), as a percentage of total loans was 1.09 percent at both September 30, 2021 and June 30, 2021, and 1.03 percent at September 30, 2020. During the third quarter 2021, we recorded a $3.5 million provision for credit losses as compared to $8.8 million and $31.0 million for the second quarter 2021 and the third quarter 2020, respectively. The third quarter 2021 provision reflects, among other factors, additional quantitative reserves related to certain segments of our commercial real estate portfolio, an increase in specific reserves, and non-PPP loan growth, largely offset by a decline in the economic forecast component of the reserve at September 30, 2021 as compared to June 30, 2021. There was no provision for unfunded credit commitments for the third quarter 2021 as the overall level of such reserves remained materially unchanged at September 30, 2021 as compared to June 30, 2021.
At September 30, 2021, the allowance allocations for credit losses as a percentage of total loans increased in commercial and industrial and commercial real estate loan categories as compared to June 30, 2021. The allocated reserves as a percentage of commercial and industrial loans increased by 4 basis points mainly due to the third quarter 2021 repayments (loan forgiveness) of PPP loans guaranteed by the SBA with no related allowance at September 30, 2021. The allocated reserves as a percentage of commercial real estate loans increased 3 basis points largely due to higher quantitative reserves for the non-owner occupied loan portfolio during the third quarter 2021. The allowance for credit losses as a percentage of total non-PPP loans was 1.12 percent, 1.14 percent and 1.11 percent for the third quarter 2021, second quarter 2021 and third quarter 2020, respectively.
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Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, 2021 and December 31, 2020, shareholders’ equity totaled approximately $4.8 billion and $4.6 billion, respectively, which represented 11.7 percent and 11.3 percent of total assets, respectively. During the nine months ended September 30, 2021, total shareholders’ equity increased by $230.4 million primarily due to net income of $358.8 million and a $30.4 million increase attributable to the effect of our stock incentive plan. These positive changes were partially offset by cash dividends declared on common and preferred stock totaling a combined $145.1 million and an increase in other comprehensive loss of $13.7 million.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the Federal Reserve Bank and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of September 30, 2021 and December 31, 2020, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build since adoption (i.e., provision for credit losses less net charge-offs) will be phased in over the same time frame.
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The following table presents Valley’s and Valley National Bank’s actual capital positions and ratios under Basel III risk-based capital guidelines at September 30, 2021 and December 31, 2020:
  Actual Minimum Capital
Requirements 		To Be Well Capitalized
Under Prompt Corrective
Action Provision
  Amount Ratio Amount Ratio Amount Ratio
 
 ($ in thousands)
As of September 30, 2021
Total Risk-based Capital
Valley $ 4,264,369  13.24  % $ 3,382,946  10.50  % N/A N/A
Valley National Bank 4,368,271  13.55  3,385,194  10.50  $ 3,223,994  10.00  %
Common Equity Tier 1 Capital
Valley 3,241,285  10.06  2,255,297  7.00  N/A N/A
Valley National Bank 4,119,028  12.78  2,256,796  7.00  2,095,596  6.50 
Tier 1 Risk-based Capital
Valley 3,456,126  10.73  2,738,575  8.50  N/A N/A
Valley National Bank 4,119,028  12.78  2,740,395  8.50  2,579,195  8.00 
Tier 1 Leverage Capital
Valley 3,456,126  8.63  1,602,010  4.00  N/A N/A
Valley National Bank 4,119,028  10.28  1,602,931  4.00  2,003,664  5.00 
As of December 31, 2020
Total Risk-based Capital
Valley $ 3,802,223  12.64  % $ 3,159,019  10.50  % N/A N/A
Valley National Bank 3,839,922  12.76  3,158,842  10.50  $ 3,008,421  10.00  %
Common Equity Tier 1 Capital
Valley 2,991,085  9.94  2,106,013  7.00  N/A N/A
Valley National Bank 3,607,625  11.99  2,105,894  7.00  1,955,473  6.50 
Tier 1 Risk-based Capital
Valley 3,205,926  10.66  2,557,301  8.50  N/A N/A
Valley National Bank 3,607,625  11.99  2,557,158  8.50  2,406,736  8.00 
Tier 1 Leverage Capital
Valley 3,205,926  8.06  1,591,852  4.00  N/A N/A
Valley National Bank 3,607,625  9.07  1,591,457  4.00  1,989,321  5.00 

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: 
September 30,
2021 		December 31,
2020
  ($ in thousands, except for share data)
Common shares outstanding 407,313,664  403,858,998 
Shareholders’ equity $ 4,822,498  $ 4,592,120 
Less: Preferred stock 209,691  209,691 
Less: Goodwill and other intangible assets 1,444,967  1,452,891 
Tangible common shareholders’ equity $ 3,167,840  $ 2,929,538 
Tangible book value per common share $ 7.78  $ 7.25 
Book value per common share $ 11.32  $ 10.85 
Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and
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facilitates comparisons with the performance of others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a substitute for or superior to financial measures calculated in accordance with U.S. GAAP. This non-GAAP financial measure may also be calculated differently from similar measures disclosed by other companies.
Typically, our primary source of capital growth is through retention of earnings. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings (or net income available to common shareholders) per common share. Our retention ratio was approximately 61.6 percent for the nine months ended September 30, 2021 as compared to 52.7 percent for the year ended December 31, 2020.
Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2021 and 2020. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision.
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, 2020 in the MD&A section - “Liquidity and Cash Requirements” and Notes 12 and 13 to the consolidated financial statements included in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 66 for a discussion of interest rate sensitivity.

Item 4. Controls and Procedures

(a) Disclosure controls and procedures. Valley maintains disclosure controls and procedures which, consistent with Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), are defined to mean controls and other procedures that are designed to ensure that information required to be disclosed in the reports that Valley files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that such information is accumulated and communicated to Valley’s management, including Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Valley’s CEO and CFO, with the assistance of other members of Valley’s management, have evaluated the effectiveness of Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, Valley’s CEO and CFO have concluded that Valley’s disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in internal controls over financial reporting. During the third quarter 2021, we completed the implementation of our SAP S/4HANA general ledger and enterprise resource planning system. The new system was subject to various testing and review procedures before, during and after implementation. As a result of this implementation, we have experienced certain changes to our processes and procedures which, in turn, resulted in changes to our internal control over financial reporting. Valley’s CEO and CFO have concluded that except for those changes there were no changes in Valley’s internal control over financial reporting in the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, Valley’s internal control over financial reporting.

Valley has not experienced any material impact to its internal controls over financial reporting due to the fact that most of Valley’s employees responsible for financial reporting are working remotely during the COVID-19
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pandemic. Valley is continually monitoring and assessing the impact of the COVID-19 pandemic on Valley’s internal controls over financial reporting to minimize the impact to their design and operating effectiveness.
Valley’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A system of internal control, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the system of internal control are met. The design of a system of internal control reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Valley have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of a simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of internal control is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION 
Item 1. Legal Proceedings

In the normal course of business, we are a party to various outstanding legal proceedings and claims. There have been no material changes in the legal proceedings, if any, previously disclosed under Part I, Item 3 of Valley’s Annual Report on Form 10-K for the year ended December 31, 2020.

Item 1A. Risk Factors

The section titled Risk Factors in Part I, Item 1A of our 2020 Annual Report on Form 10-K includes a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity). The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2020 Annual Report on Form 10-K. Except as presented below, there have been no material changes to these risk factors.

Cyber-attacks could compromise our information or result in the data of our customers being improperly divulged or our systems being disrupted which could expose us to liability, losses and escalating operating costs.

Valley regularly collects, processes, transmits and stores confidential information regarding its customers, employees and others for whom it services loans. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on Valley’s behalf. Information security risks have increased because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. Many financial institutions and companies engaged in data processing have reported significant breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, denial-of-service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. In addition, recently there have been well-publicized “ransomware” attacks against various U.S. companies with the intent to materially disrupt their computer network and services. Valley frequently experiences attempted cybersecurity attacks against its systems. In 2021, there was a breach by a threat actor of a legacy network from an acquired bank. The breach resulted in the unauthorized access of certain data stored on the legacy network. The legacy network was isolated from Valley’s network, which was not affected by the incident. There can be no assurances that Valley will not incur breaches of our systems or that of our vendors which may expose the data of our customers or disrupt our services, exposing us to significant damage, on-going operational costs and/or reputational harm.

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Cyber risk exposure will remain elevated or increase in the future due to, among other things, the increasing size and prominence of Valley in the financial services industry, our expansion of Internet and mobile banking tools and new products based on customer needs, and the system and customer account conversions associated with the integration of merger targets. Successful attacks on any one of many our third-party service providers may adversely affect our business and result in the disclosure or misuse of our confidential information or that of our customers. There can be no assurance that we or our third-party service providers will not suffer a cyber-attack that exposes us to significant damages, operational costs, or reputational harm.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter, we did not sell any equity securities not registered under the Securities Act of 1933, as amended. Purchases of equity securities by the issuer and affiliated purchasers during the three months ended September 30, 2021 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES 
Period Total  Number of
Shares  Purchased (1) 		Average
Price Paid
Per Share 		Total Number of Shares
Purchased as Part of
Publicly Announced
Plans (2) 		Maximum Number of
Shares that May Yet Be
Purchased Under the Plans (2)
July 1, 2021 to July 31, 2021 2,073  $ 13.30  —  4,112,465 
August 1, 2021 to August 31, 2021 7,937  12.85  —  4,112,465 
September 1, 2021 to September 30, 2021 —  —  —  4,112,465 
Total 10,010  $ 12.95  — 
(1)Represents repurchases made in connection with the vesting of employee restricted stock awards.
(2)On January 17, 2007, Valley publicly announced its intention to repurchase up to 4.7 million outstanding common shares in the open market or in privately negotiated transactions. The repurchase plan has no stated expiration date. No repurchase plans or programs expired or terminated during the three months ended September 30, 2021.

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Item 6. Exhibits

(3) Articles of Incorporation and By-laws:
(3.1)
(3.2)
(10) Material Contracts:
(10.2)
(31.1)
(31.2)
(32)
(101) Interactive Data File (XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) **
(104) Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.
** Furnished herewith



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    VALLEY NATIONAL BANCORP
    (Registrant)
Date:     /s/ Ira Robbins
November 8, 2021     Ira Robbins
    Chairman of the Board, President
    and Chief Executive Officer
(Principal Executive Officer)
Date:     /s/ Michael D. Hagedorn
November 8, 2021     Michael D. Hagedorn
    Senior Executive Vice President and
    Chief Financial Officer
(Principal Financial Officer)
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