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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, 2020
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 Jersey22-2477875
(State or other jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification Number)
One Penn Plaza
New York,NY10119
(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 classTrading SymbolsName of exchange on which registered
Common Stock, no par valueVLYThe Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series A, no par valueVLYPPThe Nasdaq Stock Market LLC
Non-Cumulative Perpetual Preferred Stock, Series B, no par valueVLYPOThe 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 403,876,309 shares were outstanding as of November 4, 2020.


TABLE OF CONTENTS
 
  Page
Number
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 6.

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,
2020		December 31,
2019
Assets(Unaudited)
Cash and due from banks$276,120 $256,264 
Interest bearing deposits with banks654,591 178,423 
Investment securities:
Equity securities29,026 41,410 
Available for sale debt securities1,526,564 1,566,801 
Held to maturity debt securities (net of allowance for credit losses of $1,481 at September 30, 2020)
2,168,995 2,336,095 
Total investment securities3,724,585 3,944,306 
Loans held for sale, at fair value209,250 76,113 
Loans32,415,586 29,699,208 
Less: Allowance for loan losses(325,032)(161,759)
Net loans32,090,554 29,537,449 
Premises and equipment, net323,056 334,533 
Lease right of use assets265,599 285,129 
Bank owned life insurance533,768 540,169 
Accrued interest receivable136,058 105,637 
Goodwill1,375,409 1,373,625 
Other intangible assets, net73,873 86,772 
Other assets1,084,629 717,600 
Total Assets$40,747,492 $37,436,020 
Liabilities
Deposits:
Non-interest bearing$8,756,924 $6,710,408 
Interest bearing:
Savings, NOW and money market14,893,477 12,757,484 
Time7,537,581 9,717,945 
Total deposits31,187,982 29,185,837 
Short-term borrowings1,430,726 1,093,280 
Long-term borrowings2,852,569 2,122,426 
Junior subordinated debentures issued to capital trusts55,978 55,718 
Lease liabilities290,441 309,849 
Accrued expenses and other liabilities396,033 284,722 
Total Liabilities36,213,729 33,051,832 
Shareholders’ Equity
Preferred stock, no par value; 50,000,000 authorized shares:
Series A (4,600,000 shares issued at September 30, 2020 and December 31, 2019)
111,590 111,590 
Series B (4,000,000 shares issued at September 30, 2020 and December 31, 2019)
98,101 98,101 
Common stock (no par value, authorized 650,000,000 shares; issued 403,880,132 shares at September 30, 2020 and 403,322,773 shares at December 31, 2019)
141,718 141,423 
Surplus3,633,321 3,622,208 
Retained earnings553,826 443,559 
Accumulated other comprehensive loss(4,783)(32,214)
Treasury stock, at cost (1,388 common shares at September 30, 2020 and 44,383 common shares at December 31, 2019)
(10)(479)
Total Shareholders’ Equity4,533,763 4,384,188 
Total Liabilities and Shareholders’ Equity$40,747,492 $37,436,020 
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,
 2020201920202019
Interest Income
Interest and fees on loans$315,788 $298,384 $970,739 $883,595 
Interest and dividends on investment securities:
Taxable14,845 21,801 56,225 67,166 
Tax-exempt3,606 4,219 11,224 13,379 
Dividends2,684 3,171 9,177 9,140 
Interest on federal funds sold and other short-term investments
420 1,686 2,296 3,947 
Total interest income337,343 329,261 1,049,661 977,227 
Interest Expense
Interest on deposits:
Savings, NOW and money market13,323 35,944 64,463 110,247 
Time19,028 42,848 91,699 121,350 
Interest on short-term borrowings2,588 12,953 9,275 40,362 
Interest on long-term borrowings and junior subordinated debentures
19,318 16,891 53,240 45,761 
Total interest expense54,257 108,636 218,677 317,720 
Net Interest Income283,086 220,625 830,984 659,507 
(Credit) provision for credit losses for held to maturity securities(112)— 688 — 
Provision for credit losses for loans31,020 8,700 106,059 18,800 
Net Interest Income After Provision for Credit Losses252,178 211,925 724,237 640,707 
Non-Interest Income
Trust and investment services3,068 3,296 9,307 9,296 
Insurance commissions1,816 2,748 5,426 7,922 
Service charges on deposit accounts3,952 5,904 13,189 17,634 
Losses on securities transactions, net(46)(93)(127)(114)
Other-than-temporary impairment losses on securities— — — (2,928)
Fees from loan servicing2,551 2,463 7,526 7,260 
Gains on sales of loans, net13,366 5,194 26,253 13,700 
Gains (losses) on sales of assets, net894 (159)716 76,997 
Bank owned life insurance(1,304)2,687 7,661 6,779 
Other24,975 19,110 65,548 39,880 
Total non-interest income49,272 41,150 135,499 176,426 
Non-Interest Expense
Salary and employee benefits expense83,626 77,271 247,886 236,559 
Net occupancy and equipment expense31,116 29,203 96,774 86,789 
FDIC insurance assessment4,847 5,098 14,858 16,150 
Amortization of other intangible assets6,377 4,694 18,528 13,175 
Professional and legal fees8,762 5,870 22,646 15,286 
Loss on extinguishment of debt2,353 — 2,353 — 
Amortization of tax credit investments2,759 4,385 9,403 16,421 
Telecommunication expense2,094 2,698 7,247 7,317 
Other18,251 16,658 53,312 43,712 
Total non-interest expense160,185 145,877 473,007 435,409 
Income Before Income Taxes141,265 107,198 386,729 381,724 
Income tax expense38,891 25,307 101,486 110,035 
Net Income102,374 81,891 285,243 271,689 
Dividends on preferred stock 3,172 3,172 9,516 9,516 
Net Income Available to Common Shareholders$99,202 $78,719 $275,727 $262,173 
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,
 2020201920202019
Earnings Per Common Share:
Basic$0.25 $0.24 $0.68 $0.79 
Diluted0.25 0.24 0.68 0.79 
Cash Dividends Declared per Common Share0.11 0.11 0.33 0.33 
Weighted Average Number of Common Shares Outstanding:
Basic403,833,469 331,797,982 403,714,701 331,716,652 
Diluted404,788,526 333,405,196 404,912,126 333,039,436 
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,
 2020201920202019
Net income$102,374 $81,891 $285,243 $271,689 
Other comprehensive income, net of tax:
Unrealized gains and losses on available for sale securities
Net (losses) gains arising during the period(1,262)8,135 27,819 42,890 
Less reclassification adjustment for net losses included in net income36 72 94 90 
Total(1,226)8,207 27,913 42,980 
Unrealized gains and losses on derivatives (cash flow hedges)
Net gains (losses) on derivatives arising during the period83 76 (2,254)(989)
Less reclassification adjustment for net losses included in net income1,127 324 1,257 806 
Total1,210 400 (997)(183)
Defined benefit pension plan
Amortization of actuarial net loss171 56 515 166 
Total other comprehensive income155 8,663 27,431 42,963 
Total comprehensive income$102,529 $90,554 $312,674 $314,652 
See accompanying notes to consolidated financial statements.

5


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended September 30, 2020
Common StockAccumulated
Preferred StockSharesAmountSurplusRetained
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, 2020209,691 403,278 141,423 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, 2020209,691 403,744 141,613 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, 2020209,691 403,796 141,667 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 

6


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

For the Nine Months Ended September 30, 2019
Common StockAccumulated
Preferred StockSharesAmountSurplusRetained
Earnings		Other
Comprehensive
Loss		Treasury
Stock		Total
Shareholders’
Equity
 (in thousands)
Balance - December 31, 2018$209,691 331,431 $116,240 $2,796,499 $299,642 $(69,431)$(2,187)$3,350,454 
Adjustment due to the adoption of ASU No. 2016-02
— — — — 4,414 — — 4,414 
Adjustment due to the adoption of ASU No. 2017-08
— — — — (1,446)— — (1,446)
Balance - January 1, 2019209,691 331,431 116,240 2,796,499 302,610 (69,431)(2,187)3,353,422 
Net income— — — — 113,330 — — 113,330 
Other comprehensive income, net of tax
— — — — — 16,174 — 16,174 
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
— — — — (36,686)— — (36,686)
Effect of stock incentive plan, net
— 302 226 2,935 (99)— (1,251)1,811 
Balance - March 31, 2019209,691 331,733 116,466 2,799,434 375,983 (53,257)(3,438)3,444,879 
Net income— — — — 76,468 — — 76,468 
Other comprehensive income, net of tax
— — — — — 18,126 — 18,126 
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
— — — — (36,712)— — (36,712)
Effect of stock incentive plan, net
— 55 105 4,625 (377)— 176 4,529 
Balance - June 30, 2019209,691 331,788 116,571 2,804,059 412,190 (35,131)(3,262)3,504,118 
Net income— — — — 81,891 — — 81,891 
Other comprehensive income, net of tax
— — — — — 8,663 — 8,663 
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
— — — — (36,732)— — (36,732)
Effect of stock incentive plan, net
— 18 79 3,207 (157)— 178 3,307 
Balance - September 30, 2019$209,691 331,806 $116,650 $2,807,266 $454,020 $(26,468)$(3,084)$3,558,075 

See accompanying notes to consolidated financial statements.
7


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:
Net income$285,243 $271,689 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization43,975 38,329 
Stock-based compensation12,001 11,504 
Provision for credit losses106,747 18,800 
Net amortization of premiums and accretion of discounts on securities and borrowings26,051 21,584 
Amortization of other intangible assets18,528 13,175 
Losses on securities transactions, net127 114 
Proceeds from sales of loans held for sale716,739 341,503 
Gains on sales of loans, net(26,253)(13,700)
Net impairment losses on securities recognized in earnings— 2,928 
Originations of loans held for sale(829,252)(338,996)
Gains on sales of assets, net(716)(76,997)
Net change in:
Cash surrender value of bank owned life insurance(7,661)(6,779)
Accrued interest receivable(30,421)(1,986)
Other assets(420,572)(264,228)
Accrued expenses and other liabilities85,944 92,542 
Net cash (used in) provided by operating activities(19,520)109,482 
Cash flows from investing activities:
Net loan originations and purchases(2,686,137)(1,846,329)
Equity securities:
Purchases(7,616)— 
Sales27,867 — 
Held to maturity debt securities:
Purchases(381,606)(317,794)
Maturities, calls and principal repayments532,151 281,961 
Available for sale debt securities:
Purchases(306,071)(19,892)
Maturities, calls and principal repayments374,321 188,619 
Death benefit proceeds from bank owned life insurance14,062 6,354 
Proceeds from sales of real estate property and equipment16,136 107,132 
Proceeds from sales of loans held for investment30,020 302,951 
Purchases of real estate property and equipment(20,715)(15,753)
Net cash used in investing activities(2,407,588)(1,312,751)
8


VALLEY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands)
 Nine Months Ended
September 30,
 20202019
Cash flows from financing activities:
Net change in deposits2,002,145 1,093,148 
Net change in short-term borrowings337,446 (293,497)
Proceeds from issuance of long-term borrowings, net838,388 850,000 
Repayments of long-term borrowings(108,446)(255,000)
Cash dividends paid to preferred shareholders(9,516)(9,516)
Cash dividends paid to common shareholders(133,536)(110,037)
Purchase of common shares to treasury(4,972)(1,505)
Common stock issued, net2,074 (351)
Other, net(451)(365)
Net cash provided by financing activities2,923,132 1,272,877 
Net change in cash and cash equivalents496,024 69,608 
Cash and cash equivalents at beginning of year434,687 428,629 
Cash and cash equivalents at end of period$930,711 $498,237 
Supplemental disclosures of cash flow information:
Cash payments for:
Interest on deposits and borrowings$229,987 $312,663 
Federal and state income taxes108,302 106,296 
Supplemental schedule of non-cash investing activities:
Transfer of loans to other real estate owned$3,716 $1,453 
Transfer of loans to loans held for sale30,020 302,951 
Lease right of use assets obtained in exchange for operating lease liabilities10,141 306,471 
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, 2020 and for all periods presented have been made. The results of operations for the three and nine months ended on September 30, 2020 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, 2019.
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.
Impact of COVID-19. Valley's primary market areas within New Jersey, New York, Florida and Alabama have all experienced significant outbreaks and resurgences of the disease caused by the novel coronavirus (COVID-19) and disruptions from the pandemic. The COVID-19 pandemic and any preventative or protective actions that Valley or its customers have taken or may take in response resulted and may continue to result in extended periods of disruption to Valley, its customers, service providers, and third parties. The full extent and duration of the adverse impacts of COVID-19 on Valley's business, financial position, results of operations, and prospects are currently unknown, but could be significant. As of the date of this report, the banking and financial services industries have been deemed essential businesses in the jurisdictions in which Valley operates. However, Valley remains subject to various protocols and practices imposed to safeguard the health and wellness of customers and employees and to comply with applicable government directives, and the implementation and extent of any further restrictions on operations could have a material effect on Valley’s business. Valley cannot predict whether and to what extent governmental and nongovernmental authorities will continue to implement policy measures or further legislative relief to assist Valley and its customers and the failure to do so could have adverse effects on Valley's business.

10


Note 2. Business Combinations

On December 1, 2019, Valley completed its acquisition of Oritani Financial Corp. (Oritani) and its wholly-owned subsidiary, Oritani Bank. Oritani had approximately $4.3 billion in assets, $3.4 billion in net loans and $2.9 billion in deposits, after purchase accounting adjustments, and a branch network of 26 locations. The acquisition represents a significant addition to Valley's New Jersey franchise, and meaningfully enhanced its presence in the Bergen County market. The common shareholders of Oritani received 1.60 shares of Valley common stock for each Oritani share that they owned prior to the merger. The total consideration for the acquisition was approximately $835.3 million, consisting of 71.1 million shares of Valley common stock and the outstanding Oritani stock-based awards.

Merger expenses totaled $106 thousand and $1.8 million for the three and nine months ended September 30, 2020, respectively, which primarily related to professional and legal, net occupancy and equipment, and other expenses included in non-interest expense on the consolidated statements of income.

During the first quarter 2020, Valley revised the estimated fair values of the acquired assets as of the Oritani acquisition date due to additional information obtained that existed as of December 1, 2019. The adjustments mostly related to the fair value of certain loans and deferred tax assets as of the acquisition date and resulted in a $1.8 million increase in goodwill (see Note 9 for amount of goodwill as allocated to Valley's business segments). If additional information (that existed as of the acquisition date) becomes available, the fair value estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date.
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, 2020 and 2019:
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
 (in thousands, except for share data)
Net income available to common shareholders$99,202 $78,719 $275,727 $262,173 
Basic weighted average number of common shares outstanding
403,833,469 331,797,982 403,714,701 331,716,652 
Plus: Common stock equivalents955,057 1,607,214 1,197,425 1,322,784 
Diluted weighted average number of common shares outstanding
404,788,526 333,405,196 404,912,126 333,039,436 
Earnings per common share:
Basic$0.25 $0.24 $0.68 $0.79 
Diluted0.25 0.24 0.68 0.79 

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 and restricted stock units 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. Potential anti-dilutive weighted common shares equaled approximately 4.9 million shares and 2.2 million shares for the three and nine months ended September 30, 2020, respectively, and 265 thousand shares and 475 thousand shares for the three and nine months ended September 30, 2019, 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, 2020: 
 Components of Accumulated Other Comprehensive LossTotal
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, 2020$34,961 $(5,936)$(33,963)$(4,938)
Other comprehensive (loss) income before reclassification (1,262)83 — (1,179)
Amounts reclassified from other comprehensive income
36 1,127 171 1,334 
Other comprehensive (loss) income, net(1,226)1,210 171 155 
Balance at September 30, 2020$33,735 $(4,726)$(33,792)$(4,783)

 Components of Accumulated Other Comprehensive LossTotal
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, 2019$5,822 $(3,729)$(34,307)$(32,214)
Other comprehensive income (loss) before reclassification
27,819 (2,254)— 25,565 
Amounts reclassified from other comprehensive income
94 1,257 515 1,866 
Other comprehensive income (loss), net
27,913 (997)515 27,431 
Balance at September 30, 2020$33,735 $(4,726)$(33,792)$(4,783)

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, 2020 and 2019:
Amounts Reclassified from
Accumulated Other Comprehensive Loss
Three Months Ended
September 30,		Nine Months Ended September 30,
Components of Accumulated Other Comprehensive Loss2020201920202019Income Statement Line Item
 (in thousands) 
Unrealized losses on AFS securities before tax$(46)$(93)$(127)$(114)Losses on securities transactions, net
Tax effect10 21 33 24 
Total net of tax(36)(72)(94)(90)
Unrealized losses on derivatives (cash flow hedges) before tax(1,586)(453)(1,763)(1,126)Interest expense
Tax effect459 129 506 320 
Total net of tax(1,127)(324)(1,257)(806)
Defined benefit pension plan:
Amortization of actuarial net loss(234)(79)(699)(235)*
Tax effect63 23 184 69 
Total net of tax(171)(56)(515)(166)
Total reclassifications, net of tax$(1,334)$(452)$(1,866)$(1,062)
*Amortization of net loss is included in the computation of net periodic pension cost recognized within other non-interest expense.
12


Note 5. New Authoritative Accounting Guidance

New Accounting Guidance Adopted in 2020

Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" amends the accounting guidance on the impairment of financial instruments. The FASB issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new current expected credit loss (CECL) model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The measurement of expected credit loss under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, held to maturity investments and purchased financial assets with credit deterioration (PCD) assets. It also applies to certain off-balance sheet credit exposures.

Valley adopted ASU No. 2016-13 on January 1, 2020 using the modified retrospective approach for all financial assets measured at amortized cost (except for PCD loans) and off-balance sheet credit exposures. Valley has established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used. At adoption, Valley recorded a $100.4 million increase to its allowance for credit losses, including reserves of $92.5 million, $7.1 million and $793 thousand related to loans, unfunded credit commitments and held to maturity debt securities, respectively. Of the $92.5 million in loan reserves, $61.6 million represents PCD loan related reserves which were recognized through a gross-up that increases the amortized cost basis of loans with a corresponding increase to the allowance for credit losses, and therefore results in no impact to shareholders' equity. The remaining non-credit discount of $97.7 million related to PCD loans is accreted into interest income over the life of the loans at the effective interest rate effective January 1, 2020. The non-PCD loan related increase to the allowance for credit losses of $38.8 million, including the reserves for unfunded loan commitments and held to maturity debt securities, was offset in shareholders' equity and deferred tax assets.

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) net of taxes will be phased in over the same time frame.

ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test guidance) to measure a goodwill impairment charge. Instead, an entity will be required to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current guidance). In addition, ASU No. 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. However, an entity will be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 was effective for Valley on January 1, 2020 and Valley applied this new guidance in its annual goodwill impairment test performed during the second quarter 2020.

New Accounting Guidance issued in 2020

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
13


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. ASU No. 2020-08 will be effective for Valley for the annual and interim periods beginning January 1, 2021 and early adoption is not permitted. This new guidance is not expected to have a significant impact on Valley’s consolidated financial statements.

ASU No. 2020-04, "Reference Rate Reform (Topic 848)" provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued, subject to meeting certain criteria. Under the new guidance, an entity can elect by accounting topic or industry subtopic to account for the modification of a contract affected by reference rate reform as a continuation of the existing contract, if certain conditions are met. In addition, the new guidance allows an entity to elect on a hedge-by-hedge basis to continue to apply hedge accounting for hedging relationships in which the critical terms change due to reference rate reform, if certain conditions are met. A one-time election to sell and/or transfer held-to-maturity debt securities that reference a rate affected by reference rate reform is also allowed. ASU No. 2020-04 became effective for all entities as of March 12, 2020 and will apply to all LIBOR reference rate modifications through December 31, 2022. Management is currently evaluating the impact of the ASU 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).

14


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 nonrecurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial condition at September 30, 2020 and December 31, 2019. The assets presented under “nonrecurring 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,
2020		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)
$26,527 $19,136 $— $— 
Available for sale:
U.S. Treasury securities51,578 51,578 — — 
U.S. government agency securities26,448 — 26,448 — 
Obligations of states and political subdivisions
134,193 — 133,410 783 
Residential mortgage-backed securities
1,233,436 — 1,233,436 — 
Corporate and other debt securities80,909 — 80,909 — 
Total available for sale debt securities1,526,564 51,578 1,474,203 783 
Loans held for sale (2)
209,250 — 209,250 — 
Other assets (3)
455,565 — 455,565 — 
Total assets$2,217,906 $70,714 $2,139,018 $783 
Liabilities
Other liabilities (3)
$190,049 $— $190,049 $— 
Total liabilities$190,049 $— $190,049 $— 
Non-recurring fair value measurements:
Collateral dependent loans $35,907 $— $— $35,907 
Loan servicing rights14,000 — — 14,000 
Foreclosed assets 7,747 — — 7,747 
Total$57,654 $— $— $57,654 
15


  Fair Value Measurements at Reporting Date Using:
 December 31,
2019		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 at fair value $41,410 $41,410 $— $— 
Available for sale:
U.S. Treasury securities50,943 50,943 — — 
U.S. government agency securities29,243 — 29,243 — 
Obligations of states and political subdivisions170,051 — 169,371 680 
Residential mortgage-backed securities1,254,786 — 1,254,786 — 
Trust preferred securities— — — — 
Corporate and other debt securities61,778 — 61,778 — 
Total available for sale1,566,801 50,943 1,515,178 680 
Trading securities— — — — 
Loans held for sale (2)
76,113 — 76,113 — 
Other assets (3)
158,532 — 158,532 — 
Total assets$1,842,856 $92,353 $1,749,823 $680 
Liabilities
Other liabilities (3)
$43,926 $— $43,926 $— 
Total liabilities$43,926 $— $43,926 $— 
Non-recurring fair value measurements:
Collateral dependent impaired loans $39,075 $— $— $39,075 
Loan servicing rights1,591 — — 1,591 
Foreclosed assets 10,807 — — 10,807 
Total$51,473 $— $— $51,473 
(1)Includes equity securities measured at net asset value (NAV) per share (or its equivalent) as a practical expedient totaling $7.4 million at September 30, 2020. These securities have not been classified in the fair value hierarchy.
(2)Represents residential mortgage loans originated for sale that are carried at fair value and had contractual unpaid principal balances totaling approximately $199.4 million and $74.5 million at September 30, 2020 and December 31, 2019, 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 largely consists of a publicly traded mutual fund, a Community Reinvestment Act (CRA) investment fund that is carried at quoted prices in active markets and privately held CRA funds measured at NAV. 

16




Available for sale securities. 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 securities and attempts to identify transactions which may not be orderly or reflective of a significant level of activity and volume.

In calculating the fair value of one impaired special revenue bond (within obligations of states and political subdivisions in the table above) under Level 3, Valley prepared its best estimate of the present value of the cash flows to determine an internal price estimate. In determining the internal price, Valley utilized recent financial information and developments provided by the issuer, as well as other unobservable inputs which reflect Valley’s own assumptions about the inputs that market participants would use in pricing of the defaulted security. A quoted price received from an independent pricing service was weighted with the internal price estimate to determine the fair value of the instrument at September 30, 2020 and December 31, 2019.

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, 2020 and December 31, 2019 based on the short duration these assets were held, and the high 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 and Overnight Index Swap rate curves. 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, 2020 and December 31, 2019), 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, 2020 and December 31, 2019.

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 nonrecurring 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, 2020, collateral dependent loans were individually re-measured and reported at fair value through direct loan charge-offs to the allowance for credit loan losses and/or a specific
17


valuation allowance allocation based on the fair value of the underlying collateral. At September 30, 2020, collateral dependent loans, primarily consisting of taxi medallion loans, with a total amortized cost of $99.3 million were reduced by specific valuation allowance allocations totaling $63.4 million to a reported total net carrying amount of $35.9 million.

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, 2020, the fair value model used a blended prepayment speed (stated as constant prepayment rates) of 18.4 percent and a discount rate of 9.6 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, 2020, certain loan servicing rights were re-measured at fair value totaling $14.0 million. 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 adjusted to the lower of cost or estimated fair value, 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. There were no discount adjustments of the appraisals of foreclosed assets at September 30, 2020.

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.

18


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, 2020 and December 31, 2019 were as follows: 
 Fair Value
Hierarchy		September 30, 2020December 31, 2019
 Carrying
Amount		Fair ValueCarrying
Amount		Fair Value
 (in thousands)
Financial assets
Cash and due from banksLevel 1$276,120 $276,120 $256,264 $256,264 
Interest bearing deposits with banksLevel 1654,591 654,591 178,423 178,423 
Equity securities (1)
Level 32,499 2,499 — — 
Investment securities held to maturity:
U.S. Treasury securitiesLevel 1138,224 146,429 138,352 144,113 
U.S. government agency securities
Level 26,302 6,634 7,345 7,362 
Obligations of states and political subdivisions
Level 2464,051 479,824 500,705 513,607 
Residential mortgage-backed securities
Level 21,491,808 1,528,703 1,620,119 1,629,572 
Trust preferred securitiesLevel 237,341 30,000 37,324 31,382 
Corporate and other debt securitiesLevel 232,750 33,381 32,250 32,684 
Total investment securities held to maturity (2)
2,170,476 2,224,971 2,336,095 2,358,720 
Net loansLevel 332,090,554 31,883,095 29,537,449 28,964,396 
Accrued interest receivableLevel 1136,058 136,058 105,637 105,637 
Federal Reserve Bank and Federal Home Loan Bank stock (3)
Level 2287,628 287,628 214,421 214,421 
Financial liabilities
Deposits without stated maturitiesLevel 123,650,401 23,650,401 19,467,892 19,467,892 
Deposits with stated maturitiesLevel 27,537,581 7,466,794 9,717,945 9,747,867 
Short-term borrowingsLevel 21,430,726 1,544,596 1,093,280 1,081,879 
Long-term borrowingsLevel 22,852,569 3,115,757 2,122,426 2,181,401 
Junior subordinated debentures issued to capital trusts
Level 255,978 44,771 55,718 53,889 
Accrued interest payable (4)
Level 121,756 21,756 33,066 33,066 
(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.


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Note 7. Investment Securities

Equity Securities

Equity securities carried at fair value totaled $29.0 million and $41.4 million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, Valley's equity securities consisted of one publicly traded money market mutual fund, CRA investments both publicly traded and privately held and, to a lesser extent, equity securities without readily determinable fair values.

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, 2020 and December 31, 2019 were as follows: 
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
 (in thousands)
September 30, 2020
U.S. Treasury securities$50,035 $1,543 $— $51,578 
U.S. government agency securities25,302 1,164 (18)26,448 
Obligations of states and political subdivisions:
Obligations of states and state agencies58,807 1,151 (30)59,928 
Municipal bonds73,063 1,276 (74)74,265 
Total obligations of states and political subdivisions131,870 2,427 (104)134,193 
Residential mortgage-backed securities1,193,052 41,326 (942)1,233,436 
Corporate and other debt securities79,707 1,539 (337)80,909 
Total investment securities available for sale$1,479,966 $47,999 $(1,401)$1,526,564 
December 31, 2019
U.S. Treasury securities$50,952 $12 $(21)$50,943 
U.S. government agency securities28,982 280 (19)29,243 
Obligations of states and political subdivisions:
Obligations of states and state agencies78,116 540 (83)78,573 
Municipal bonds90,662 902 (86)91,478 
Total obligations of states and political subdivisions168,778 1,442 (169)170,051 
Residential mortgage-backed securities1,248,814 11,234 (5,262)1,254,786 
Corporate and other debt securities61,261 628 (111)61,778 
Total investment securities available for sale$1,558,787 $13,596 $(5,582)$1,566,801 


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The age of unrealized losses and fair value of related securities available for sale at September 30, 2020 and December 31, 2019 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, 2020
U.S. government agency securities$— $— $1,585 $(18)$1,585 $(18)
Obligations of states and political subdivisions:
Obligations of states and state agencies
1,319 (6)1,023 (24)2,342 (30)
Municipal bonds6,767 (74)— — 6,767 (74)
Total obligations of states and political subdivisions
8,086 (80)1,023 (24)9,109 (104)
Residential mortgage-backed securities111,973 (526)33,346 (416)145,319 (942)
Corporate and other debt securities14,656 (337)— — 14,656 (337)
Total$134,715 $(943)$35,954 $(458)$170,669 $(1,401)
December 31, 2019
U.S. Treasury securities$25,019 $(21)$— $— $25,019 $(21)
U.S. government agency securities— — 1,783 (19)1,783 (19)
Obligations of states and political subdivisions:
Obligations of states and state agencies
18,540 (21)8,755 (62)27,295 (83)
Municipal bonds— — 13,177 (86)13,177 (86)
Total obligations of states and political subdivisions
18,540 (21)21,932 (148)40,472 (169)
Residential mortgage-backed securities240,412 (1,194)282,798 (4,068)523,210 (5,262)
Corporate and other debt securities5,139 (111)— — 5,139 (111)
Total$289,110 $(1,347)$306,513 $(4,235)$595,623 $(5,582)
Within the available for sale debt securities portfolio, the total number of security positions in an unrealized loss position was 64 and 182 at September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020, 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 $868.9 million.
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The contractual maturities of available for sale debt securities at September 30, 2020 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, 2020
 Amortized
Cost		Fair
Value
 (in thousands)
Due in one year$20,975 $20,991 
Due after one year through five years92,873 95,436 
Due after five years through ten years107,004 108,746 
Due after ten years66,062 67,955 
Residential mortgage-backed securities1,193,052 1,233,436 
Total investment securities available for sale$1,479,966 $1,526,564 
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 3.9 years at September 30, 2020.
Impairment Analysis of Available For Sale Debt Securities
Valley's available for sale debt securities portfolio includes corporate bonds and special revenue bonds, among other securities. These type 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 COVID-19.
Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. In performing an assessment of whether any decline in fair value is due to a credit loss, Valley considers the extent to which the fair value is less than the amortized cost, changes in credit ratings, any adverse economic conditions, as well as all relevant information at the individual security level such as credit deterioration of the issuer or collateral underlying the security. In assessing the impairment, Valley compares the present value of cash flows expected to be collected with the amortized cost basis of the security. If it is determined that the decline in fair value was due to credit losses, an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. The non-credit related decrease in the fair value, such as a decline due to changes in market interest rates, is recorded in other comprehensive income, net of tax. Valley also assesses the intent to sell the securities (as well as the likelihood of a near-term recovery). If Valley intends to sell an available for sale debt security or it is more likely than not that Valley will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings.

The obligations of states and political subdivisions classified as available for sale include special revenue bonds which had an aggregate amortized cost and fair value of $70.6 million and $71.9 million, respectively, at September 30, 2020. The gross unrealized losses associated with the special revenue bonds as of September 30, 2020 were not material. Approximately 41 percent of the special revenue bonds were issued by the states of (or municipalities within) Utah and Illinois. As part of Valley’s pre-purchase analysis and on-going quarterly assessment of impairment of the obligations of states and political subdivisions, the Credit Risk Management Department conducts a financial analysis and risk rating assessment of each security issuer based on the issuer’s most recently issued financial statements and other publicly available information. These investments are a mix of municipal bonds with investment grade ratings or non-rated revenue bonds paying in accordance with their contractual terms. The vast majority of the bonds not rated by the rating agencies are state housing finance agency
22


revenue bonds secured by Ginnie Mae securities that are commonly referred to as Tax Exempt Mortgage Securities (TEMS). Valley continues to monitor the special revenue bond portfolio as part of its quarterly impairment analysis.

Valley has evaluated available for sale debt securities that are in an unrealized loss position as of September 30, 2020 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, 2020 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2020.

During the nine months ended September 30, 2019, Valley recognized a $2.9 million other-than-temporary credit impairment charge on one special revenue bond classified as available for sale (within the obligations of states and state agencies in the tables above). The credit impairment was due to severe credit deterioration disclosed by the issuer in the second quarter 2019, as well as the issuer's default on its contractual payment. At September 30, 2020, the non-accruing impaired security had an adjusted amortized cost and fair value of $680 thousand and $783 thousand, respectively.

Valley discontinues the recognition of interest on debt securities if the securities meet both of the following criteria: (i) regularly scheduled interest payments have not been paid or have been deferred by the issuer, and (ii) full collection of all contractual principal and interest payments is not deemed to be the most likely outcome, resulting in the recognition of other-than-temporary impairment of the security.

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, 2020 and December 31, 2019 were as follows: 
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
 (in thousands)
September 30, 2020
U.S. Treasury securities$138,224 $8,205 $— $146,429 
U.S. government agency securities6,302 332 — 6,634 
Obligations of states and political subdivisions:
Obligations of states and state agencies271,038 9,040 (176)279,902 
Municipal bonds193,013 6,909 — 199,922 
Total obligations of states and political subdivisions464,051 15,949 (176)479,824 
Residential mortgage-backed securities1,491,808 37,819 (924)1,528,703 
Trust preferred securities37,341 52 (7,393)30,000 
Corporate and other debt securities32,750 637 (6)33,381 
Total investment securities held to maturity$2,170,476 $62,994 $(8,499)$2,224,971 
December 31, 2019
U.S. Treasury securities$138,352 $5,761 $— $144,113 
U.S. government agency securities7,345 58 (41)7,362 
Obligations of states and political subdivisions:
Obligations of states and state agencies297,454 7,745 (529)304,670 
Municipal bonds203,251 5,696 (10)208,937 
Total obligations of states and political subdivisions500,705 13,441 (539)513,607 
Residential mortgage-backed securities1,620,119 14,803 (5,350)1,629,572 
Trust preferred securities37,324 39 (5,981)31,382 
Corporate and other debt securities32,250 454 (20)32,684 
Total investment securities held to maturity$2,336,095 $34,556 $(11,931)$2,358,720 
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The age of unrealized losses and fair value of related debt securities held to maturity at September 30, 2020 and December 31, 2019 were as follows: 
 Less than
Twelve Months		More than
Twelve Months		Total
 Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
 (in thousands)
September 30, 2020
Obligations of states and political subdivisions:
Obligations of states and state agencies
$5,493 $(176)$— $— $5,493 $(176)
Total obligations of states and political subdivisions
5,493 (176)— — 5,493 (176)
Residential mortgage-backed securities
237,070 (919)2,677 (5)239,747 (924)
Trust preferred securities— — 28,595 (7,393)28,595 (7,393)
Corporate and other debt securities7,494 (6)— — 7,494 (6)
Total$250,057 $(1,101)$31,272 $(7,398)$281,329 $(8,499)
December 31, 2019
U.S. government agency securities$5,183 $(41)$— $— $5,183 $(41)
Obligations of states and political subdivisions:
Obligations of states and state agencies
11,178 (55)32,397 (474)43,575 (529)
Municipal bonds— — 798 (10)798 (10)
Total obligations of states and political subdivisions
11,178 (55)33,195 (484)44,373 (539)
Residential mortgage-backed securities
307,885 (1,387)254,915 (3,963)562,800 (5,350)
Trust preferred securities— — 29,990 (5,981)29,990 (5,981)
Corporate and other debt securities
— — 4,980 (20)4,980 (20)
Total$324,246 $(1,483)$323,080 $(10,448)$647,326 $(11,931)

Within the held to maturity portfolio, the total number of security positions in an unrealized loss position was 20 and 82 at September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020, 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 $1.0 billion.
The contractual maturities of investments in debt securities held to maturity at September 30, 2020 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, 2020
 Amortized
Cost		Fair
Value
 (in thousands)
Due in one year$113,188 $113,628 
Due after one year through five years201,101 213,801 
Due after five years through ten years162,911 168,821 
Due after ten years201,468 200,018 
Residential mortgage-backed securities1,491,808 1,528,703 
Total investment securities held to maturity$2,170,476 $2,224,971 
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Actual maturities of 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 2.5 years at September 30, 2020.

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, 2020 and December 31, 2019.
AAA/AA/A RatedBBB ratedNon-investment grade ratedNon-ratedTotal
 (in thousands)
September 30, 2020
U.S. Treasury securities$138,224 $— $— $— $138,224 
U.S. government agency securities6,302 — — — 6,302 
Obligations of states and political subdivisions:
Obligations of states and state agencies233,581 — 5,669 31,788 271,038 
Municipal bonds171,766 — — 21,247 193,013 
Total obligations of states and political subdivisions
405,347 — 5,669 53,035 464,051 
Residential mortgage-backed securities1,491,808 — — — 1,491,808 
Trust preferred securities— — — 37,341 37,341 
Corporate and other debt securities— 5,000 — 27,750 32,750 
Total investment securities held to maturity$2,041,681 $5,000 $5,669 $118,126 $2,170,476 
December 31, 2019
U.S. Treasury securities$138,352 $— $— $— $138,352 
U.S. government agency securities7,345 — — — 7,345 
Obligations of states and political subdivisions:
Obligations of states and state agencies248,533 5,722 — 43,199 297,454 
Municipal bonds202,642 — — 609 203,251 
Total obligations of states and political subdivisions
451,175 5,722 — 43,808 500,705 
Residential mortgage-backed securities1,620,119 — — — 1,620,119 
Trust preferred securities— — — 37,324 37,324 
Corporate and other debt securities— 5,000 — 27,250 32,250 
Total investment securities held to maturity$2,216,991 $10,722 $— $108,382 $2,336,095 

Obligations of states and political subdivisions include municipal bonds and revenue bonds issued by various municipal corporations. At September 30, 2020, 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. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds called TEMS.
25



To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third-party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. The model is adjusted for a probability weighted multi-scenario economic forecast to estimate future credit losses. Valley uses 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 investment security. The economic forecast methodology and governance for debt securities is aligned with Valley's economic forecast used for the loan portfolio discussed in more detail in Note 8. Accrued interest receivable is excluded from the estimate of credit losses.

At September 30, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.5 million. Valley recorded a negative (credit) provision for credit losses of $112 thousand during the three months ended September 30, 2020 and a net provision for credit losses of $688 thousand for the nine months ended September 30, 2020. There were no net charge-offs of debt securities in the respective periods.

Note 8. Loans and Allowance for Credit Losses for Loans

The detail of the loan portfolio as of September 30, 2020 and December 31, 2019 was as follows: 
 September 30, 2020December 31, 2019
 (in thousands)
Loans:
Commercial and industrial *$6,903,345 $4,825,997 
Commercial real estate:
Commercial real estate16,815,587 15,996,741 
Construction1,720,775 1,647,018 
Total commercial real estate loans18,536,362 17,643,759 
Residential mortgage4,284,595 4,377,111 
Consumer:
Home equity457,083 487,272 
Automobile1,341,659 1,451,623 
Other consumer892,542 913,446 
Total consumer loans2,691,284 2,852,341 
Total loans$32,415,586 $29,699,208 
*Includes $2.3 billion of loans originated under the Paycheck Protection Program (PPP), net of unearned fees totaling $54.4 million at September 30, 2020.

Total loans includes net unearned discounts and deferred loan fees of $116.2 million at September 30, 2020 and net unearned premiums and deferred loan costs of $12.6 million at December 31, 2019. Net unearned discounts and deferred loan fees at September 30, 2020 include the non-credit discount on PCD loans and net unearned fees related to PPP loans.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $117.9 million and $86.3 million at September 30, 2020 and December 31, 2019, respectively, and is presented separately in the consolidated statements of financial condition.

Valley transferred and sold approximately $30.0 million and $303.0 million of residential mortgage loans from the loan portfolio to loans held for sale during the nine months ended September 30, 2020 and 2019, respectively.
26


Excluding the loan transfers, there were no other sales of loans from the held for investment portfolio during the nine months ended September 30, 2020 and 2019.

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, 2019 for further details.

Credit Quality

Loans are deemed to be past due when the contractually required principal and interest payments have not been received as they become due. Loans are placed on non-accrual status generally, when they become 90 days past due and the full and timely collection of principal and interest becomes uncertain. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Cash collections from non-accrual loans are generally applied against principal, and no interest income is recognized on these loans until the principal balance has been determined to be fully collectible.

A loan in which the borrowers’ obligation has not been released in bankruptcy courts may be restored to an accruing basis when it becomes well secured and is in the process of collection, or all past due amounts become current under the loan agreement and collectability is no longer doubtful.


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The following table presents past due, current and non-accrual loans without an allowance for credit losses by loan portfolio class (including PCD loans) at September 30, 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, 2020
Commercial and industrial
$6,587 $3,954 $6,759 $115,667 $132,967 $6,770,378 $6,903,345 $16,812 
Commercial real estate:
Commercial real estate
26,038 610 1,538 41,627 69,813 16,745,774 16,815,587 35,798 
Construction142 — — 2,497 2,639 1,718,136 1,720,775 2,405 
Total commercial real estate loans
26,180 610 1,538 44,124 72,452 18,463,910 18,536,362 38,203 
Residential mortgage22,528 3,760 891 23,877 51,056 4,233,539 4,284,595 12,356 
Consumer loans:
Home equity1,281 299 — 6,969 8,549 448,534 457,083 70 
Automobile4,797 808 538 472 6,615 1,335,044 1,341,659 — 
Other consumer2,901 245 215 — 3,361 889,181 892,542 — 
Total consumer loans
8,979 1,352 753 7,441 18,525 2,672,759 2,691,284 70 
Total$64,274 $9,676 $9,941 $191,109 $275,000 $32,140,586 $32,415,586 $67,441 

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The following table presents past due, non-accrual and current loans by loan portfolio class at December 31, 2019. At December 31, 2019, purchased credit-impaired (PCI) loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level. The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the tables above at September 30, 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 Non-PCI Loans		PCI Loans
(in thousands)
December 31, 2019
Commercial and industrial$11,700 $2,227 $3,986 $68,636 $86,549 $4,057,434 $682,014 
Commercial real estate:
Commercial real estate2,560 4,026 579 9,004 16,169 10,886,724 5,093,848 
Construction1,486 1,343 — 356 3,185 1,492,532 151,301 
Total commercial real estate loans
4,046 5,369 579 9,360 19,354 12,379,256 5,245,149 
Residential mortgage17,143 4,192 2,042 12,858 36,235 3,760,707 580,169 
Consumer loans:
Home equity1,051 80 — 1,646 2,777 373,243 111,252 
Automobile11,482 1,581 681 334 14,078 1,437,274 271 
Other consumer1,171 866 30 224 2,291 900,411 10,744 
Total consumer loans13,704 2,527 711 2,204 19,146 2,710,928 122,267 
Total$46,593 $14,315 $7,318 $93,058 $161,284 $22,908,325 $6,629,599 

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.
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The following table presents the internal loan classification risk by loan portfolio class by origination year (including PCD loans) based on the most recent analysis performed at September 30, 2020:
 Term Loans  
Amortized Cost Basis by Origination Year
September 30, 202020202019201820172016Prior to 2016Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term LoansTotal
 (in thousands)
Commercial and industrial
Risk Rating:
Pass$2,656,655 $609,142 $523,833 $246,684 $185,298 $804,896 $1,613,011 $417 $6,639,936 
Special Mention724 10,634 11,786 10,236 11,310 14,895 44,412 68 104,065 
Substandard5,411 3,181 2,780 1,789 4,095 26,720 18,092 24 62,092 
Doubtful— 5,207 7 17,162 2,632 72,244 — — 97,252 
Total commercial and industrial$2,662,790 $628,164 $538,406 $275,871 $203,335 $918,755 $1,675,515 $509 $6,903,345 
Commercial real estate
Risk Rating:
Pass$2,456,797 $3,236,056 $2,360,488 $1,993,600 $1,929,677 $4,281,267 $189,008 $15,626 $16,462,519 
Special Mention23,864 — 26,028 7,197 42,882 86,098 3,481 — 189,550 
Substandard17,539 9,450 24,168 22,014 10,329 78,322 — — 161,822 
Doubtful— — — 787 — 909 — — 1,696 
Total commercial real estate$2,498,200 $3,245,506 $2,410,684 $2,023,598 $1,982,888 $4,446,596 $192,489 $15,626 $16,815,587 
Construction
Risk Rating:
Pass$105,422 $157,407 $123,416 $16,196 $47,202 $60,663 $1,162,297 $— $1,672,603 
Special Mention— — — — 10,058 — 32,407 — 42,465 
Substandard— 31 246 2,628 2,422 380 — — 5,707 
Total construction$105,422 $157,438 $123,662 $18,824 $59,682 $61,043 $1,194,704 $— $1,720,775 
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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 (including PCD loans) based on payment activity by origination year as of September 30, 2020.
 Term Loans  
Amortized Cost Basis by Origination Year
September 30, 202020202019201820172016Prior to 2016Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term LoansTotal
 (in thousands)
Residential mortgage
Performing$560,875 $807,219 $778,367 $645,289 $407,412 $1,019,903 $52,783 $— $4,271,848 
90 days or more past due— 1,459 2,947 2,849 3,895 1,597 — — 12,747 
Total residential mortgage $560,875 $808,678 $781,314 $648,138 $411,307 $1,021,500 $52,783 $— $4,284,595 
Consumer loans
Home equity
Performing$6,436 $12,015 $13,310 $10,178 $6,505 $17,626 $336,434 $52,986 $455,490 
90 days or more past due— — — — 25 111 617 840 1,593 
Total home equity6,436 12,015 13,310 10,178 6,530 17,737 337,051 53,826 457,083 
Automobile
Performing292,584 479,860 303,799 175,359 62,193 26,843 — — 1,340,638 
90 days or more past due40 304 270 246 16 145 — — 1,021 
Total automobile292,624 480,164 304,069 175,605 62,209 26,988 — — 1,341,659 
Other Consumer
Performing5,061 5,751 11,529 1,254 1,093 6,387 860,895 — 891,970 
90 days or more past due— — 8 — — 20 136 408 572 
Total other consumer5,061 5,751 11,537 1,254 1,093 6,407 861,031 408 892,542 
Total Consumer$304,121 $497,930 $328,916 $187,037 $69,832 $51,132 $1,198,082 $54,234 $2,691,284 

The following table presents the credit exposure by internally assigned risk rating by class of loans (excluding PCI loans) based on the most recent analysis performed at December 31, 2019: 
Credit exposure—
by internally assigned risk rating		 Special  Total Non-PCI
PassMentionSubstandardDoubtfulLoans
 (in thousands)
December 31, 2019
Commercial and industrial$3,982,453 $33,718 $66,511 $61,301 $4,143,983 
Commercial real estate10,781,587 77,884 42,560 862 10,902,893 
Construction1,487,877 7,486 354 — 1,495,717 
Total$16,251,917 $119,088 $109,425 $62,163 $16,542,593 



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For residential mortgages, automobile, home equity and other consumer loan portfolio classes (excluding PCI loans), Valley also evaluates credit quality based on the aging status of the loan, which is presented above, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2019:
Credit exposure—
by payment activity		Performing
Loans		Non-Performing
Loans		Total Non-PCI
Loans
 (in thousands)
December 31, 2019
Residential mortgage$3,784,084 $12,858 $3,796,942 
Home equity374,374 1,646 376,020 
Automobile1,451,018 334 1,451,352 
Other consumer902,478 224 902,702 
Total$6,511,954 $15,062 $6,527,016 

The following table summarizes information pertaining to loans that were identified as PCI loans by class based on individual loan payment activity as of December 31, 2019:  
Credit exposure—
by payment activity		Performing
Loans		Non-Performing
Loans		Total Non-PCI
Loans
 (in thousands)
December 31, 2019
Commercial and industrial$653,997 $28,017 $682,014 
Commercial real estate5,065,388 28,460 5,093,848 
Construction148,692 2,609 151,301 
Residential mortgage571,006 9,163 580,169 
Consumer120,356 1,911 122,267 
Total$6,559,439 $70,160 $6,629,599 
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). At the adoption of ASU 2016-13, Valley was not required to reassess whether modifications to individual PCI loans prior to January 1, 2020 met the TDR loan criteria.
The majority of 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 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 $58.1 million and $73.0 million as of September 30, 2020 and December 31, 2019, respectively. Non-performing TDRs totaled $96.8 million and $65.1 million as of September 30, 2020 and December 31, 2019, respectively.



32


The following table presents the pre- and post-modification amortized cost of loans by loan class modified as TDRs (excluding PCI loans prior to the adoption of ASU 2016-13) during the three and nine months ended September 30, 2020 and 2019. Post-modification amounts are presented as of September 30, 2020 and 2019.
Three Months Ended September 30,
20202019
Troubled Debt RestructuringsNumber
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 industrial28 $31,237 $30,938 53 $42,902 $41,772 
Commercial real estate2 4,249 4,240 1 75 75 
Residential mortgage1 247 247 — — — 
Consumer1 72 72 1 19 19 
Total32 $35,805 $35,497 55 $42,996 $41,866 


Nine Months Ended September 30,
20202019
Troubled Debt RestructuringsNumber
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 industrial33 $40,537 $38,204 104 $78,601 $72,183 
Commercial real estate4 8,996 9,000 3 4,740 4,699 
Residential mortgage1 247 247 1 155 154 
Consumer1 72 72 1 19 19 
Total39 $49,852 $47,523 109 $83,515 $77,055 

The total TDRs presented in the above table had allocated reserves for loan losses of $18.7 million and $29.6 million at September 30, 2020 and 2019, respectively. There were $1.9 million and $5.6 million of partial charge-offs related to TDRs for the three and nine months ended September 30, 2020, respectively. There were no partial charge-offs related to TDR loan modifications during three months ended September 30, 2020 and $2.0 million of partial charge-offs related to TDRs for the nine months ended September 30, 2019, 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, 2020 and 2019.

Loans modified as TDRs (excluding PCI loan modifications prior to the adoption of ASU 2016-13) 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, 2020 and 2019 were as follows:
 Three Months Ended September 30,
20202019
Troubled Debt Restructurings Subsequently DefaultedNumber of
Contracts		Amortized CostNumber of
Contracts		Recorded
Investment
 ($ in thousands)
Commercial and industrial30 $17,496 1 $604 
Residential mortgage— — 1 154 
Total30 $17,496 2 $758 
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 Nine Months Ended September 30,
20202019
Troubled Debt Restructurings Subsequently DefaultedNumber of
Contracts		Amortized CostNumber of
Contracts		Recorded
Investment
 ($ in thousands)
Commercial and industrial35 $20,099 19 $12,235 
Commercial real estate— — 1 283 
Residential mortgage— — 3 369 
Consumer1 18 1 18 
Total36 $20,117 24 $12,905 

In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant, when requested by customers. These modifications complied with the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of September 30, 2020, Valley had approximately 1,400 of these loans with total outstanding balances of $1.1 billion remaining in their payment deferral period under short-term modifications. Under the applicable guidance, none of these loans were considered TDRs as of September 30, 2020.

Loans in Process of Foreclosure. Other real estate owned (OREO) totaled $7.7 million and $9.4 million at September 30, 2020 and December 31, 2019, respectively. OREO included foreclosed residential real estate properties totaling $799 thousand and $2.1 million at September 30, 2020 and December 31, 2019, respectively. Residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0 million and $2.8 million at September 30, 2020 and December 31, 2019, respectively.

Allowance for Credit Losses for Loans
The allowance for credit losses for loans under the new CECL standard adopted on January 1, 2020, consisted of the allowance for loan losses and the allowance for unfunded credit commitments. Prior periods reflect the allowance for credit losses for loans under the incurred loss model.
The following table summarizes the allowance for credit losses for loans at September 30, 2020 and December 31, 2019: 
September 30,
2020		December 31,
2019
 (in thousands)
Components of allowance for credit losses for loans:
Allowance for loan losses$325,032 $161,759 
Allowance for unfunded credit commitments10,296 2,845 
Total allowance for credit losses for loans$335,328 $164,604 






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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,
 2020201920202019
 (in thousands)
Components of provision for credit losses for loans:
Provision for loan losses$30,833 $8,757 $105,709 $20,319 
Provision for unfunded credit commitments187 (57)350 (1,519)
Total provision for credit losses for loans$31,020 $8,700 $106,059 $18,800 
Allowance for Loan Losses

The allowance for loan losses is a valuation account that is deducted from loans' amortized cost basis to present the net amount expected to be collected on loans. Valley's methodology to establish the allowance for loan losses has two basic components: (1) a collective (pooled) reserve component for estimated lifetime expected credit losses for pools of loans that share similar risk characteristics and (2) an individual reserve component for loans that do not share common risk characteristics.

Reserves for loans that share common risk characteristics. In estimating the component of the allowance on a collective basis, Valley uses a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool, and the severity of loss, based on the aggregate net lifetime losses incurred. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) lending policies and procedures, (ii) current business conditions and economic developments that affect the loan collectability, (iii) concentration risks by size, type, and geography, (iv) the potential volume and migration of loan forbearances to non-performing status, and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses that 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. Valley has identified and selected key variables that most closely correlated to its historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index.
Reserves for loans that that do not share common risk characteristics. Valley measures specific reserves for individual loans that do not share common risk characteristics with other loans, consisting of collateral dependent, TDR, and expected TDR loans, based on the amount of lifetime expected credit losses calculated on those loans and charge-offs of those amounts determined to be uncollectible. Factors considered by Valley in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as the allowance for credit losses. The effective interest rate used to discount expected cash flows is adjusted to incorporate expected prepayments, if applicable.

When Valley determines that foreclosure is probable, collateral dependent loan balances are written down to the estimated current fair value (less estimated selling costs) of each loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any consideration for personal guarantees that may be pursued in
35


the Bank’s collection process. Valley elected a practical expedient to use the estimated current fair value (less estimated selling costs) of the collateral to measure expected credit losses on collateral dependent loans when foreclosure is not probable.
The following table presents collateral dependent loans by class as of September 30, 2020:
 September 30,
2020
 (in thousands)
Commercial and industrial$115,877 
Commercial real estate:
Commercial real estate44,638 
Construction2,405 
Total commercial real estate loans
47,043 
Residential mortgage28,856 
Home equity88 
Total $191,864 

Commercial and industrial loans are primarily collateralized by taxi medallions in the table above. Commercial real estate loans are collateralized by real estate and construction loans are generally secured by the real estate to be developed and may also be secured by additional real estate to mitigate the risk. Residential and home equity loans are collateralized by residential real estate.

Allowance for Unfunded Credit Commitments

The allowance for unfunded credit commitments generally consists of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit valued using a similar methodology as used for loans. Management's estimate of expected losses inherent in these off-balance sheet credit exposures also incorporates estimated usage factors over the commitment's contractual period or an expected pull-through rate for new loan commitments. The allowance for unfunded credit commitments totaling $10.3 million at September 30, 2020 is included in accrued expenses and other liabilities on the consolidated statements of financial condition.

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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, 2020 and 2019: 
Commercial
and Industrial		Commercial
Real Estate		Residential
Mortgage		ConsumerTotal
 (in thousands)
Three Months Ended
September 30, 2020
Allowance for loan 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 for loan losses11,907 13,543 (1,040)6,423 30,833 
Ending balance$130,409 $144,650 $28,614 $21,359 $325,032 
Three Months Ended
September 30, 2019
Allowance for losses:
Beginning balance$94,384 $48,978 $5,219 $6,524 $155,105 
Loans charged-off (527)(158)(111)(2,191)(2,987)
Charged-off loans recovered 330 28 3 617 978 
Net charge-offs(197)(130)(108)(1,574)(2,009)
Provision for loan losses6,815 (77)191 1,828 8,757 
Ending balance$101,002 $48,771 $5,302 $6,778 $161,853 

Commercial
and Industrial		Commercial
Real Estate		Residential
Mortgage		ConsumerTotal
 (in thousands)
Nine Months Ended
September 30, 2020
Allowance for loan 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 
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 losses40,734 49,702 2,701 12,572 105,709 
Ending balance$130,409 $144,650 $28,614 $21,359 $325,032 
Nine Months Ended
September 30, 2019
Allowance for losses:
Beginning balance$90,956 $49,650 $5,041 $6,212 $151,859 
Loans charged-off (7,882)(158)(126)(5,971)(14,137)
Charged-off loans recovered 2,008 71 13 1,720 3,812 
Net charge-offs(5,874)(87)(113)(4,251)(10,325)
Provision for loan losses15,920 (792)374 4,817 20,319 
Ending balance$101,002 $48,771 $5,302 $6,778 $161,853 
*    Includes a $61.6 million increase representing the estimated expected credit losses for PCD loans as a result of the adoption of CECL 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, 2020 and December 31, 2019.
Commercial
and Industrial		Commercial
Real Estate		Residential
Mortgage		ConsumerTotal
 (in thousands)
September 30, 2020
Allowance for loan losses:
Individually evaluated for credit losses
$66,444 $2,058 $830 $1,232 $70,564 
Collectively evaluated for credit losses
63,965 142,592 27,784 20,127 254,468 
Total$130,409 $144,650 $28,614 $21,359 $325,032 
Loans:
Individually evaluated for credit losses
$136,696 $70,145 $35,551 $4,019 $246,411 
Collectively evaluated for credit losses
6,766,649 18,466,217 4,249,044 2,687,265 32,169,175 
Total$6,903,345 $18,536,362 $4,284,595 $2,691,284 $32,415,586 
December 31, 2019
Allowance for loan losses:
Individually evaluated for credit losses
$36,662 $1,338 $518 $58 $38,576 
Collectively evaluated for credit losses
67,397 44,335 4,542 6,909 123,183 
Total$104,059 $45,673 $5,060 $6,967 $161,759 
Loans:
Individually evaluated for credit losses
$100,860 $51,242 $10,689 $853 $163,644 
Collectively evaluated for credit losses
4,043,123 12,347,368 3,786,253 2,729,221 22,905,965 
Loans acquired with discounts related to credit quality
682,014 5,245,149 580,169 122,267 6,629,599 
Total$4,825,997 $17,643,759 $4,377,111 $2,852,341 $29,699,208 

Impaired loans. Impaired loans disclosures presented below as of December 31, 2019 represent requirements prior to the adoption of ASU No. 2016-13 on January 1, 2020. Impaired loans, consisting of non-accrual commercial and industrial loans, commercial real estate loans over $250 thousand and all loans which were modified in troubled debt restructurings, were individually evaluated for impairment. PCI loans were not classified as impaired loans because they are accounted for on a pool basis and were paying as expected.


















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The following table presents information about impaired loans by loan portfolio class at December 31, 2019:
Recorded
Investment
With No
Related
Allowance		Recorded
Investment
With
Related
Allowance		Total
Recorded
Investment		Unpaid
Contractual
Principal
Balance		Related
Allowance
 (in thousands)
December 31, 2019
Commercial and industrial$14,617 $86,243 $100,860 $114,875 $36,662 
Commercial real estate:
Commercial real estate26,046 24,842 50,888 51,258 1,338 
Construction354 — 354 354 — 
Total commercial real estate loans26,400 24,842 51,242 51,612 1,338 
Residential mortgage5,836 4,853 10,689 11,800 518 
Consumer loans:
Home equity366 487 853 956 58 
Total consumer loans366 487 853 956 58 
Total$47,219 $116,425 $163,644 $179,243 $38,576 

Purchased Credit-Impaired Loans

The table below includes disclosure requirements prior to the adoption of ASU No. 2016-13 on January 1, 2020, and presents the changes in the accretable yield for PCI loans during the three and nine months ended September 30, 2019:
 Three Months Ended
September 30, 2019		Nine Months Ended
September 30, 2019
 (in thousands)
Balance, beginning of period$853,887 $875,958 
Accretion(47,475)(155,981)
Net (decrease) increase in expected cash flows(58,268)28,167 
Balance, end of period$748,144 $748,144 
Note 9. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill as allocated to Valley's business segments, or reporting units thereof, for goodwill impairment analysis were:
 Business Segment / Reporting Unit*
 Wealth
Management		Consumer
Lending		Commercial
Lending		Investment
Management		Total
 (in thousands)
Balance at December 31, 2019$21,218 $306,572 $825,767 $220,068 $1,373,625 
Goodwill from business combinations— 121 1,654 9 1,784 
Balance at September 30, 2020$21,218 $306,693 $827,421 $220,077 $1,375,409 
*    Valley’s Wealth Management Division is comprised of trust, asset management and insurance services. This reporting unit is included in the Consumer Lending segment for financial reporting purposes.

During the nine months ended September 30, 2020, Valley recorded additional goodwill as set forth in the table above related to the Oritani acquisition, reflecting the effect of the combined adjustments to the fair value of certain loans and deferred tax assets as of the acquisition date. Certain estimates for acquired assets and assumed liabilities are subject to change for up to one year after the acquisition date. See Note 2 for further details.
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During the second quarter 2020, 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, 2020 and 2019.

The following table summarizes other intangible assets as of September 30, 2020 and December 31, 2019: 
Gross
Intangible
Assets		Accumulated
Amortization		Valuation
Allowance		Net
Intangible
Assets
 (in thousands)
September 30, 2020
Loan servicing rights$100,456 $(77,404)$(1,013)$22,039 
Core deposits101,160 (50,472)— 50,688 
Other3,945 (2,799)— 1,146 
Total other intangible assets$205,561 $(130,675)$(1,013)$73,873 
December 31, 2019
Loan servicing rights$94,827 $(70,095)$(47)$24,685 
Core deposits101,160 (40,384)— 60,776 
Other3,945 (2,634)— 1,311 
Total other intangible assets$199,932 $(113,113)$(47)$86,772 

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 impairment charges on its loan servicing rights totaling $188 thousand and $966 thousand for the three and nine months ended September 30, 2020, respectively. Valley recorded net impairment charges on its loan servicing rights totaling $64 thousand and net recoveries of impairment charges on its loan servicing rights totaling $20 thousand for the three and nine months ended September 30, 2019, 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, 2020 and 2019.

The following table presents the estimated future amortization expense of other intangible assets for the remainder of 2020 through 2024: 
Loan Servicing
Rights		Core
Deposits		Other
 (in thousands)
2020$1,477 $3,275 $55 
20214,980 11,607 206 
20223,789 9,876 191 
20232,869 8,146 131 
20242,205 6,537 117 

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Valley recognized amortization expense on other intangible assets, including net impairment (or recovery of impairment) charges on loan servicing rights, totaling approximately $6.4 million and $4.7 million for the three months ended September 30, 2020 and 2019, respectively, and $18.5 million and $13.2 million for the nine months ended September 30, 2020 and 2019, respectively.
Note 10. Borrowed Funds

Short-Term Borrowings

Short-term borrowings at September 30, 2020 and December 31, 2019 consisted of the following: 
September 30,
2020		December 31,
2019
 (in thousands)
FHLB advances$1,275,000 $940,000 
Securities sold under agreements to repurchase155,726 153,280 
Total short-term borrowings$1,430,726 $1,093,280 

The contractual weighted average interest rate for short-term borrowings was 0.44 percent and 1.68 percent at September 30, 2020 and December 31, 2019, respectively. Short-term FHLB advances totaling $1.1 billion were hedged with cash flow interest rate swaps during the nine months ended September 30, 2020. See Note 12 for additional details.

Long-Term Borrowings

Long-term borrowings at September 30, 2020 and December 31, 2019 consisted of the following: 
September 30,
2020		December 31,
2019
 (in thousands)
FHLB advances, net (1)
$2,148,633 $1,480,012 
Subordinated debt, net (2)
403,936 292,414 
Securities sold under agreements to repurchase300,000 350,000 
Total long-term borrowings$2,852,569 $2,122,426 
(1)
FHLB advances are presented net of unamortized prepayment penalties and other purchase accounting adjustments totaling $503 thousand and $2.8 million at September 30, 2020 and December 31, 2019, respectively.
(2)
Subordinated debt is presented net of unamortized debt issuance costs totaling $2.8 million and $1.2 million at September 30, 2020 and December 31, 2019, respectively.

FHLB advances. Long-term FHLB advances had a weighted average interest rate of 2.11 percent and 2.23 percent at September 30, 2020 and December 31, 2019, 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.
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The long-term FHLB advances at September 30, 2020 are scheduled for contractual balance repayments as follows: 
YearAmount
 (in thousands)
2020$25,000 
2021994,768 
2022121,420 
2023428,163 
2024300,000 
Thereafter279,785 
Total long-term FHLB advances$2,149,136 

There are no FHLB advances with scheduled repayments in years 2020 and thereafter, reported in the table above, which are callable for early redemption by the FHLB during 2020.

Securities sold under agreements to repurchase (repos). Long-term repos had a weighted average interest rate of 3.33 percent and 1.94 percent at September 30, 2020 and December 31, 2019, respectively. Long-term repos outstanding as of September 30, 2020 have maturities in 2021.

In September 2020, Valley prepaid $50 million of long-term institutional repo borrowings with an interest rate of 3.70 percent and an original contractual maturity date in January 2022. The debt prepayment was funded by excess cash liquidity. The transaction was accounted for as an early debt extinguishment resulting in a loss, reported within non-interest expense, of $2.4 million for the third quarter 2020.

Subordinated debt. On June 5, 2020, Valley issued $115.0 million of 5.25 percent Fixed-to-Floating Rate 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. Interest on the subordinated notes during the initial five year term through June 15, 2025 is payable semi-annually on June 15 and December 15. Thereafter, interest is expected to be set based on Three-Month Term SOFR plus 514 basis points and paid quarterly through maturity of the notes.

Valley also had the following subordinated debt outstanding at September 30, 2020:

•$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;

•$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;

•$60 million aggregate principal amount of 6.25 percent subordinated notes due April 1, 2026 that are callable on or after April 1, 2021 or anytime upon the occurrence of certain events.
See Note 11 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 for further details.
Note 11. Stock–Based Compensation
Valley currently has one active employee stock plan, the 2016 Long-Term Stock Incentive Plan (the 2016 Stock Plan), adopted by Valley’s Board of Directors on January 29, 2016 and approved by its shareholders on April 28, 2016. The 2016 Stock Plan is administered by the Compensation and Human Resources Committee (the Committee) appointed by Valley's Board of Directors. The Committee can grant awards to officers and key employees of Valley. The primary purpose of the 2016 Stock Plan is to provide additional incentive 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 competent and dedicated officers and other key employees whose efforts will result in the continued and long-term growth of Valley’s business.
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Under the 2016 Stock Plan, Valley may award shares of common stock in the form of stock appreciation rights, both incentive and non-qualified stock options, restricted stock and restricted stock units (RSUs) to its employees and non-employee directors (for acting in their roles as board members). As of September 30, 2020, 3.1 million shares of common stock were available for issuance under the 2016 Stock 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.
Restricted Stock Units (RSUs). Valley granted 26 thousand and 42 thousand of time-based RSUs during the three months ended September 30, 2020 and 2019, respectively, and 1.2 million and 868 thousand during the nine months ended September 30, 2020 and 2019, respectively. Generally, time-based RSUs vest ratably one-third each year over a three-year vesting period. The average grant date fair value of the RSUs granted during the nine months ended September 30, 2020 and 2019 was $10.41 per share and $10.43 per share, respectively.
Valley granted 589 thousand and 532 thousand of performance-based RSUs to certain executive officers for the nine months ended September 30, 2020 and 2019, 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 RSUs granted during the nine months ended September 30, 2020 and 2019 was $10.82 per share and $10.43 per share, respectively.

Valley recorded total stock-based compensation expense of $4.1 million and $3.2 million for the three months ended September 30, 2020 and 2019, respectively, and $12.3 million and $11.5 million for the nine months ended September 30, 2020 and 2019, respectively. The fair values of stock awards are expensed over the shorter of the vesting or required service period. As of September 30, 2020, the unrecognized amortization expense for all stock-based employee compensation totaled approximately $21.3 million and will be recognized over an average remaining vesting period of 1.84 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.

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.

During the nine months ended September 30, 2020, Valley entered into new interest rate swap agreements designated as cash flow hedges with a total notional amount of $1.1 billion. The swaps are intended to hedge the changes in cash flows associated with certain FHLB advances and brokered deposits. Valley is required to pay fixed-rates of interest ranging from 0.05 percent to 0.67 percent and receives variable rates of interest that reset quarterly based on three-month LIBOR. Expiration dates for the swaps range from April 2021 to August 2022.

Fair Value Hedges of Fixed Rate Assets and Liabilities. Valley is exposed to changes in the fair value of certain of its fixed rate assets or liabilities due to changes in benchmark interest rates based on one-month LIBOR. From time to time, Valley has used interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable rate payments from a counterparty in exchange for
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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. Valley includes the gain or loss on the hedged items in the same income statement line item as the loss or gain on the related derivatives.

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.

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, 2020, Valley had 23 credit swaps with an aggregate notional amount of $181.5 million related to risk participation agreements. 

At September 30, 2020, 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.
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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, 2020December 31, 2019
 Fair ValueFair Value
Other AssetsOther LiabilitiesNotional AmountOther AssetsOther LiabilitiesNotional Amount
 (in thousands)
Derivatives designated as hedging instruments:
Cash flow hedge interest rate swaps
$— $4,233 $1,175,000 $— $1,484 $180,000 
Fair value hedge interest rate swaps— 59 7,079 — 229 7,281 
Total derivatives designated as hedging instruments
$— $4,292 $1,182,079 $— $1,713 $187,281 
Derivatives not designated as hedging instruments:
Interest rate swaps and embedded derivatives
$455,404 $182,741 $8,306,557 $158,382 $42,020 $4,113,106 
Mortgage banking derivatives161 3,016 521,418 150 193 142,760 
Total derivatives not designated as hedging instruments
$455,565 $185,757 $8,827,975 $158,532 $42,213 $4,255,866 

The Chicago Mercantile Exchange and London Clearing House variation margins are classified as a single-unit of account with the fair value of certain cash flow and non-designated derivative instruments. As a result, the fair value of the designated cash flow interest rate swaps assets and designated and non-designated interest rate swaps liabilities were offset by variation margins posted by (with) the applicable counterparties and reported in the table above on a net basis at September 30, 2020 and December 31, 2019.
Gains and (losses) included in the consolidated statements of income and other comprehensive income, 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,
 2020201920202019
 (in thousands)
Amount of loss reclassified from accumulated other comprehensive loss to interest expense$(1,586)$(453)$(1,763)$(1,126)
Amount of gain (loss) recognized in other comprehensive income95 108 3,158 (1,404)
The accumulated net after-tax losses related to effective cash flow hedges included in accumulated other comprehensive loss were $4.7 million and $3.7 million at September 30, 2020 and December 31, 2019, 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 $3.8 million will be reclassified as an increase to interest expense over the next 12 months.




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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,
 2020201920202019
 (in thousands)
Derivative - interest rate swaps:
Interest income$88 $48 $170 $121 
Hedged item - loans:
Interest income$(88)$(48)$(170)$(121)
The following table presents the hedged items related to interest rate derivatives designated as hedges of fair value and the cumulative basis fair value adjustment included in the net carrying amount of the hedged items at September 30, 2020 and December 31, 2019.
Line Item in the Statement of Financial Condition in Which the Hedged Item is IncludedCarrying Amount of the Hedged AssetCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Asset
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
(in thousands)
Loans$7,138 $7,510 $59 $229 

The net losses (gains) 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,
 2020201920202019
 (in thousands)
Non-designated hedge interest rate swaps and credit derivatives
Other non-interest expense$600 $(468)$2,105 $(1,225)

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 $19.2 million and $13.9 million for the three months ended September 30, 2020 and 2019, respectively, and $48.1 million and $23.4 million for the nine months ended September 30, 2020 and 2019, respectively.

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, 2020, Valley was in compliance with all of the provisions of its derivative counterparty
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agreements. As of September 30, 2020, 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 $184.1 million. Valley has derivative counterparty agreements that require minimum collateral posting thresholds for certain counterparties.
Note 13. Balance Sheet Offsetting
Certain financial instruments, including interest rate swap derivatives and repurchase agreements (accounted for as secured long-term borrowings), may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar 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 (i.e., the threshold for posting collateral is reduced to zero, subject to certain minimum transfer amounts). 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 repurchase agreement should Valley be in default.
The table below presents information about Valley’s financial instruments eligible for offset in the consolidated statements of financial condition as of September 30, 2020 and December 31, 2019.
    Gross Amounts Not Offset 
 Gross Amounts
Recognized		Gross Amounts
Offset		Net Amounts
Presented		Financial
Instruments		Cash
Collateral		Net
Amount
 (in thousands)
September 30, 2020
Assets:
Interest rate swaps$455,404 $— $455,404 $— $— $455,404 
Liabilities:
Interest rate swaps $187,033 $— $187,033 $— $(184,050)$2,983 
Repurchase agreements300,000 — 300,000 (300,000)*— — 
Total$487,033 $— $487,033 $(300,000)$(184,050)$2,983 
December 31, 2019
Assets:
Interest rate swaps$158,382 $— $158,382 $(118)$— $158,264 
Liabilities:
Interest rate swaps$43,733 $— $43,733 $(118)$(16,881)$26,734 
Repurchase agreements350,000 — 350,000 (350,000)*— — 
Total$393,733 $— $393,733 $(350,118)$(16,881)$26,734 
*    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.

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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.

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, 2020 and December 31, 2019:
September 30,
2020		December 31,
2019
(in thousands)
Other Assets:
Affordable housing tax credit investments, net$21,647 $25,049 
Other tax credit investments, net49,907 59,081 
Total tax credit investments, net
$71,554 $84,130 
Other Liabilities:
Unfunded affordable housing tax credit commitments$1,397 $1,539 
Unfunded other tax credit commitments1,139 1,139 
    Total unfunded tax credit commitments$2,536 $2,678 

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, 2020 and 2019: 
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
(in thousands)
Components of Income Tax Expense:
Affordable housing tax credits and other tax benefits$1,352 $1,666 $3,979 $5,087 
Other tax credit investment credits and tax benefits1,727 1,902 5,567 6,863 
Total reduction in income tax expense
$3,079 $3,568 $9,546 $11,950 
Amortization of Tax Credit Investments:
Affordable housing tax credit investment losses$642 $530 $1,733 $1,796 
Affordable housing tax credit investment impairment losses
585 857 1,668 2,381 
Other tax credit investment losses12 1,093 1,235 4,589 
Other tax credit investment impairment losses1,520 1,905 4,767 7,655 
Total amortization of tax credit investments recorded in non-interest expense
$2,759 $4,385 $9,403 $16,421 

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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.
The following tables represent the financial data for Valley’s four business segments for the three and nine months ended September 30, 2020 and 2019:
 Three Months Ended September 30, 2020
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets
$7,126,157 $25,389,107 $5,252,446 $—$37,767,710 
Interest income$63,956 $251,920 $22,513 $(1,046)$337,343 
Interest expense9,048 33,330 6,728 5,15154,257 
Net interest income (loss)54,908 218,590 15,785 (6,197)283,086 
Provision for credit losses5,383 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 income23,531 20,421 (1,304)6,62449,272 
Non-interest expense19,877 25,633 (186)114,861160,185 
Internal expense transfer18,614 66,390 13,713 (98,717)— 
Income (loss) before income taxes$34,565 $121,351 $1,066 $(15,717)$141,265 
Return on average interest earning assets (pre-tax)
1.94 %1.91 %0.08 %N/A1.50 %
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 Three Months Ended September 30, 2019
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets
$6,858,216 $19,278,529 $4,357,824 $—$30,494,569 
Interest income$68,253 $230,183 $31,999 $(1,174)$329,261 
Interest expense23,552 66,209 14,965 3,910108,636 
Net interest income (loss)44,701 163,974 17,034 (5,084)220,625 
Provision for credit losses2,003 6,697 — —8,700 
Net interest income (loss) after provision for credit losses
42,698 157,277 17,034 (5,084)211,925 
Non-interest income15,108 15,057 2,687 8,29841,150 
Non-interest expense19,748 25,161 381 100,587145,877 
Internal expense transfer19,758 55,544 12,559 (87,861)— 
Income (loss) before income taxes$18,300 $91,629 $6,781 $(9,512)$107,198 
Return on average interest earning assets (pre-tax)
1.07 %1.90 %0.62 %N/A1.41 %

 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 expense40,217 136,156 29,216 13,088218,677 
Net interest income (loss)158,801 635,791 52,689 (16,297)830,984 
Provision for credit losses15,274 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 income55,383 52,192 7,661 20,263135,499 
Non-interest expense60,188 73,041 843 338,935473,007 
Internal expense transfer58,355 197,444 42,393 (298,192)— 
Income (loss) before income taxes$80,367 $326,713 $16,426 $(36,777)$386,729 
Return on average interest earning assets (pre-tax)
1.49 %1.79 %0.42 %N/A1.40 %
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 Nine Months Ended September 30, 2019
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets
$6,812,001 $18,839,194 $4,330,504 $—$29,981,699 
Interest income$203,897 $679,833 $97,189 $(3,692)$977,227 
Interest expense69,504 192,221 44,185 11,810317,720 
Net interest income (loss)134,393 487,612 53,004 (15,502)659,507 
Provision for credit losses4,986 13,814 — —18,800 
Net interest income (loss) after provision for credit losses
129,407 473,798 53,004 (15,502)640,707 
Non-interest income41,927 29,527 7,365 97,607176,426 
Non-interest expense56,845 76,729 684 301,151435,409 
Internal expense transfer58,476 161,803 37,245 (257,524)— 
Income (loss) before income taxes$56,013 $264,793 $22,440 $38,478$381,724 
Return on average interest earning assets (pre-tax)
1.10 %1.87 %0.69 %N/A1.70 %

Item 2. Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations

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

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

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

•the impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients;
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•the impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets;
•potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic or as a result of our actions in response to, or failure to implement or effectively implement, federal, state and local laws, rules or executive orders requiring that we grant forbearances or not act to collect our loans;
•the impact of forbearances or deferrals we are required or agree to as a result of customer requests and/or government actions, including, but not limited to our potential inability to recover fully deferred payments from the borrower or the collateral;
•damage verdicts or settlements or restrictions related to existing or potential class action litigation or individual litigation arising from claims of violations of laws or regulations, contractual claims, breach of fiduciary responsibility, negligence, fraud, environmental laws, patent or trademark infringement, employment related claims, and other matters;
•a prolonged downturn in the economy, mainly in New Jersey, New York, Florida and Alabama, as well as an unexpected decline in commercial real estate values within our market areas;
•higher or lower than expected income tax expense or tax rates, including increases or decreases resulting from changes in uncertain tax position liabilities, tax laws, regulations and case law;
•the inability to grow customer deposits to keep pace with loan growth;
•a material change in our allowance for credit losses under CECL due to forecasted economic conditions and/or unexpected credit deterioration in our loan and investment portfolios;
•the need to supplement debt or equity capital to maintain or exceed internal capital thresholds;
•greater than expected technology related costs due to, among other factors, prolonged or failed implementations, additional project staffing and obsolescence caused by continuous and rapid market innovations;
•the loss of or decrease in lower-cost funding sources within our deposit base, including our inability to achieve deposit retention targets under Valley's branch transformation strategy;
•cyber-attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;
•results of examinations by the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (FRB), the Consumer Financial Protection Bureau (CFPB) and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for credit losses, write-down assets, reimburse customers, change the way we do business, or limit or eliminate certain other banking activities;
•our inability or determination not to pay dividends at current levels, or at all, because of inadequate earnings, regulatory restrictions or limitations, changes in our capital requirements or a decision to increase capital by retaining more earnings;
•unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, the COVID-19 pandemic or other external events;
•unexpected significant declines in the loan portfolio due to the lack of economic expansion, increased competition, large prepayments, changes in regulatory lending guidance or other factors; and
•the failure of other financial institutions with whom we have trading, clearing, counterparty and other financial relationships.

A detailed discussion of factors that could affect our results is included in our SEC filings, including the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of this report.
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Critical Accounting Policies and Estimates

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

Determining the allowance for loan losses has historically been identified as a critical accounting estimate. On January 1, 2020, we adopted new accounting guidance which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans, unfunded credit commitments and held to maturity debt securities measured at amortized cost. Previously, an allowance for credit losses on loans was recognized based on probable incurred losses. See Notes 5, 7 and 8 to the consolidated financial statements for further discussion of our accounting policies and methodologies for establishing the allowance for credit losses.

The accounting estimates relating to the allowance for credit losses remains a "critical accounting estimate" for the following reasons:

•Changes in the provision for credit losses can materially affect our financial results;
•Estimates relating to the allowance for credit losses require us to project future borrower performance, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default;
•The allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, gross domestic product (GDP), inflation, energy prices and unemployment; and
•Judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

Our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Changes in such estimates could significantly impact our allowance and provision for credit losses. Accordingly, our actual credit loss experience may not be in line with our expectations.

As discussed further in the "Allowance for Credit Losses" section in this MD&A, we incorporated a multi-scenario economic forecast for estimating lifetime expected credit losses at September 30, 2020. As a result of the deterioration in economic conditions caused by the COVID-19 pandemic during the nine months ended September 30, 2020 and the related increase in economic uncertainty, we increased our probability weighting for the most severe economic scenario as compared to those at January 1, 2020. As a result, approximately 32 percent of the provision of credit losses for loans totaling $106.1 million for the nine months ended September 30, 2020 reflected the impact of the adverse economic forecast within Valley's lifetime expected credit loss estimate.

Details regarding our critical accounting policies for goodwill and other intangible assets, and income taxes are described in detail in Part II, Item 7 in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019.
New Authoritative Accounting Guidance

See Note 5 to the consolidated financial statements for a description of new authoritative accounting guidance, including the respective dates of adoption and effects on results of operations and financial condition.




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Executive Summary

Company Overview. At September 30, 2020, Valley had consolidated total assets of approximately $40.7 billion, total net loans of $32.1 billion, total deposits of $31.2 billion and total shareholders’ equity of $4.5 billion. Our commercial bank operations include branch office locations in northern and central New Jersey, the New York City Boroughs of Manhattan, Brooklyn, Queens, and Long Island, Florida and Alabama. Of our current 236 branch network, 59 percent, 16 percent, 18 percent and 7 percent of the branches are in New Jersey, New York, Florida and Alabama, respectively. Despite targeted branch consolidation activity, we have significantly grown both in asset size and locations over the past several years primarily through bank acquisitions, including our acquisition of Oritani Financial Corp. (Oritani) on December 1, 2019. See Note 2 to the consolidated financial statements for more information regarding the Oritani acquisition.

Impact of COVID-19. The outbreak of the disease caused by the novel coronavirus (COVID-19) and the resulting pandemic have greatly disrupted consumer, business and government activity during the nine months ended September 30, 2020, including within the markets we serve. While the overall level of economic activity improved in the third quarter 2020 following the steep economic downturn in second quarter 2020, certain industries and businesses continue to be adversely impacted with a significant loss of their normal revenue streams and continue to experience business interruptions. Our outlook since the end of the second quarter indicates continued macroeconomic deterioration with higher levels of credit stress related to borrowers impacted by COVID-19 and lower valuations of collateral securing our non-performing taxi medallion loan portfolio. Uncertainties and disruptions resulting from the COVID-19 pandemic have slowed our traditional new commercial loan volumes and the loan balances for residential and many consumer loan products have seen moderate declines in the third quarter 2020, including the impact of a higher level of residential mortgage loans originated for sale due to our current interest rate risk management strategies. Any sustained economic downturn due to COVID-19 and other factors, or other long-term changes in consumer and business behaviors from COVID-19 may adversely impact the value of assets that serve as collateral for our loans.

The Paycheck Protection Program (PPP) provided for in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as supplemented by the Paycheck Protection Program and Health Care Enhancement Act (Enhancement Act), was designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee 8 to 24 weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. Valley National Bank is a certified Small Business Administration (SBA) lender and facilitated approximately 13,000 SBA-approved PPP loans totaling $2.3 billion through the close of the program on August 8, 2020. While difficult to accurately predict, we expect the majority of these loans to be forgiven in accordance with rules, application and documentation requirements for this program.

We have reopened all bank branches in our network that were either temporarily closed or had reduced lobby services due to COVID-19, however we continue to act with an abundance of caution in order to safeguard the health and wellness of our customers and employees and may limit capacity in our branch locations and/or require scheduled appointments. We continue to closely monitor local conditions in the areas we serve and will take actions as circumstances warrant, which may necessitate certain branch or other office closures and reduced lobby services. Our business continuity plan continues to remain in effect with many of our non-customer facing employees continuing to work remotely as we monitor the level of the health crisis in our primary markets.

In response to the COVID-19 pandemic and its economic impact on certain customers and in accordance with provisions set forth by the CARES Act, Valley implemented short-term loan modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of September 30, 2020, Valley had approximately 1,400 loans with total unpaid principal balances of $1.1 billion remaining in their payment deferral period under short-term modification. The $1.1 billion of loans in deferral represented approximately 3.3 percent of our total loan portfolio at September 30, 2020, decreasing from approximately $2.7 billion, or 8.4 percent of total loans, near the start of the third quarter 2020.
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Significant uncertainties as to future economic conditions exist with significant economic stress on our customers. The severe adverse economic pressures, coupled with the implementation of an expected loss methodology for determining our provision for credit losses as required by CECL, have contributed to a sharply increased provision for credit losses for the nine months ended September 30, 2020, following our initial adoption of CECL on January 1, 2020. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, Enhancement Act and other government stimulus or Federal Reserve actions. However, the extent to which the COVID-19 pandemic will impact our operations and financial results during the fourth quarter 2020 and during 2021 is highly uncertain. See the "Operating Environment" section and our risk factors under Part II, Item 1A below for more details.

Branch Transformation. As previously disclosed, Valley has embarked on a strategy to overhaul its retail network. Over one year ago, we established the foundation of what the transformation of our branch network would look like in coming years. At that time, we identified 74 branches that did not meet certain internal performance measures, including 20 branches that were closed and consolidated by the end of the first quarter 2019. For the remaining 54 branches, we implemented tailored action plans focused on improving profitability and deposit levels, as well as upgrades in staffing and training, within a defined timeline. During the first quarter 2020, we permanently closed an additional 9 branches located in New Jersey, including the consolidation of 6 acquired Oritani branches into nearby legacy Valley branches. We currently plan to permanently close 7 New Jersey branches and 2 Florida branches during fourth quarter 2020, and one additional New Jersey branch in first quarter 2021. For the remaining branch network, we continue to monitor the operating performance of each branch and implement tailored action plans focused on improving profitability and deposit levels for those branches that underperform.

Quarterly Results. Net income for the third quarter 2020 was $102.4 million, or $0.25 per diluted common share, compared to $81.9 million, or $0.24 per diluted common share, for the third quarter 2019. The $20.5 million increase in quarterly net income as compared to the same quarter one year ago was largely due to: (i) a $62.5 million increase in net interest income driven by organic and Oritani acquired loan growth over the last 12 months combined with our ability to significantly reduce our deposit and other funding costs in the current low interest rate environment, (ii) a $8.1 million increase in non-interest income mainly caused by strong commercial loan customer swap fees and additional gains on the sales of residential mortgage loans, partially offset by (iii) a $22.2 million increase in our provision for credit losses due to the adoption of CECL and the impact of the COVID-19 pandemic on the model results, (iv) a $14.3 million increase in non-interest expense due to the Oritani acquisition, higher cash incentive accruals, increased technology consulting expense, certain additional expenses due to COVID-19, and the charge incurred in third quarter 2020 on a debt extinguishment, and (v) a $13.6 million increase in income tax expense. See the “Net Interest Income”, “Non-Interest Income”, “Non-Interest Expense”, and “Income Taxes” sections below for more details on the items above impacting our third quarter 2020 results, as well as other items discussed elsewhere in this MD&A, for more details on the impact of the items above on our third quarter 2020 results.

Operating Environment. During third quarter 2020, real GDP increased over 33 percent with lower rates of COVID-19 transmission and a gradual resumption of many personal, business, and government activities following the steep decline in GDP during the second quarter. The unemployment rate also improved to 7.9 percent in September 2020 as compared to 11.1 percent in June 2020. Government policy measures, including the CARES Act improved the flow of credit to households and businesses with employment increasing sharply and prices for goods and services stabilized. In addition, the Federal Reserve maintained its low target range for the federal funds rate which was reduced earlier this year and began purchasing Treasury securities, as well as agency issued mortgage-backed securities. The federal funds rate target rate remains between zero and 0.25 percent and the 10-year U.S. Treasury note yield ended the third quarter at 0.69 percent, which was 99 basis points lower as compared with September 30, 2019.

The current economic environment is expected to mute our overall growth of our loan portfolio, however, the strength of our loan origination pipeline has remained fairly resilient in the early stages of the fourth quarter 2020. The low market interest rates for new loans will continue to put pressure on our loan yields and net margin, as well as influence our decision to originate most residential mortgage loans for sale versus portfolio investment. The COVID-19 pandemic and its recent resurgences across the U.S. are expected to impact the level of economic
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activity, employment and household and business confidence in the fourth quarter 2020 and beyond. A prolonged COVID-19 pandemic and economic recovery are likely to weigh on the Bank’s financial results, as highlighted in the remaining MD&A discussion below.
Loans. Loans increased $101.0 million to approximately $32.4 billion at September 30, 2020 from June 30, 2020 largely due to controlled growth in our commercial real estate loan portfolio and a $63 million increase in SBA PPP loans classified as commercial and industrial loans during the third quarter. Commercial real estate loans increased $243.7 million, or 5.9 percent on an annualized basis, to $16.8 billion at September 30, 2020 as compared to June 30, 2020 mainly due to our solid loan commitment pipeline at June 30, 2020 and slower repayment activity in the third quarter. The residential mortgage and most consumer loan categories experienced moderate declines in the third quarter due to the impact of COVID-19, including a higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies. During the third quarter 2020, we originated $385.6 million of residential mortgage loans for sale rather than held for investment and sold approximately $301.2 million of these loans. Residential mortgage loans held for sale at fair value totaled $209.3 million and $120.6 million at September 30, 2020 and June 30, 2020, respectively. See further details on our loan activities under the “Loan Portfolio” section below.
Asset Quality. Total non-performing assets (NPAs), consisting of non-accrual loans, other real estate owned (OREO), other repossessed assets and non-accrual debt security decreased $20.5 million to $203.6 million at September 30, 2020 as compared to June 30, 2020. Non-accrual loans decreased $19.5 million to $191.1 million at September 30, 2020 as compared to June 30, 2020 mainly due to charge-offs within the commercial and industrial loan category, including charge-offs from our taxi medallion loan portfolio caused by a decline in collateral valuations at September 30, 2020. Non-accrual loans represented 0.59 percent of total loans at September 30, 2020, as compared to 0.65 percent at June 30, 2020.
Total accruing past due loans (i.e., loans past due 30 days or more and still accruing interest) decreased $9.2 million to $83.9 million, or 0.26 percent of total loans, at September 30, 2020 as compared to $93.1 million, or 0.29 percent of total loans, at June 30, 2020 mainly due to declines in residential mortgage and consumer loans in all delinquency categories. This decrease was largely due to improved customer performance, including CARES Act qualifying forbearance loans that resumed their scheduled monthly payments during the third quarter 2020. Commercial real estate loans past due 30 to 59 days increased $12.1 million as compared to June 30, 2020 mainly due to three loan relationships included in this delinquency category at September 30, 2020. See further details in the "Non-performing Assets" section below.
Deposits and Other Borrowings. Average non-interest bearing deposits; savings, NOW and money market deposits; and time deposits represented approximately 28 percent, 46 percent and 26 percent of total deposits as of September 30, 2020, respectively. Overall, average deposits increased by $552.7 million to $31.4 billion for the third quarter 2020 as compared to the second quarter 2020. Our mix of the deposit categories of total average deposits for the third quarter 2020 as compared to the second quarter 2020 experienced a partial migration from time deposits to non-interest bearing and lower-cost transaction account types.
Actual ending balances for deposits decreased $240.0 million to approximately $31.2 billion at September 30, 2020 from June 30, 2020 largely due to decreases of $735.2 million and $232.9 million in time deposits and non-interest bearing deposits, respectively, which were mostly offset by an increase of $728.1 million in the money market, now and savings account category. The decrease in time deposits was driven by maturing high cost retail CDs and partial migration to more liquid deposit product categories, while the decline in non-interest bearing balances was partially caused by normal period end fluctuations and lower deposit balances with PPP loan customers. Total brokered deposits (consisting of both time and money market deposit accounts) were $3.3 billion at September 30, 2020 as compared to $3.6 billion at June 30, 2020. While we believe the current operating environment will likely continue to be favorable for Valley’s deposit gathering initiatives, we cannot guarantee that we will be able to maintain deposit levels at or near those reported at September 30, 2020. Additionally, the vast majority of the PPP loan customers that are Valley depositors are expected to continue to use PPP funds for qualifying payroll and other costs over an 8 to 24 week total period to obtain loan forgiveness. The resulting outflow of funds for such expenditures may contribute to lower levels of deposit balances in the fourth quarter 2020.
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Average short-term borrowings decreased $784.7 million to $1.5 billion for the third quarter 2020 as compared to the second quarter 2020 due to a decline in overnight borrowings, comprised mainly of federal funds purchased, and corresponding reductions in our excess liquidity levels which were prudently elevated by management in the first half of 2020 due to the COVID-19 pandemic. Average long-term borrowings (including junior subordinated debentures issued to capital trusts which are presented separately on the consolidated statements of financial condition) increased by $73.7 million to $3.0 billion for the third quarter 2020 as compared to the second quarter 2020 mainly due to the $115 million subordinated note issuance in June 2020, which was outstanding for the entire third quarter.
Actual ending balances for short-term borrowings decreased by $652.2 million to $1.4 billion at September 30, 2020 from the second quarter 2020 due to the decline in overnight borrowings. Long-term borrowings decreased by $55.0 million to $2.9 billion at September 30, 2020 as compared to June 30, 2020 mainly due to the prepayment of a $50 million institutional repo borrowing with a stated interest rate of 3.7 percent. The prepayment resulted in a $2.4 million prepayment penalty charge recognized in non-interest expense during the third quarter 2020.
Selected Performance Indicators. The following table presents our annualized performance ratios for the periods indicated:
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Return on average assets0.99 %0.98 %0.94 %1.10 %
Return on average assets, as adjusted1.01 1.00 0.95 0.96 
Return on average shareholders’ equity9.04 9.26 8.50 10.44 
Return on average shareholders’ equity, as adjusted9.20 9.40 8.59 9.10 
Return on average tangible shareholders’ equity (ROATE)13.30 13.75 12.61 15.65 
ROATE, as adjusted13.53 13.96 12.75 13.65 

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

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Adjusted net income is computed as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
(in thousands)
Net income, as reported$102,374 $81,891 $285,243 $271,689 
Add: Loss on extinguishment of debt (net of tax)1,691 — 1,691 — 
Add: Net impairment losses on securities (net of tax)— — — 2,078 
Add: Losses on securities transactions (net of tax)33 67 91 82 
Add: Severance expense (net of tax) (1)
— — — 3,433 
Add: Tax credit investment impairment (net of tax) (2)
— — — 1,757 
Add: Merger related expenses (net of tax) (3)
76 1,043 1,275 1,068 
Add: Income tax expense (4)
— 133 — 12,456 
Less: Gain on sale-leaseback transaction (net of tax) (5)
— — — (55,707)
Net income, as adjusted$104,174 $83,134 $288,300 $236,856 
(1)    Severance expense is included in salary and employee benefits expense.
(2)    Impairment is included in the amortization of tax credit investments.
(3)    Merger related expenses are primarily within salary and employee benefits expense, professional and legal fees, and other non-interest expenses.
(4)    Income tax expense related to reserves for uncertain tax positions.
(5)    The gain on sale leaseback transactions is included in net gains on the sales of assets within other non-interest income.

Adjusted annualized return on average assets is computed by dividing adjusted net income by average assets, as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
($ in thousands)
Net income, as adjusted$104,174$83,134$288,300$236,856
Average assets$41,356,737$33,419,137$40,304,956$32,811,565
Annualized return on average assets, as adjusted1.01 %1.00 %0.95 %0.96 %

Adjusted annualized return on average shareholders' equity is computed by dividing adjusted net income by average shareholders' equity, as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
($ in thousands)
Net income, as adjusted$104,174$83,134$288,300$236,856
Average shareholders' equity$4,530,671$3,536,528$4,472,447$3,471,432
Annualized return on average shareholders' equity, as adjusted9.20 %9.40 %8.59 %9.10 %

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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,
 2020201920202019
 ($ in thousands)
Net income$102,374$81,891$285,243$271,689
Net income, as adjusted$104,174$83,134$288,300$236,856
Average shareholders’ equity$4,530,671$3,536,528$4,472,447$3,471,432
Less: Average goodwill and other intangible assets
1,451,8891,154,4621,456,5361,157,203
Average tangible shareholders’ equity$3,078,782$2,382,066$3,015,911$2,314,229
Annualized ROATE13.30 %13.75 %12.61 %15.65 %
Annualized ROATE, as adjusted13.53 %13.96 %12.75 %13.65 %

In addition to the items used to calculate net income, as adjusted, in the tables above, our net income is, from time to time, impacted by fluctuations in the level of net gains on sales of loans and swap fees recognized from commercial loan customer transactions. These amounts can vary widely from period to period due to, among other factors, the amount of residential mortgage loans originated for sale, bulk loan portfolio sales and commercial loan customer demand for certain products. See the “Non-Interest Income” section below for more details.
Net Interest Income

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

Net interest income on a tax equivalent basis totaling $284.1 million for the third quarter 2020 increased $62.4 million as compared to the third quarter 2019 and increased $579 thousand as compared to the second quarter 2020. Our third quarter 2020 net interest income results benefited from the prudent management of the level of interest rates offered on our deposits products, as well as a shift in customer preference towards deposits without stated maturities. Interest expense of $54.3 million for the third quarter 2020 decreased $11.7 million as compared to the second quarter 2020 largely due to the maturity and run-off of higher cost time deposits, reduced interest rates on all deposit products and a reduction in average short-term borrowings within our funding mix during the third quarter. Interest income for the third quarter 2020 decreased by $11.1 million as compared to the second quarter 2020 driven by (i) a $6.0 million decrease in interest income from our loan portfolio largely caused by new and refinanced loan originations at lower current interest rates and a moderate decline in discount accretion related to purchased credit deteriorated loans, and (ii) a $5.1 million decrease in interest and dividends from investment securities due to normal repayments of higher yielding securities and the acceleration of premium amortization expense related to the increased prepayment of mortgage-backed securities.

Average interest earning assets increased $7.3 billion to $37.8 billion for the third quarter 2020 as compared to the third quarter 2019 primarily due to $3.8 billion of interest earning assets acquired from Oritani and organic loan growth over the 12-month period, including $2.3 billion of PPP loans. As compared to the second quarter 2020, average interest earning assets decreased by $10.7 million from $37.8 billion driven by lower excess liquidity held in overnight interest-bearing deposits with banks and normal repayments of investment securities, mostly offset by a $474.1 million increase in average loan balances during the third quarter 2020.

Average interest bearing liabilities increased $4.2 billion to $27.1 billion for the third quarter 2020 as compared to the third quarter 2019 mainly due to deposits and borrowings totaling a combined $3.4 billion assumed in the Oritani acquisition, organic growth of retail deposits and additional long-term borrowings caused by the funding of loan growth and our increased liquidity in response to COVID-19. As compared to the second quarter 2020, average interest bearing liabilities decreased by $516.0 million in the third quarter 2020 primarily due to a decline in overnight borrowings, partially offset by higher average deposit levels caused by general increases in customer
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balances, as well as funded PPP loans which were placed into customer deposit accounts. See additional information under "Deposits and Other Borrowings" in the Executive Summary section above.

Our net interest margin on a tax equivalent basis of 3.01 percent for the third quarter 2020 increased by 1 basis point and 10 basis points from 3.00 percent and 2.91 percent for the second quarter 2020 and third quarter 2019, respectively. The yield on average interest earning assets decreased by 12 basis points on a linked quarter basis, mostly due to the impact of the lower interest rate environment. The yield on average loans decreased by 13 basis points to 3.89 percent for the third quarter 2020 as compared to the second quarter 2020 largely due to the continued repayment of higher yield loans and the lower yield on new loans. The overall cost of average interest bearing liabilities decreased 16 basis points to 0.80 percent for the third quarter 2020 as compared to the linked second quarter 2020 primarily due to the lower rates offered on deposit products, maturing time deposits and a decrease in average short-term borrowings. Our cost of total average deposits was 0.41 percent for the third quarter 2020 as compared to 0.60 percent for the second quarter 2020.

As previously noted, the Federal Reserve has signaled that it expects to hold interest rates near zero for several years to support the economic recovery. While our net interest income and margin was positively impacted by the repricing of deposits which outpaced the decline in yield on interest earning assets during the third quarter 2020, we expect continued pressure on our margin as this positive spread could potentially narrow in future periods.
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The following table reflects the components of net interest income for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019:

Quarterly Analysis of Average Assets, Liabilities and Shareholders’ Equity and
Net Interest Income on a Tax Equivalent Basis
 Three Months Ended
 September 30, 2020June 30, 2020September 30, 2019
 Average
Balance		InterestAverage
Rate		Average
Balance		InterestAverage
Rate		Average
Balance		InterestAverage
Rate
 ($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)
$32,515,264 $315,863 3.89 %$32,041,200 $321,883 4.02 %$26,136,745 $298,384 4.57 %
Taxable investments (3)
3,354,373 17,529 2.09 3,673,090 22,539 2.45 3,411,330 24,972 2.93 
Tax-exempt investments (1)(3)
542,450 4,564 3.37 562,172 4,673 3.32 632,709 5,341 3.38 
Interest bearing deposits with banks1,355,623 420 0.12 1,501,925 411 0.11 313,785 1,686 2.15 
Total interest earning assets37,767,710 338,376 3.58 37,778,387 349,506 3.70 30,494,569 330,383 4.33 
Allowance for loan losses(309,382)(284,184)(157,176)
Cash and due from banks291,803 424,625 267,331 
Other assets3,558,927 3,540,513 2,812,665 
Unrealized gains on securities available for sale, net47,679 44,173 1,748 
Total assets$41,356,737 $41,503,514 $33,419,137 
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits$14,542,470 $13,323 0.37 %$13,788,951 $16,627 0.48 %$11,065,959 $35,944 1.30 %
Time deposits8,027,346 19,028 0.95 8,585,782 29,857 1.39 7,383,202 42,848 2.32 
Total interest bearing deposits22,569,816 32,351 0.57 22,374,733 46,484 0.83 18,449,161 78,792 1.71 
Short-term borrowings1,533,246 2,588 0.68 2,317,992 1,980 0.34 2,265,528 12,953 2.29 
Long-term borrowings (4)
2,959,728 19,318 2.61 2,886,016 17,502 2.43 2,143,432 16,891 3.15 
Total interest bearing liabilities27,062,790 54,257 0.80 27,578,741 65,966 0.96 22,858,121 108,636 1.90 
Non-interest bearing deposits8,820,877 8,463,230 6,387,188 
Other liabilities942,399 984,097 637,300 
Shareholders’ equity4,530,671 4,477,446 3,536,528 
Total liabilities and shareholders’ equity$41,356,737 $41,503,514 $33,419,137 
Net interest income/interest rate spread (5)
$284,119 2.78 %$283,540 2.74 %$221,747 2.43 %
Tax equivalent adjustment(1,033)(981)(1,122)
Net interest income, as reported$283,086 $282,559 $220,625 
Net interest margin (6)
3.00 %2.99 %2.89 %
Tax equivalent effect0.01 %0.01 %0.02 %
Net interest margin on a fully tax equivalent basis (6)
3.01 %3.00 %2.91 %

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The following table reflects the components of net interest income for the nine months ended September 30, 2020 and 2019:
 Nine Months Ended
 September 30, 2020September 30, 2019
 Average
Balance		InterestAverage
Rate		Average
Balance		InterestAverage
Rate
 ($ in thousands)
Assets
Interest earning assets:
Loans (1)(2)
$31,522,268 $970,814 4.11 %$25,651,195 $883,595 4.59 %
Taxable investments (3)
3,527,823 65,402 2.47 3,418,614 76,306 2.98 
Tax-exempt investments (1)(3)
563,459 14,207 3.36 660,162 16,936 3.42 
Interest bearing deposits with banks1,130,257 2,296 0.27 251,728 3,947 2.09 
Total interest earning assets36,743,807 1,052,719 3.82 29,981,699 980,784 4.36 
Allowance for loan losses(283,508)(155,643)
Cash and due from banks318,370 273,191 
Other assets3,492,846 2,734,304 
Unrealized gains (losses) on securities available for sale, net33,441 (21,986)
Total assets$40,304,956 $32,811,565 
Liabilities and shareholders’ equity
Interest bearing liabilities:
Savings, NOW and money market deposits$13,834,930 $64,463 0.62 %$11,268,852 $110,247 1.30 %
Time deposits8,501,949 91,699 1.44 7,215,745 121,350 2.24 
Total interest bearing deposits22,336,879 156,162 0.93 18,484,597 231,597 1.67 
Short-term borrowings1,723,947 9,275 0.72 2,220,014 40,362 2.42 
Long-term borrowings (4)
2,873,912 53,240 2.47 1,807,503 45,761 3.38 
Total interest bearing liabilities26,934,738 218,677 1.08 22,512,114 317,720 1.88 
Non-interest bearing deposits7,995,759 6,288,382 
Other liabilities902,012 539,637 
Shareholders’ equity4,472,447 3,471,432 
Total liabilities and shareholders’ equity$40,304,956 $32,811,565 
Net interest income/interest rate spread (5)
$834,042 2.74 %$663,064 2.48 %
Tax equivalent adjustment(3,058)(3,557)
Net interest income, as reported$830,984 $659,507 
Net interest margin (6)
3.02 %2.93 %
Tax equivalent effect0.01 %0.02 %
Net interest margin on a fully tax equivalent basis (6)
3.03 %2.95 %
(1)Interest income is presented on a tax equivalent basis using a 21 percent federal tax rate.
(2)Loans are stated net of unearned income and include non-accrual loans.
(3)The yield for securities that are classified as available for sale is based on the average historical amortized cost.
(4)Includes junior subordinated debentures issued to capital trusts which are presented separately on the consolidated
statements of financial condition.
(5)Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)Net interest income as a percentage of total average interest earning assets.

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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, 2020 Compared to September 30, 2019Nine Months Ended September 30, 2020 Compared to September 30, 2019
 Change
Due to
Volume		Change
Due to
Rate		Total
Change		Change
Due to
Volume		Change
Due to
Rate		Total
Change
 (in thousands)
Interest Income:
Loans*$66,080 $(48,601)$17,479 $187,593 $(100,374)$87,219 
Taxable investments(410)(7,033)(7,443)2,372 (13,276)(10,904)
Tax-exempt investments*(759)(18)(777)(2,443)(286)(2,729)
Interest bearing deposits with banks1,489 (2,755)(1,266)4,178 (5,829)(1,651)
Total increase (decrease) in interest income66,400 (58,407)7,993 191,700 (119,765)71,935 
Interest Expense:
Savings, NOW and money market deposits8,825 (31,446)(22,621)21,120 (66,904)(45,784)
Time deposits3,454 (27,274)(23,820)19,055 (48,706)(29,651)
Short-term borrowings(3,259)(7,106)(10,365)(7,489)(23,598)(31,087)
Long-term borrowings and junior subordinated debentures
5,671 (3,244)2,427 22,020 (14,541)7,479 
Total increase (decrease) in interest expense14,691 (69,070)(54,379)54,706 (153,749)(99,043)
Total increase in net interest income
$51,709 $10,663 $62,372 $136,994 $33,984 $170,978 
*Interest income is presented on a tax equivalent basis using 21 percent as the federal tax rate.
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Non-Interest Income

Non-interest income increased $8.1 million and decreased $40.9 million for the three and nine months ended September 30, 2020 as compared to the same periods of 2019. The following table presents the components of non-interest income for the three and nine months ended September 30, 2020 and 2019:

 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
 (in thousands)
Trust and investment services$3,068 $3,296 $9,307 $9,296 
Insurance commissions1,816 2,748 5,426 7,922 
Service charges on deposit accounts3,952 5,904 13,189 17,634 
Losses on securities transactions, net(46)(93)(127)(114)
Net impairment losses on securities recognized in earnings
— — — (2,928)
Fees from loan servicing2,551 2,463 7,526 7,260 
Gains on sales of loans, net13,366 5,194 26,253 13,700 
Gains (losses) on sales of assets, net894 (159)716 76,997 
Bank owned life insurance(1,304)2,687 7,661 6,779 
Other24,975 19,110 65,548 39,880 
Total non-interest income$49,272 $41,150 $135,499 $176,426 

Insurance commissions declined $932 thousand and $2.5 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in 2019 mainly due to lower volumes of business generated by the Bank's insurance agency subsidiary.

Service charges on deposit accounts decreased by $2.0 million and $4.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 mostly due to waived fees related to COVID-19 customer relief efforts during the second and third quarters of 2020.

The other-than-temporary impairment losses on securities for the nine months ended September 30, 2019 related to one special revenue bond in default of its contractual payments starting in the second quarter 2019.
Gains on sales of loans, net increased $8.2 million and $12.6 million for the three and nine months ended September 30, 2020, respectively, as compared to the corresponding periods in 2019. Our net gains on sales of loans for each period are comprised of both gains on sales of residential mortgages and the net change in the mark to market gains and losses on our loans originated for sale and carried at fair value at each period end. The net gains from the change in the fair value of loans held for sale totaled $4.3 million and $8.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the $1.4 million increase and $4.4 million decrease for the three and nine months ended September 30, 2019, respectively. During the third quarter 2020, we sold approximately $301.2 million of residential mortgage loans as compared to $219.6 million during the third quarter 2019. See further discussions of our residential mortgage loan origination activity under the “Loan Portfolio” section of this MD&A below.

Net gains on sales of assets decreased $76.3 million for the nine months ended September 30, 2020 as compared to the same period of 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of 26 locations recognized during the first quarter 2019.

Bank owned life insurance income decreased $4.0 million for the third quarter 2020 as compared to the same period in 2019 largely due to several periodic death benefits claims received in the second quarter 2020 and a related credit
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adjustment of $3.3 million to the mortality contingency reserves component of our BOLI assets recognized during the third quarter 2020 with a corresponding reduction in BOLI income.

Other non-interest income increased $5.9 million and $25.7 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019 primarily due to increased swap fee income related to derivative interest rate swaps executed with commercial loan customers. Swap fees totaled $19.2 million and $13.9 million for the three months ended September 30, 2020 and 2019, respectively, and $48.1 million and $23.4 million for the nine months ended September 30, 2020 and 2019, respectively.
Non-Interest Expense

Non-interest expense increased $14.3 million and $37.6 million for the three and nine months ended September 30, 2020 as compared to the same periods of 2019. The following table presents the components of non-interest expense for the three and nine months ended September 30, 2020 and 2019:

 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
 (in thousands)
Salary and employee benefits expense$83,626 $77,271 $247,886 $236,559 
Net occupancy and equipment expense31,116 29,203 96,774 86,789 
FDIC insurance assessment4,847 5,098 14,858 16,150 
Amortization of other intangible assets6,377 4,694 18,528 13,175 
Professional and legal fees8,762 5,870 22,646 15,286 
Loss on extinguishment of debt2,353 — 2,353 — 
Amortization of tax credit investments2,759 4,385 9,403 16,421 
Telecommunications expense2,094 2,698 7,247 7,317 
Other18,251 16,658 53,312 43,712 
Total non-interest expense$160,185 $145,877 $473,007 $435,409 

Salary and employee benefits expense increased $6.4 million and $11.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019. The increases in both periods were largely due to additional salaries related to bank branch and other operational staff retained from the Oritani acquisition, as well as higher accrued cash incentive compensation and increased medical expenses. These additional expenses were partially offset by cost reductions from our ongoing branch transformation efforts and other operational improvements over the last 12 months. The increase for the nine months ended September 30, 2020 as compared to the same period in 2019 was also partly driven by a $1.8 million special bonus paid to hourly employees impacted by COVID-19 that was incurred in the first quarter 2020.

Net occupancy and equipment expense increased $1.9 million and $10.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019. These increases were mostly due to additional costs associated with branches and other facilities acquired from Oritani, which were partially offset by costs savings from branch closures over the last 12 months. During the three and nine months ended September 30, 2020, we incurred higher equipment and certain other COVID-19 related expenses which included additional cleaning services for facilities to maintain employee and customer safety. In addition, the increase for the nine months September 30, 2020 was driven by higher rental expenses resulting from a sale leaseback transaction completed near the end of the first quarter 2019 and higher depreciation expense related to computer equipment and new data centers placed into service in fourth quarter 2019.

Loss on extinguishment of debt totaling $2.4 million for the three and nine months ended September 30, 2020 related to the prepayment of $50 million of long-term institutional repo borrowings during September 2020. The
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debt prepayment was funded by excess cash liquidity. See Note 10 to the consolidated financial statements for additional information.

Amortization of other intangibles increased $1.7 million and $5.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 largely due to higher amortization expense of loan servicing rights and core deposit intangible amortization acquired in the recent Oritani acquisition, as well as $966 thousand of net impairment of loan servicing rights for the nine months ended September 30, 2020. See Note 9 to the consolidated financial statements for additional information.

Professional and legal fees increased $2.9 million and $7.4 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019, largely due to higher costs from technology transformation consulting services, as well as remote work readiness costs largely incurred in the second quarter 2020 impacting the nine month period.

Amortization of tax credit investments decreased $1.6 million and $7.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019 largely due to a decline in impairment. The nine months ended September 30, 2019 included a $2.4 million impairment charge related to investments in three federal renewable energy tax credit funds sponsored by DC Solar. The remainder of the variances from the prior periods were mainly due to normal differences in the timing and amount of such investments and recognition of the related tax credits. Tax credit investments, while negatively impacting the level of our operating expenses and efficiency ratio, produce tax credits that reduce our income tax expense and effective tax rate. See Note 14 to the consolidated financial statements for more details on our tax credit investments.

Other non-interest expense increased $1.6 million and $9.6 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods of 2019. These increases were largely due to higher data processing costs, certain PPP loan costs, such as advertising, and other COVID-19 related costs, as well as incrementally higher operating expenses in several categories due to the expansion of our operations both organically and through the acquisition of Oritani in the fourth quarter 2019. Within the category, net gains on the sale of OREO properties decreased $782 thousand for the nine months ended September 30, 2020 as compared to the same period in 2019.

Efficiency Ratio
The efficiency ratio measures total non-interest expense as a percentage of net interest income plus total non-interest income. We believe this non-GAAP measure provides a meaningful comparison of our operational performance and facilitates investors’ assessments of business performance and trends in comparison to our peers in the banking industry. Our overall efficiency ratio, and its comparability to some of our peers, is negatively impacted by the amortization of tax credit investments, as well as infrequent charges within non-interest income and expense, such as the loss on extinguishment of debt and merger expenses.


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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, 2020 and 2019:
 Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
 ($ in thousands)
Total non-interest expense$160,185 $145,877 $473,007 $435,409 
Less: Loss on extinguishment of debt (pre-tax)2,353 — 2,353 — 
Less: Severance expense (pre-tax)— — — 4,838 
Less: Amortization of tax credit investments (pre-tax)2,759 4,385 9,403 16,421 
Less: Merger related expenses (pre-tax)
106 1,434 1,774 1,469 
Total non-interest expense, adjusted$154,967 $140,058 $459,477 $412,681 
Net interest income$283,086 $220,625 $830,984 $659,507 
Total non-interest income49,272 41,150 135,499 176,426 
Less: Gain on sale-leaseback transaction (pre-tax)— — — 78,505 
Add: Losses on securities transactions, net (pre-tax)46 93 127 114 
Add: Net impairment losses on securities (pre-tax)— — — 2,928 
Total net interest income and non-interest income$332,404 $261,868 $966,610 $760,470 
Efficiency ratio48.20 %55.73 %48.94 %52.09 %
Efficiency ratio, adjusted46.62 %53.48 %47.53 %54.27 %
Income Taxes

Income tax expense totaled $38.9 million for the third quarter 2020 as compared to $33.5 million and $25.3 million for the second quarter 2020 and third quarter 2019, respectively. Our effective tax rate was 27.5 percent, 25.9 percent and 23.6 percent for the third quarter 2020, second quarter 2020 and third quarter 2019, respectively. The increase in the third quarter 2020 effective tax rate was mainly due to higher pre-tax income and the retroactive increase in New Jersey’s corporate business income tax surtax from 1.5 percent to 2.5 percent caused by a change in state tax laws which went into effect in the third quarter 2020. The change in the New Jersey surtax resulted in an additional $1.1 million, net of federal tax benefit, charge to income tax expense for the third quarter 2020.

The CARES Act did not have a material impact on our reported income tax expense for the nine months ended September 30, 2020.

U.S. GAAP requires that any change in judgment or change in measurement of a tax position taken in a prior annual period be recognized as a discrete event in the quarter in which it occurs, rather than being recognized as a change in effective tax rate for the current year. Our adherence to these tax guidelines may result in volatile effective income tax rates in future quarterly and annual periods. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.
Business Segments

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

The following tables present the financial data for each business segment for the three months ended September 30, 2020 and 2019:
 Three Months Ended September 30, 2020
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets$7,126,157$25,389,107$5,252,446$—$37,767,710
Income (loss) before income taxes34,565121,3511,066(15,717)141,265
Annualized return on average interest earning assets (before tax)
1.94 %1.91 %0.08 %N/A1.50 %
 
 Three Months Ended September 30, 2019
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets$6,858,216$19,278,529$4,357,824$—$30,494,569
Income (loss) before income taxes18,30091,6296,781(9,512)107,198
Annualized return on average interest earning assets (before tax)
1.07 %1.90 %0.62 %N/A1.41 %

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

This segment, representing approximately 21.5 percent of our loan portfolio at September 30, 2020, is mainly comprised of residential mortgage loans and automobile loans, and to a lesser extent, home equity loans, secured personal lines of credit and other consumer loans (including credit card loans). The duration of the residential mortgage loan portfolio (which represented 13.2 percent of our loan portfolio at September 30, 2020) is subject to movements in the market level of interest rates and forecasted prepayment speeds. The weighted average life of the automobile loans (representing 4.1 percent of total loans at September 30, 2020) is relatively unaffected by movements in the market level of interest rates. However, the average life may be impacted by new loans as a result of the availability of credit within the automobile marketplace and consumer demand for purchasing new or used automobiles. The consumer lending segment also includes the Wealth Management and Insurance Services Division, comprised of trust, asset management, and insurance services.

Average interest earning assets in this segment increased $267.9 million to $7.1 billion for the three months ended September 30, 2020 as compared to the third quarter 2019. The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the economic slowdown starting in the second quarter 2020 due to the COVID-19 pandemic.

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Income before income taxes generated by the consumer lending segment increased $16.3 million to $34.6 million for the third quarter 2020 as compared to the third quarter 2019 largely due to increases in both net interest income and non-interest income totaling $10.2 million and $8.4 million, respectively. The increase in net interest income was mainly driven by lower funding costs and the increase in average loans. The increase in non-interest income was mostly driven by an $8.2 million increase in the net gains on sales of loans caused by the higher level of residential mortgage sales during the third quarter 2020. The positive impact of the aforementioned items was partially offset by a $3.4 million increase in the provision for loan losses for the third quarter 2020 as compared to the third quarter 2019 mainly due to the impact of the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment. See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio increased 47 basis points to 3.08 percent for the third quarter 2020 as compared to the third quarter 2019 mainly due to a 86 basis point decrease in the costs associated with our funding sources, partially offset by a 39 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019. The 39 basis point decrease in loan yield was largely due to lower yielding new loan volumes. See the "Executive Summary" and the "Net Interest Income" sections above for more details on our net interest margin and funding sources.
Commercial Lending

The commercial lending segment is comprised of floating rate and adjustable rate commercial and industrial loans and construction loans, as well as fixed rate owner occupied and commercial real estate loans. Due to the portfolio’s interest rate characteristics, commercial lending is Valley’s business segment that is most sensitive to movements in market interest rates. Commercial and industrial loans totaled approximately $6.9 billion and represented 21.3 percent of the total loan portfolio at September 30, 2020. Commercial real estate loans and construction loans totaled $18.5 billion and represented 57.2 percent of the total loan portfolio at September 30, 2020.

Average interest earning assets in this segment increased approximately $6.1 billion to $25.4 billion for the three months ended September 30, 2020 as compared to the third quarter 2019. The increase was mostly due to strong organic loan growth within the commercial and industrial and commercial real estate loan portfolios over most of the last 12-month period, including $2.3 billion of PPP loans originated in the second and third quarters of 2020, as well as $3.4 billion of loans acquired from Oritani during the fourth quarter 2019.
For the three months ended September 30, 2020, income before income taxes for the commercial lending segment increased $29.7 million to $121.4 million as compared to the third quarter 2019 mainly due to increases in both net interest income and non-interest income. Net interest income increased $54.6 million to $218.6 million for the third quarter 2020 as compared to the same period in 2019 mostly driven by lower funding costs and the increase in average loans. Non-interest income increased $5.4 million to $20.4 million during the three months ended September 30, 2020 as compared to the third quarter 2019 mainly due to a $5.3 million increase in swap fee income related to derivative interest rate swaps executed with commercial loan customers. The positive impact of the aforementioned items was partially offset by a $18.9 million increase in the provision for credit losses caused by several factors, including the adverse economic forecast for lifetime expected credit losses, additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers impacted by COVID-19, and the impact of lower valuations of collateral securing our non-performing taxi medallion loan portfolio. Internal transfer expense also increased $10.8 million for the third quarter 2020 as compared to the third quarter 2019 partly due to general increases related to acquired and organic growth in our business.

The net interest margin for this segment increased 3 basis points to 3.44 percent for the third quarter 2020 as compared to the third quarter 2019 largely due to a 84 basis point decrease in the cost of our funding sources, partially offset by a 81 basis point decrease in the yield on average loans.


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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.

Average interest earning assets in this segment increased $894.6 million during the third quarter 2020 as compared to the third quarter 2019 primarily due to a $1.0 billion increase in average interest bearing deposits with banks. The increase in average overnight interest bearing deposits with banks was mostly caused by our prudent maintenance of higher excess liquidity levels due to the COVID-19 pandemic during third quarter 2020, as well as the normal timing of loan and investment activity, including sales of residential mortgage loans.

For the third quarter 2020, income before income taxes for the investment management segment decreased $5.7 million to $1.1 million as compared to the third quarter 2019 mostly due to decreases in non-interest income and net interest income totaling $4.0 million and $1.2 million, respectively. The decrease in non-interest income was primarily due to lower BOLI income due to a periodic adjustment to the BOLI assets recognized in the three months ended September 30, 2020. See further details in the "Non-Interest Income" sections of this MD&A.

The net interest margin for this segment decreased 37 basis points to 1.20 percent for the third quarter 2020 as compared to the same quarter 2019 largely due to a 123 basis point decrease in the yield on average investments, partially offset by a 86 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments as compared to the third quarter 2019 was largely driven by repayment and prepayment of higher yield residential mortgage-backed securities, acceleration of premium amortization expense related to the increased prepayment of mortgage-backed securities and purchases of lower yielding investment securities over the last 12 months.
Corporate and other adjustments

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

The corporate segment recognized a $15.7 million and $9.5 million pre-tax loss for the three months ended September 30, 2020 and 2019, respectively. Higher pre-tax loss for the third quarter 2020 was mainly due to a $14.3 million increase in non-interest expense, partially offset by a $10.9 million increase in internal transfer income. The increase in non-interest expense was largely driven by increases in salaries and employee benefits expenses, net occupancy and equipment expense, professional and legal fees, and a $2.4 million loss on extinguishment of debt recognized in the third quarter 2020. Non-interest income also decreased $1.7 million for the three months ended September 30, 2020 from the third quarter 2019. See further details in the "Non-Interest Income" and "Non-Interest Expense" sections of this MD&A.







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The following tables present the financial data for each business segment for the nine months ended September 30, 2020 and 2019:
 Nine Months Ended September 30, 2020
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets$7,187,839$24,334,429$5,221,538$—$36,743,806
Income (loss) before income taxes80,367326,71316,426(36,777)386,729
Annualized return on average interest earning assets (before tax)
1.49 %1.79 %0.42 %N/A1.40 %
 Nine Months Ended September 30, 2019
 Consumer
Lending		Commercial
Lending		Investment
Management		Corporate
and Other
Adjustments		Total
 ($ in thousands)
Average interest earning assets$6,812,001$18,839,194$4,330,504$—$29,981,699
Income before income taxes56,013264,79322,44038,478381,724
Annualized return on average interest earning assets (before tax)
1.10 %1.87 %0.69 %N/A1.70 %

Consumer Lending

Average interest earning assets in this segment increased $375.8 million to $7.2 billion for the nine months ended September 30, 2020 as compared to the same period in 2019. The increase was largely due to approximately $255 million of loans acquired from Oritani, loan growth from residential mortgage loan originations for investment over most of the last 12 month period, as well as solid demand for both automobile loans and collateralized personal lines of credit prior to the economic slowdown in the second quarter 2020 due to the COVID-19 pandemic.

Income before income taxes generated by the consumer lending segment increased $24.4 million to $80.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases of $24.4 million and $13.5 million in net interest income and non-interest income, respectively. The increase in net interest income was mainly driven by lower funding costs and the increase in average loans. The increase in non-interest income was largely attributable to higher net gains on sales of loans for the nine months ended September 30, 2020 as compared to the same period in 2019. The positive impact of the aforementioned items was partially offset by increases of $10.3 million and $3.3 million in the provision for loan losses and non-interest expense, respectively. The increase in the provision for loan losses for the nine months ended September 30, 2020 as compared to the same period of 2019 was mainly due to the adverse economic forecast caused by COVID-19 included in our estimate of lifetime expected credit losses for this segment as well as additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to COVID-19 impacted borrowers. See further details in the "Allowance for Credit Losses" section of this MD&A.

The net interest margin on the consumer lending portfolio increased 31 basis points to 2.94 percent for the nine months ended September 30, 2020 as compared to the same period one year ago mainly due to a 61 basis point decrease in the costs associated with our funding sources, partially offset by a 30 basis point decrease in the yield on average loans. The decrease in our funding costs was mainly due to both deposits and borrowings continuing to reprice at lower interest rates and the prepayment of the $635 million high cost FHLB advances in December 2019. The 30 basis point decrease in loan yield was largely due to lower yielding new loan volumes.

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Commercial Lending

Average interest earning assets in this segment increased $5.5 billion to $24.3 billion for the nine months ended September 30, 2020 as compared to the same period in 2019. This increase was primarily due to organic loan growth over the last 12-month period, including PPP loans originations of $2.3 billion during the second and the third quarters 2020, and loans acquired from Oritani on December 1, 2019.

For the nine months ended September 30, 2020, income before income taxes for the commercial lending segment increased $61.9 million to $326.7 million as compared to the same period in 2019. Net interest income increased $148.2 million to $635.8 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to the higher average loan balances. Non-interest income also increased $22.7 million for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to a $24.7 million increase in fee income related to derivative interest rate swaps executed with commercial loan customers. The positive impact of the aforementioned items was partially offset by a $77.0 million increase in the provision for credit losses to $90.8 million during the nine months ended September 30, 2020 as compared to $13.8 million for the same period in 2019. The increase in the provision for credit losses was mainly due to the adverse economic forecast for lifetime expected credit losses during the first half of 2020, higher specific reserves for tax medallion loans and qualitative adjustments for potential credit stress related to borrowers impacted by the COVID-19 pandemic. See the "Allowance for Credit Losses" section below for further details. Internal transfer expense increased $35.6 million to $197.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019.

The net interest margin for this segment increased 3 basis points to 3.48 percent for the nine months ended September 30, 2020 as compared to the same period in 2019 due to a 61 basis point decrease in the cost of our funding sources, partially offset by a 58 basis point decrease in yield on average loans.
Investment Management

Average interest earning assets in this segment increased $891.0 million during the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases of $878.5 million in average interest bearing deposits with banks and, to a much lesser extent, an increase in the investment securities portfolio. The increase in average overnight interest bearing deposits with banks was mainly due to our higher levels of excess liquidity levels that were maintained in the 2020 period in response to the uncertainties created by the COVID-19 pandemic.

For the nine months ended September 30, 2020, income before income taxes for the investment management segment decreased $6.0 million to $16.4 million as compared to the same period in 2019 mainly due to increases in internal transfer expense and provision for credit losses for debt securities held to maturity totaling $5.1 million and $688 thousand, respectively.

The net interest margin for this segment decreased 29 basis points to 1.34 percent for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to a 90 basis point decrease in the yield on average investments, partially offset by a 61 basis point decrease in costs associated with our funding sources. The decrease in the yield on average investments as compared to the same period of 2019 was mainly due to repayment and prepayment of higher yield residential mortgage-backed securities, increased premium amortization and lower yielding new investments purchased over the last 12 months, and low yielding excess liquidity held in overnight investments.
Corporate and other adjustments

The pre-tax net loss for the corporate segment totaled $36.8 million for the nine months ended September 30, 2020 as compared to the net income of $38.5 million for the same period in 2019. The negative change of $75.3 million was mainly due to a decrease in non-interest income coupled with an increase in non-interest expense. The non-interest income decreased $77.3 million to $20.3 million for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to a $78.5 million gain on the sale (and leaseback) of several
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bank locations recognized during the nine months ended September 30, 2019. Non-interest expense increased $37.8 million to $338.9 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to increases in net occupancy and equipment expense, salaries and employee benefits expenses and professional and legal fees. See further details in the "Non-Interest Expense" section above. Internal transfer income increased $40.7 million to $298.2 million for the nine months ended September 30, 2020 as compared to the same period in 2019 largely due to general increases related to our growth.
ASSET/LIABILITY MANAGEMENT

Interest Rate Sensitivity

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

We use a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a 12-month and 24-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumptions of certain assets and liabilities as of September 30, 2020. The model assumes immediate changes in interest rates without any proactive change in the composition or size of the balance sheet, or other future actions that management might undertake to mitigate this risk. In the model, the forecasted shape of the yield curve remains static as of September 30, 2020. The impact of interest rate derivatives, such as interest rate swaps, is also included in the model.

Our simulation model is based on market interest rates and prepayment speeds prevalent in the market as of September 30, 2020. Although the size of Valley’s balance sheet is forecasted to remain static as of September 30, 2020 in our model, the composition is adjusted to reflect new interest earning assets and funding originations coupled with rate spreads utilizing our actual originations during the third quarter 2020. The model also utilizes an immediate parallel shift in market interest rates at September 30, 2020.

The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the table below due to the frequency and timing of changes in interest rates and changes in spreads between maturity and re-pricing categories. Overall, our net interest income is affected by changes in interest rates and cash flows from our loan and investment portfolios. We actively manage these cash flows in conjunction with our liability mix, duration and interest rates to optimize the net interest income, while structuring the balance sheet in response to actual or potential changes in interest rates. Additionally, our net interest income is impacted by the level of competition within our marketplace. Competition can negatively impact the level of interest rates attainable on loans and increase the cost of deposits, which may result in downward pressure on our net interest margin in future periods. Other factors, including, but not limited to, the slope of the yield curve and projected cash flows will impact our net interest income results and may increase or decrease the level of asset sensitivity of our balance sheet.
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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 in light of the aforementioned assumptions. While an instantaneous and severe shift in interest rates was used in this simulation model, we believe that any actual shift in interest rates would likely be more gradual and would therefore have a more modest impact than shown in the table below.
 Estimated Change in
Future Net Interest Income
Changes in Interest RatesDollar
Change		Percentage
Change
(in basis points)($ in thousands)
+200$53,334 4.82 %
+10032,868 2.97 
–100(23,054)(2.08)

As noted in the table above, a 100 basis point immediate increase in interest rates combined with a static balance
sheet where the size, mix, and proportions of assets and liabilities remain unchanged is projected to increase net interest income over the next 12 months by 2.97 percent. Management believes the interest rate sensitivity remains within an acceptable tolerance range at September 30, 2020. However, the level of net interest income sensitivity may increase or decrease in the future as a result of several factors, including potential changes in deposit and borrowings strategies, the slope of the yield curve and projected cash flows.
Liquidity

Bank Liquidity

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

The Bank has no required regulatory liquidity ratios to maintain; however, it adheres to an internal liquidity policy. The current policy maintains that we may not have a ratio of loans to deposits in excess of 110 percent or reliance on wholesale funding greater than 25 percent of total funding. The Bank was in compliance with the foregoing policies at September 30, 2020.
At September 30, 2020, our cash and cash equivalents totaled $930.7 million as compared to $1.9 billion and $434.7 million at June 30, 2020 and December 31, 2019, respectively. The decrease from June 30, 2020 was largely attributable to our managed reduction of elevated excess liquidity levels that were maintained in the first half of 2020 in response to the uncertainties created by COVID-19. We continue to closely monitor external events and adjust our mix and levels of various funding sources accordingly. See the "Deposits and Other Borrowings" section and Note 10 to the consolidated financial statements for more information.

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On the asset side of the balance sheet, the Bank has numerous sources of liquid funds in the form of cash and due from banks, interest bearing deposits with banks (including the Federal Reserve Bank of New York), investment securities held to maturity that are maturing within 90 days or would otherwise qualify as maturities if sold (i.e., 85 percent of original cost basis has been repaid), investment securities 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 $2.7 billion, representing 7.4 percent of earning assets at September 30, 2020 and $2.2 billion, representing 6.4 percent of earning assets at December 31, 2019. Of the $2.7 billion of liquid assets at September 30, 2020, approximately $868.9 million of various investment securities were pledged to counterparties to support our earning asset funding strategies. We anticipate the receipt of approximately $1.2 billion in principal payments from securities in the total investment portfolio over the next 12 months due to normally scheduled principal repayments and expected prepayments of certain securities, primarily residential mortgage-backed securities.

Additional liquidity is derived from scheduled loan payments of principal and interest, as well as prepayments received. Loan principal payments (including loans held for sale at September 30, 2020) are projected in accordance with their scheduled contractual terms to be approximately $9.6 billion over the next 12 months. As a contingency plan for any liquidity constraints, liquidity could also be derived from the sale of conforming residential mortgages from our loan portfolio or alleviated from the temporary curtailment of lending activities.

On the liability side of the balance sheet, we utilize multiple sources of funds to meet liquidity needs, including retail and commercial deposits, brokered and municipal deposits, and short-term and long-term borrowings. Our core deposit base, which generally excludes fully insured brokered deposits and both retail and brokered certificates of deposit over $250 thousand, represents the largest of these sources. Average core deposits totaled approximately $25.7 billion and $20.4 billion for the nine months ended September 30, 2020 and for the year ended December 31, 2019, respectively, representing 70.0 percent and 66.8 percent of average earning assets for the respective periods. The level of interest bearing deposits is affected by interest rates offered, which is often influenced by our need for funds and the need to match the maturities of assets and liabilities.

Additional funding may be provided through deposit gathering networks and in the form of federal funds purchased through our well established relationships with numerous banks. While these lending lines are uncommitted, management believes that the Bank could borrow approximately $1.4 billion from these banks on a collective basis. The Bank is also a member of the Federal Home Loan Bank of New York (FHLB) and has the ability to borrow from them in the form of FHLB advances secured by pledges of certain eligible collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgage and commercial real estate loans. Additionally, Valley's collateral pledged to the FHLB may be used to obtain Municipal Letters of Credit (MULOC) to collateralize certain municipal deposits held by Valley. At September 30, 2020, Valley had $700 million of MULOCs outstanding for this purpose. Furthermore, we can obtain overnight borrowings from the FRB via the discount window as a contingency for additional liquidity. At September 30, 2020, our traditional borrowing capacity, excluding PPP loans, under the Federal Reserve's discount window was $1.6 billion.

We also have access to other short-term and long-term borrowing sources to support our asset base, such as repos (i.e., securities sold under agreements to repurchase). Short-term borrowings (consisting of FHLB advances, repos, and from time to time, federal funds purchased) increased approximately $337.4 million to $1.4 billion at September 30, 2020 as compared to December 31, 2019. The increase in short-term borrowings, mainly consisting of FHLB advances at September 30, 2020, was primarily driven by increase liquidity levels in response to the COVID-19 pandemic, as well as funding of PPP loan originations primarily in the second quarter 2020.






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The following table sets forth information regarding Valley’s short-term FHLB advances at the dates and for the year to date periods ended September 30, 2020 and December 31, 2019:
September 30,
2020		December 31,
2019
 ($ in thousands)
FHLB advances:
Average balance outstanding$1,322,226 $1,681,844 
Maximum outstanding at any month-end during the period1,930,000 2,510,000 
Balance outstanding at end of period1,275,000 940,000 
Weighted average interest rate during the period0.37 %1.88 %
Weighted average interest rate at the end of the period0.46 1.85 
Corporation Liquidity

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

Valley's ability to maintain quarterly dividends to its preferred and common shareholders is heavily dependent on the ability of its principal subsidiary, the Bank, to pay dividends to Valley. However, we cannot accurately predict the extent of the economic decline due to COVID-19 or other factors that may result in inadequate earnings (primarily by the Bank), regulatory restrictions and limitations, changes in our capital requirements, or a decision to increase capital by retention of earnings, that may result in Valley's inability or determination by its Board not to pay dividends at current levels, or at all.
Investment Securities Portfolios

As of September 30, 2020, we had $29.0 million, $1.5 billion and $2.2 billion in equities, available for sale debt securities and held to maturity debt securities, respectively. Our equity securities portfolio is mainly comprised of a money market mutual fund and investments in public and private Community Reinvestment Act funds. Our held to maturity and available for sale debt securities portfolios were comprised of U.S. Treasury securities, U.S. government agency securities, tax-exempt and taxable issuances of states and political subdivisions (including special revenue bonds), residential mortgage-backed securities, single-issuer trust preferred securities principally issued by bank holding companies, and high quality corporate bonds issued by banks at September 30, 2020. There were no securities in the name of any one issuer exceeding 10 percent of shareholders’ equity, except for residential mortgage-backed securities issued by Ginnie Mae and Fannie Mae. Additionally, certain securities with limited marketability and/or restrictions, such as FHLB and FRB stocks, are carried at cost and are included in other assets. See Note 7 to the consolidated financial statements for additional information.




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Allowance for Credit Losses and Impairment Analysis

Effective January 1, 2020, Valley adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires an estimate of lifetime expected credit losses for held to maturity debt securities established as an allowance for credit losses and replaces the other-than-temporarily impaired model for available for sale debt securities.

Available for sale debt securities. The new guidance in ASC Topic 326-30 requires credit losses to be presented as an allowance, rather than as a write-down if management does not intend to sell an available for sale debt security before recovery of its amortized cost basis. Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. In assessing whether a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount the fair value is less than amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.

We have evaluated all available for sale debt securities that are in an unrealized loss position as of September 30, 2020 and determined that the declines in fair value are mainly attributable to changes in market volatility, due to factors such as interest rates and spread factors, but not attributable to credit quality or other factors. Based on a comparison of the present value of expected cash flows to the amortized cost, management recognized no impairment charges during the three and nine months ended September 30, 2020 and, as a result, there was no allowance for credit losses for available for sale debt securities at September 30, 2020.
Held to maturity debt securities. As discussed in Note 7 to the consolidated financial statements, Valley has a zero loss expectation for certain securities within the held to maturity portfolio, including, U.S. Treasury securities, U.S. agency securities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and collateralized municipal bonds. To measure the expected credit losses on held to maturity debt securities that have loss expectations, Valley estimates the expected credit losses using a discounted cash flow model developed by a third party. Assumptions used in the model for pools of securities with common risk characteristics include the historical lifetime probability of default and severity of loss in the event of default, with the model incorporating several economic cycles of loss history data to calculate expected credit losses given default at the individual security level. At September 30, 2020, held to maturity debt securities were carried net of allowance for credit losses totaling $1.5 million. We recorded a negative (credit) provision of $112 thousand during the third quarter 2020 mostly due to modest improvement in expected default rates for certain securities as compared to June 30, 2020. The provision totaled $688 thousand for the nine months ended September 30, 2020 driven mainly by our negative economic forecast incorporated within the allowance model since the onset of the COVID-19 pandemic. There were no net charge-offs of debt securities in the respective periods.

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


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The following table presents the held to maturity and available for sale investment securities portfolios by investment grades at September 30, 2020:
 September 30, 2020
 Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
 (in thousands)
Held to maturity investment grades: *
AAA Rated$1,836,858 $54,293 $(924)$1,890,227 
AA Rated190,266 7,067 — 197,333 
A Rated14,557 441 — 14,998 
BBB Rated5,000 463 — 5,463 
Non-investment grade5,669 — (176)5,493 
Not rated118,126 730 (7,399)111,457 
Total investment securities held to maturity$2,170,476 $62,994 $(8,499)$2,224,971 
Available for sale investment grades: *
AAA Rated$1,319,492 $45,008 $(960)$1,363,540 
AA Rated45,422 916 (24)46,314 
A Rated14,264 416 — 14,680 
BBB Rated24,379 594 (6)24,967 
Non-investment grade11,833 — (179)11,654 
Not rated64,576 1,065 (232)65,409 
Total investment securities available for sale$1,479,966 $47,999 $(1,401)$1,526,564 
*Rated using external rating agencies. Ratings categories include the entire range. For example, “A rated” includes A+, A, and A-. Split rated securities with two ratings are categorized at the higher of the rating levels.
The investment securities held to maturity portfolio included $118.1 million of investments not rated by the rating agencies with aggregate unrealized losses of $7.4 million at September 30, 2020 related to four single-issuer bank trust preferred issuances with a combined amortized cost of $36.0 million.
See Note 7 to the consolidated financial statements for additional information regarding our available for sale and held to maturity securities.
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Loan Portfolio

The following table reflects the composition of the loan portfolio as of the dates presented:
September 30,
2020		June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019
 ($ in thousands)
Loans
Commercial and industrial$6,903,345 $6,884,689 $4,998,731 $4,825,997 $4,695,608 
Commercial real estate:
Commercial real estate16,815,587 16,571,877 16,390,236 15,996,741 13,365,454 
Construction1,720,775 1,721,352 1,727,046 1,647,018 1,537,590 
Total commercial real estate18,536,362 18,293,229 18,117,282 17,643,759 14,903,044 
Residential mortgage4,284,595 4,405,147 4,478,982 4,377,111 4,133,331 
Consumer:
Home equity457,083 471,115 481,751 487,272 489,808 
Automobile1,341,659 1,369,489 1,436,734 1,451,623 1,436,608 
Other consumer892,542 890,942 914,587 913,446 908,760 
Total consumer loans2,691,284 2,731,546 2,833,072 2,852,341 2,835,176 
Total loans*
$32,415,586 $32,314,611 $30,428,067 $29,699,208 $26,567,159 
As a percent of total loans:
Commercial and industrial21.3 %21.3 %16.5 %16.2 %17.7 %
Commercial real estate57.2 56.6 59.5 59.5 56.1 
Residential mortgage13.2 13.6 14.6 14.7 15.5 
Consumer loans8.3 8.5 9.4 9.6 10.7 
Total100.0 %100.0 %100.0 %100.0 %100.0 %
*     Includes net unearned discount and deferred loan fees of $116.2 million, $131.3 million, and $76.4 million at September 30, 2020, June 30, 2020, and March 31, 2020, respectively, and net unearned premiums and deferred loan fees of $12.6 million and $18.3 million at December 31, 2019 and September 30, 2019, respectively. Net unearned discounts and deferred loan fees at September 30, 2020, June 30, 2020, and March 31, 2020 include the non-credit discount on purchased credit deteriorated (PCD) loans, and $54.4 million and $62.1 million of net unearned fees related to PPP loans at September 30, 2020 and June 30, 2020, respectively.

Loans increased $101.0 million to approximately $32.4 billion at September 30, 2020 from June 30, 2020 largely due to controlled commercial real estate loan growth and a $63 million increase in PPP loans within the commercial and industrial loan category during the third quarter 2020. The residential mortgage and most consumer loan categories experienced moderate declines in loan balances in the third quarter largely due to loan principal repayment and refinance activity, as well as higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies. Residential mortgage loans held for sale totaled $209.3 million and $120.6 million at September 30, 2020 and June 30, 2020, respectively. See additional information regarding our residential mortgage loan activities below.

Total commercial and industrial loans increased only $18.7 million from June 30, 2020 to approximately $6.9 billion at September 30, 2020 largely due to the $55.4 million of PPP loan originations in the third quarter. Excluding the PPP loans, commercial and industrial loans decreased $44.5 million, or 4 percent on an annualized basis, at September 30, 2020 compared to June 30, 2020 as the continued weak economic environment caused by the COVID-19 pandemic has weighed on loan demand particularly in the New Jersey and New York markets, and our existing small to middle market lending relationships have become more strategic with new capital expenditures. Commercial and industrial loans included PPP loans of approximately $2.3 billion and $2.2 billion at September 30, 2020 and June 30, 2020, respectively, net of unearned net deferred fees totaling $54.4 million and $62.1 million, respectively.

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Commercial real estate loans (excluding construction loans) increased $243.7 million, or 5.9 percent on an annualized basis, to $16.8 billion at September 30, 2020 from June 30, 2020 mainly due to strong underwriting within our loan commitment pipeline at June 30, 2020, including many pre-existing, longstanding borrowers, as well as slower repayment activity during the third quarter. However, construction loans decreased $577 thousand to $1.7 billion at September 30, 2020 from June 30, 2020 mainly due to run-off of completed existing projects, and to a lesser extent, migration of such completed projects to permanent financing during the third quarter 2020. Construction demand in our Florida markets, which have mostly reopened during the current COVID-19 pandemic, remains robust as compared to the Northeast and we intend to be strategically competitive for the strongest borrowers and projects.

Total residential mortgage loans decreased $120.6 million to approximately $4.3 billion at September 30, 2020 from June 30, 2020 largely due to loan principal repayment and refinance activity and higher level of residential mortgage loans originated for sale due to current interest rate risk management strategies. New and refinanced residential mortgage loan originations totaled approximately $540.2 million for the third quarter 2020, as compared to $494.2 million and $477.2 million for the second quarter 2020 and third quarter 2019, respectively. Of the total originations for the third quarter 2020, $385.6 million of residential mortgage loans were originated for sale rather than held for investment and sold approximately $301.2 million of these loans. We may continue to sell a large portion of our new fixed rate residential mortgage loan originations during the remainder of 2020 based upon normal management of the interest rate risk and mix of the interest earning assets on our balance sheet.
Home equity loans totaled $457.1 million at September 30, 2020, and moderately decreased $14.0 million from June 30, 2020. New home equity loan volumes and customer usage of existing home equity lines of credit continue to be modest, despite the favorable low interest rate environment caused by the COVID-19 pandemic.
Automobile loans decreased by $27.8 million to $1.3 billion at September 30, 2020 as compared to June 30, 2020. The third quarter annualized decline was 8.1 percent as our new indirect auto loan volumes did not keep pace with the normal portfolio repayment and refinance activity. However, the volume of indirect loans and application activity was higher during the third quarter 2020 as compared to the second quarter 2020. Our Florida dealership network remained relatively unchanged from the second quarter totaling $14.4 million in auto loan originations, representing approximately 11 percent of new loans, during the third quarter 2020, as compared to $14.3 million, representing approximately 20 percent of new loans, during the second quarter 2020.
Other consumer loans increased $1.6 million to $892.5 million at September 30, 2020 as compared to $890.9 million at June 30, 2020. The modest increase was mainly due to lower usage and demand within our collateralized personal lines of credit portfolio.
Most of our lending is in northern and central New Jersey, New York City, Long Island and Florida, except for smaller auto and residential mortgage loan portfolios derived from other neighboring states of New Jersey, which could present a geographic and credit risk due to the recent economic downturn within these regions caused by the COVID-19 pandemic and the uncertain path forward to restart the U.S. economy. To mitigate our geographic risks, we make efforts to maintain a diversified portfolio as to type of borrower and loan, to guard against a potential downward turn in any one economic sector.
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Non-performing Assets
Prior to our adoption of the CECL standard on January 1, 2020, our past due loans and non-accrual loans discussed further below excluded those loans which were classified as purchased credit impaired (PCI) loans. Under previous U.S. GAAP, the PCI loans (acquired at a discount that is due, in part, to credit quality) were accounted for on a pool basis and were not subject to delinquency classification in the same manner as loans originated by Valley. Under the CECL standard, Valley's former PCI loan pools are accounted for as purchased credit deteriorated (PCD) loans on a loan level basis and, if applicable, are reported in our past due and non-accrual loans at September 30, 2020, June 30, 2020 and March 31, 2020.
Non-performing assets include non-accrual loans, other real estate owned (OREO), other repossessed assets (which primarily consists of automobiles and taxi medallions) and non-accrual debt securities at September 30, 2020. Loans are generally placed on non-accrual status when they become past due in excess of 90 days as to payment of principal or interest. Exceptions to the non-accrual policy may be permitted if the loan is sufficiently collateralized and in the process of collection. OREO is acquired through foreclosure on loans secured by land or real estate. OREO and other repossessed assets are reported at the lower of cost or fair value, less estimated cost to sell. Our non-performing assets decreased $20.5 million to $203.6 million at September 30, 2020 as compared to June 30, 2020, mainly due to a $19.5 million decrease in non-accrual loans in the third quarter 2020. Non-performing assets as a percentage of total loans and non-performing assets totaled 0.62 percent and 0.69 percent at September 30, 2020 and June 30, 2020, respectively (as shown in the table below). For additional details, see the "Credit quality indicators" section in Note 8 to the consolidated financial statements.

Our lending strategy is based on underwriting standards designed to maintain high credit quality and we remain optimistic regarding the overall future performance of our loan portfolio. However, due to the potential for future credit deterioration caused by the uncertain economic recovery from the pandemic recession, lack of additional federal stimulus and a number of our borrowers that are performing under short-term forbearance agreements, management cannot provide assurance that our non-performing assets will not increase substantially from the levels reported at September 30, 2020.





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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,
2020		June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019
 ($ in thousands)
Accruing past due loans: *
30 to 59 days past due:
Commercial and industrial$6,587 $6,206 $9,780 $11,700 $5,702 
Commercial real estate26,038 13,912 41,664 2,560 20,851 
Construction142 — 7,119 1,486 11,523 
Residential mortgage22,528 35,263 38,965 17,143 12,945 
Total Consumer8,979 12,962 19,508 13,704 13,079 
Total 30 to 59 days past due64,274 68,343 117,036 46,593 64,100 
60 to 89 days past due:
Commercial and industrial3,954 4,178 7,624 2,227 3,158 
Commercial real estate610 1,543 15,963 4,026 735 
Construction— — 49 1,343 7,129 
Residential mortgage3,760 4,169 9,307 4,192 4,417 
Total Consumer1,352 3,786 2,309 2,527 1,577 
Total 60 to 89 days past due9,676 13,676 35,252 14,315 17,016 
90 or more days past due:
Commercial and industrial6,759 5,220 4,049 3,986 4,133 
Commercial real estate1,538 — 161 579 1,125 
Residential mortgage891 3,812 1,798 2,042 1,347 
Total Consumer753 2,082 1,092 711 756 
Total 90 or more days past due9,941 11,114 7,100 7,318 7,361 
Total accruing past due loans$83,891 $93,133 $159,388 $68,226 $88,477 
Non-accrual loans: *
Commercial and industrial$115,667 $130,876 $132,622 $68,636 $75,311 
Commercial real estate41,627 43,678 41,616 9,004 9,560 
Construction2,497 3,308 2,972 356 356 
Residential mortgage23,877 25,776 24,625 12,858 13,772 
Total Consumer7,441 6,947 4,095 2,204 2,050 
Total non-accrual loans191,109 210,585 205,930 93,058 101,049 
Other real estate owned (OREO)7,746 8,283 10,198 9,414 6,415 
Other repossessed assets3,988 3,920 3,842 1,276 2,568 
Non-accrual debt securities783 1,365 531 680 680 
Total non-performing assets (NPAs)$203,626 $224,153 $220,501 $104,428 $110,712 
Performing troubled debt restructured loans
$58,090 $53,936 $48,024 $73,012 $79,364 
Total non-accrual loans as a % of loans0.59 %0.65 %0.68 %0.31 %0.38 %
Total NPAs as a % of loans and NPAs0.62 0.69 0.72 0.35 0.41 
Total accruing past due and non-accrual loans as a % of loans
0.85 0.94 1.20 0.54 0.71 
Allowance for loan losses as a % of non-accrual loans
170.08 147.03 137.59 173.83 160.17 
*     Past due loans and non-accrual loans presented at December 31, 2019 and September 30, 2019 exclude PCI loans. Prior to January 1, 2020, PCI loans were accounted for on a pool basis under U.S. GAAP and were not subject to delinquency classification.
    
Loans past due 30 to 59 days decreased $4.1 million to $64.3 million at September 30, 2020 as compared to June 30, 2020 largely due to improved performance in the residential mortgage and consumer loan categories, including CARES Act qualifying forbearance loans that resumed their scheduled monthly payments during the third quarter 2020. Commercial real estate loans increased by $12.1 million as compared to June 30, 2020 mainly due to three loan relationships with a combined total of $20.3 million reported in this delinquency category at September 30, 2020.
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While the three loan relationships are internally classified as substandard, management believes they are well secured and in the process of collection.

Loans past due 60 to 89 days decreased $4.0 million to $9.7 million at September 30, 2020 as compared to June 30, 2020 partly due to improved residential and consumer loan performance and collection effort results during the third quarter 2020.

Loans past due 90 days or more and still accruing interest decreased $1.2 million to $9.9 million at September 30, 2020 as compared to $11.1 million at June 30, 2020 mainly due to lower residential and consumer delinquencies, partially offset by higher commercial and industrial and commercial real estate delinquencies during the third quarter 2020. All of the loans past due 90 days or more and still accruing are considered to be well secured and in the process of collection.

Non-accrual loans decreased $19.5 million to $191.1 million at September 30, 2020 as compared to $210.6 million at June 30, 2020 largely due to a $15.2 million decrease in commercial and industrial loan category. The third quarter 2020 loan charge-offs were mostly comprised of the full charge-off of a $6.0 million loan relationship, as well as partial taxi medallion loan charge-offs totaling $6.1 million caused by lower estimated collateral valuations at September 30, 2020. Non-accrual loans represented 0.59 percent of total loans at September 30, 2020 compared to 0.65 percent at June 30, 2020.

During the third quarter 2020, we continued to closely monitor our New York City and Chicago taxi medallion loans totaling $93.1 million and $7.0 million, respectively, within the commercial and industrial loan portfolio at September 30, 2020. Due to continued negative trends in estimated fair valuations of the underlying taxi medallion collateral, a weak operating environment for ride services and uncertain borrower performance, the remainder of our previously accruing taxi medallion loans were placed on non-accrual status during the first quarter 2020. At September 30, 2020, non-accrual taxi medallion loans totaling $100.1 million had related reserves of $60.4 million within the allowance for loan losses as compared to $106.8 million with related reserves of $61.6 million at June 30, 2020.

Valley's historical taxi medallion lending criteria had been conservative regarding capping the loan amounts in relation to market valuations, as well as obtaining personal guarantees and other collateral in certain instances. However, the severe decline in the market valuation of taxi medallions has adversely affected the estimated fair valuation of these loans and, as a result, we increased the level of our allowance for loan losses at September 30, 2020. See the "Allowance for Credit Losses" section below for further details. Potential further declines in the market valuation of taxi medallions and the stressed operating environment within both New York City and Chicago due to the COVID-19 pandemic could also negatively impact the future performance of this portfolio. For example, a 25 percent decline in our current estimated market value of the taxi medallions would require additional allocated reserves of $14.2 million within the allowance for loan losses based upon the impaired taxi medallion loan balances at September 30, 2020.

OREO properties decreased $537 thousand to $7.7 million at September 30, 2020 from $8.3 million at June 30, 2020 due to normal sales activity in the third quarter. Sales of OREO properties resulted in net gains of $109 thousand and $540 thousand for the three and nine months ended September 30, 2020, respectively, as compared to net losses of $417 thousand and net gains of $1.3 million for the three and nine months ended September 30, 2019, respectively. The residential mortgage and consumer loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $2.0 million at September 30, 2020.

TDRs represent loan modifications for customers experiencing financial difficulties where a concession has been granted. Performing TDRs (i.e., TDRs not reported as loans 90 days or more past due and still accruing or as non-accrual loans) increased $4.2 million to $58.1 million at September 30, 2020 as compared to $53.9 million at June 30, 2020. Performing TDRs consisted of 81 loans at September 30, 2020. On an aggregate basis, the $58.1 million in performing TDRs at September 30, 2020 had a modified weighted average interest rate of approximately 4.81 percent as compared to a pre-modification weighted average interest rate of 4.10 percent.
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Loan Forbearance. In response to the COVID-19 pandemic and its economic impact to certain customers, Valley implemented short-term loan modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant, when requested by customers. Generally, the modification terms allow for a deferral of payments for up to 90 days, which Valley may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. As of September 30, 2020, Valley had approximately 1,400 loans with total outstanding balances of $1.1 billion remaining in their payment deferral period under short-term modifications.
Higher Risk COVID-19 Credit Exposures. Valley has identified certain borrower industries as being potentially exposed to the effects of economic shutdowns related to the COVID-19 pandemic. These industries include doctor and surgery centers, retail trade, hotels and hospitality, restaurants and food service, and entertainment and recreation. As of September 30, 2020, Valley had outstanding loans of approximately $2.2 billion to borrowers in these industries representing approximately 7.4 percent of total outstanding loans. Active deferrals in this category totaled $158 million, or 7.1 percent of total loans at September 30, 2020. A large majority of loans within the higher risk industries were pass-rated under Valley’s internal risk rating system as of September 30, 2020.
Allowance for Credit Losses for Loans
The allowance for credit losses for loans consists of the allowance for loan losses and the reserve for unfunded credit commitments. Effective January 1, 2020, we adopted the new CECL standard, which is based on lifetime expected credit losses rather than incurred losses. At adoption, Valley recorded a $99.6 million increase to its allowance for credit losses for loans, including reserves of $61.6 million related to PCD loans. See Note 5 to the consolidated financial statements for further details on the Day 1 CECL adoption.

Our methodology to establish the allowance for loan losses has two basic components: (1) a collective (pooled) reserve component for estimated expected credit losses for pools of loans that share similar risk characteristics and (2) an individual reserve component for loans that do not share risk characteristics, consisting of collateral dependent, TDR, and expected TDR loans. Valley also maintains a separate allowance for unfunded credit commitments mainly consisting of undisbursed non-cancellable lines of credit, new loan commitments and commercial letters of credit.
In estimating the component of the allowance on a collective basis we use a transition matrix model which calculates an expected life of loan loss percentage for each loan pool by generating probability of default and loss given default metrics. The metrics are based on the migration of loans from performing to loss by credit quality rating or delinquency categories using historical life-of-loan analysis periods for each loan portfolio pool and the severity of loss based on the aggregate net lifetime losses incurred. The model's expected losses based on loss history are adjusted for qualitative factors. Among other things, these adjustments include and account for differences in: (i) lending policies and procedures; (ii) current business conditions and economic developments that affect the loan collectability; (iii) concentration risks by size, type, and geography; (iv) the potential volume and migration of loan forbearances to non-performing status; and (v) the effect of external factors such as legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.
Valley utilizes a two-year reasonable and supportable forecast period followed by a one-year period over which estimated losses revert to historical loss experience for the remaining life of the loan. The forecasts consist of a multi-scenario economic forecast model to estimate future credit losses and is governed by a cross-functional committee. The committee meets each quarter to determine which economic scenarios developed by Moody's will be incorporated into the model, as well as the relative probability weightings of the selected scenarios, based upon all readily available information. The model projects economic variables under each scenario based on detailed statistical analyses. We have identified and selected key variables that most closely correlated to our historical credit performance, which include: GDP, unemployment and the Case-Shiller Home Price Index.

For the third quarter 2020, we continued to incorporate a probability weighted three-scenario economic forecast, including Moody's Baseline, S-3 and S-4 scenarios. During the third quarter 2020, Valley placed increased weightings on S-3 and S-4 alternative downside scenarios as compared to the second quarter due to many factors, including, but not limited to the uncertainty related to additional federal economic stimulus, the results of the presidential election, loan customers in deferral of payments, the timing of a COVID-19 vaccine and the severity of future COVID-19
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outbreaks and resulting business disruptions. The S-4 forecast is the most severe economic scenario and includes the following assumptions:

•Assumes that the COVID-19 crisis will persist and meaningfully impact the economy;
•National unemployment rate will remain elevated throughout 2020 to 2022, with a peak at 12.3 percent in the second quarter 2022;
•Federal funds interest rates will remain at or near zero for the foreseeable future; and
•A prolonged economic downturn until the fourth quarter 2021.

The allowance for credit losses for loans methodology and accounting policy are fully described in Note 8 to the consolidated financial statements.


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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 EndedNine Months Ended
September 30,
2020		June 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
 ($ in thousands)
Average loans outstanding$32,515,264$32,041,200$26,136,745$31,522,268$25,651,195
Beginning balance - Allowance for credit losses for loans
319,723293,361158,079164,604156,295
Impact of ASU No. 2016-13 adoption on January 1, 2020 (1)
———37,989—
Allowance for purchased credit deteriorated (PCD) loans (1)
———61,643—
Beginning balance, adjusted 319,723293,361158,079264,236156,295
Loans charged-off: (2)
Commercial and industrial(13,965)(14,024)(527)(31,349)(7,882)
Commercial real estate(695)(27)(158)(766)(158)
Residential mortgage(7)(5)(111)(348)(126)
Total Consumer(2,458)(2,601)(2,191)(7,624)(5,971)
Total charge-offs(17,125)(16,657)(2,987)(40,087)(14,137)
Charged-off loans recovered:
Commercial and industrial4287993301,7962,008
Commercial real estate60312816471
Construction4020—80—
Residential mortgage31545362613
Total Consumer1,1515096172,4541,720
Total recoveries1,7101,9049785,1203,812
Net charge-offs(15,415)(14,753)(2,009)(34,967)(10,325)
Provision charged for credit losses31,02041,1158,700106,05918,800
Ending balance - Allowance for credit for losses
$335,328$319,723$164,770$335,328$164,770
Components of allowance for credit losses for loans:
Allowance for loan losses$325,032$309,614$161,853$325,032$161,853
Allowance for unfunded credit commitments
10,29610,1092,91710,2962,917
Allowance for credit losses for loans$335,328$319,723$164,770$335,328$164,770
Components of provision for credit losses for loans:
Provision for credit losses for loans$30,833$41,025$8,757$105,709$20,319
Provision for unfunded credit commitments (3)
18790(57)350(1,519)
Total provision for credit losses for loans$31,020$41,115$8,700$106,059$18,800
Annualized ratio of net charge-offs to average loans outstanding
0.19 %0.18 %0.03 %0.15 %0.05 %
(1)    The adjustment represents an increase in the allowance for credit losses for loans as a result of the adoption of ASU 2016-13 effective January 1, 2020.
(2)     Charge-offs and recoveries presented for periods prior to January 1, 2020 exclude loans formerly accounting for as PCI loans.
(3)    Periods prior to January 1, 2020 represent the allowance and provision for unfunded letters of credit only.

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Net loan charge-offs totaled $15.4 million for the third quarter 2020 as compared to $14.8 million and $2.0 million for the second quarter 2020 and third quarter 2019, respectively. The increase in net loan charge-offs for the third quarter 2020 was mostly driven by the full charge-off of one commercial and industrial loan totaling $6.0 million, which was fully reserved for in our allowance for loan losses at June 30, 2020. The commercial and industrial loan category also included partial charge-offs of taxi medallion loans totaling $6.1 million for the third quarter 2020 as compared to $3.2 million for the second quarter 2020. There were no taxi medallion loan charge-offs during the third quarter 2019. The overall level of loan charge-offs (as presented in the above table) continues to trend within management's expectations for the credit quality of the loan portfolio.
The following table summarizes the allocation of the allowance for credit losses for loans to loan portfolio categories and the allocations as a percentage of each loan category:
 September 30, 2020June 30, 2020September 30, 2019
 Allowance
Allocation *		Allocation
as a % of
Loan
Category		Allowance
Allocation*		Allocation
as a % of
Loan
Category		Allowance
Allocation*		Allocation
as a % of
Loan
Category
 ($ in thousands)
Loan Category:
Commercial and Industrial loans$130,409 1.89 %$132,039 1.92 %$101,002 2.15 %
Commercial real estate loans:
Commercial real estate128,699 0.77 %117,743 0.71 %23,044 0.17 %
Construction15,951 0.93 %13,959 0.81 %25,727 1.67 %
Total commercial real estate loans144,650 0.78 %131,702 0.72 %48,771 0.33 %
Residential mortgage loans28,614 0.67 %29,630 0.67 %5,302 0.13 %
Consumer loans:
Home equity5,972 1.31 %4,766 1.01 %487 0.10 %
Auto and other consumer15,387 0.69 %11,477 0.51 %6,291 0.27 %
Total consumer loans21,359 0.79 %16,243 0.59 %6,778 0.24 %
Total allowance for loan losses325,032 1.00 %309,614 0.96 %161,853 0.61 %
Allowance for unfunded credit commitments
10,296 10,109 2,917 
Total allowance for credit losses for loans
$335,328 $319,723 $164,770 
Allowance for credit losses for loans as a % loans
1.03 %0.99 %0.62 %
*CECL was adopted January 1, 2020. Prior periods reflect the allowance for credit losses for loans under the incurred loss model.

The allowance for credit losses for loans, comprised of our allowance for loan losses and unfunded credit commitments, as a percentage of total loans was 1.03 percent, 0.99 percent and 0.62 percent at September 30, 2020, June 30, 2020 and September 30, 2019, respectively. During the third quarter 2020, we recorded a $31.0 million provision for credit losses as compared to $41.1 million and $8.7 million for the second quarter 2020 and the third quarter 2019, respectively. The reserve build in the third quarter 2020 reflects several factors, including deterioration in Valley's macroeconomic outlook since the end of the second quarter, additional qualitative management adjustments to reflect the potential for higher levels of credit stress related to borrowers impacted by the COVID-19 pandemic, and the impact of lower valuations of collateral securing our non-performing taxi medallion loan portfolio.

At September 30, 2020, the allowance allocations for credit losses as a percentage of total loans increased for most loan categories as compared to June 30, 2020. However, the allocated reserves as a percentage of commercial and industrial loans declined by 0.03 percent largely due to the aforementioned net loan charge-offs in the third quarter
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2020, as well as moderate growth within the PPP loan portfolio which had no related allowance at September 30, 2020 and June 30, 2020. The allowance for credit losses for loans as a percentage of non-PPP loans was 1.11 percent and 1.06 percent at September 30, 2020 and June 30, 2020, respectively.
Capital Adequacy

A significant measure of the strength of a financial institution is its shareholders’ equity. At September 30, 2020 and December 31, 2019, shareholders’ equity totaled approximately $4.5 billion and $4.4 billion, which represented 11.1 percent and 11.7 percent of total assets, respectively. During the nine months ended September 30, 2020, total shareholders’ equity increased by $149.6 million primarily due to (i) net income of $285.2 million, (ii) an increase in other comprehensive income of $27.4 million, and (iii) a $9.2 million increase attributable to the effect of our stock incentive plan. These positive changes were partially offset by (i) cash dividends declared on common and preferred stock totaling a combined $144.0 million and (ii) a $28.2 million net cumulative effect adjustment to retained earnings for the adoption of new accounting guidance as of January 1, 2020.
Valley and Valley National Bank are subject to the regulatory capital requirements administered by the FRB and the OCC. Quantitative measures established by regulation to ensure capital adequacy require Valley and Valley National Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, as defined in the regulations.

We are required to maintain common equity Tier 1 capital to risk-weighted assets ratio of 4.5 percent, Tier 1 capital to risk-weighted assets ratio of 6.0 percent, ratio of total capital to risk-weighted assets of 8.0 percent, and minimum leverage ratio of 4.0 percent, plus a 2.5 percent capital conservation buffer added to the minimum requirements for capital adequacy purposes. As of September 30, 2020 and December 31, 2019, Valley and Valley National Bank exceeded all capital adequacy requirements (see table below).

For regulatory capital purposes, in connection with the Federal Reserve Board’s final interim rule as of April 3, 2020, 100 percent of the CECL Day 1 impact to shareholders' equity equaling $28.2 million after-tax will be deferred over a two-year period ending January 1, 2022, at which time it will be phased in on a pro-rata basis over a three-year period ending January 1, 2025. Additionally, 25 percent of the reserve build (i.e., provision for credit losses less net charge-offs) for the nine months ended September 30, 2020 will be phased in over the same time frame.
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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, 2020 and December 31, 2019:
 ActualMinimum Capital
Requirements		To Be Well Capitalized
Under Prompt Corrective
Action Provision
 AmountRatioAmountRatioAmountRatio
 
 ($ in thousands)
As of September 30, 2020
Total Risk-based Capital
Valley$3,733,338 12.37 %$3,169,791 10.50 %N/AN/A
Valley National Bank3,772,443 12.50 3,168,912 10.50 $3,018,011 10.00 %
Common Equity Tier 1 Capital
Valley2,930,220 9.71 2,113,194 7.00 N/AN/A
Valley National Bank3,448,166 11.43 2,112,608 7.00 1,961,707 6.50 
Tier 1 Risk-based Capital
Valley3,145,061 10.42 2,566,022 8.50 N/AN/A
Valley National Bank3,448,166 11.43 2,565,310 8.50 2,414,409 8.00 
Tier 1 Leverage Capital
Valley3,145,061 7.89 1,593,845 4.00 N/AN/A
Valley National Bank3,448,166 8.66 1,593,506 4.00 1,991,882 5.00 
As of December 31, 2019
Total Risk-based Capital
Valley$3,427,134 11.72 %$3,070,687 10.50 %N/AN/A
Valley National Bank3,416,674 11.69 3,069,894 10.50 $2,923,709 10.00 %
Common Equity Tier 1 Capital
Valley2,754,524 9.42 2,047,125 7.00 N/AN/A
Valley National Bank3,152,070 10.78 2,046,596 7.00 1,900,411 6.50 
Tier 1 Risk-based Capital
Valley2,968,530 10.15 2,485,795 8.50 N/AN/A
Valley National Bank3,152,070 10.78 2,485,153 8.50 2,338,967 8.00 
Tier 1 Leverage Capital
Valley2,968,530 8.76 1,355,378 4.00 N/AN/A
Valley National Bank3,152,070 9.31 1,354,693 4.00 1,693,366 5.00 

Tangible book value per common share is computed by dividing shareholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding as follows: 
September 30,
2020		December 31,
2019
 ($ in thousands, except for share data)
Common shares outstanding403,878,744 403,278,390 
Shareholders’ equity$4,533,763 $4,384,188 
Less: Preferred stock209,691 209,691 
Less: Goodwill and other intangible assets1,449,282 1,460,397 
Tangible common shareholders’ equity$2,874,790 $2,714,100 
Tangible book value per common share$7.12 $6.73 
Book value per common share$10.71 $10.35 
Management believes the tangible book value per common share ratio provides information useful to management and investors in understanding our underlying operational performance, our business and performance trends and
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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 stockholders) per common share. Our retention ratio was approximately 51.5 percent for the nine months ended September 30, 2020 as compared to 49.4 percent for the year ended December 31, 2019.
Cash dividends declared amounted to $0.33 per common share for each of the nine months ended September 30, 2020 and 2019. The Board is committed to examining and weighing relevant facts and considerations, including its commitment to shareholder value, each time it makes a cash dividend decision. The Federal Reserve has cautioned all bank holding companies about distributing dividends which may reduce the level of capital or not allow capital to grow considering the increased capital levels as required under the Basel III rules. Prior to the date of this filing, Valley has received no objection or adverse guidance from the FRB or the OCC regarding the current level of its quarterly common stock dividend. However, the FRB recently reiterated its long-standing guidance that banking organizations should consult them before declaring dividends in excess of earnings for the corresponding quarter. The renewed guidance was largely due to the increased risk of the COVID-19 pandemic negatively impacting the future level of bank earnings. See the risk factors at Part II, Item 1A of this report for additional information.
Off-Balance Sheet Arrangements, Contractual Obligations and Other Matters

For a discussion of Valley’s off-balance sheet arrangements and contractual obligations see information included in Valley’s Annual Report on Form 10-K for the year ended December 31, 2019 in the MD&A section - “Contractual Obligations and Off-Balance Sheet Arrangements” and Notes 12 and 13 to the consolidated financial statements included in this report.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices, and commodity prices. Valley’s market risk is composed primarily of interest rate risk. See page 73 for a discussion of interest rate sensitivity.

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. Beginning January 1, 2020, Valley adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
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Instruments”. Valley implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASU No. 2016-13. Many controls under this new standard remained unchanged under prior GAAP. New controls were established over the review of economic forecasting projections obtained externally. Except as related to the adoption of ASU No. 2016-13, Valley’s CEO and CFO have also concluded that there have not been any changes in Valley’s internal control over financial reporting in the quarter ended September 30, 2020 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 Valley’s 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 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 may be 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, 2019.

Item 1A.Risk Factors

The section titled Risk Factors in Part I, Item 1A of our 2019 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 2019 Annual Report on Form 10-K. Except as presented below, there have been no material changes to these risk factors.
We anticipate that the COVID-19 pandemic will continue to adversely affect us and our customers, counterparties, employees, and third-party service providers. The full extent and duration of the adverse impacts on our business, financial position, results of operations, and prospects are currently unknown and could be significant.
The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deterioration in business, economic, and market conditions and household incomes, including in the states of New Jersey, New York, Florida and Alabama where we conduct nearly all of our business. The extent of the impact of the COVID-19 pandemic on our capital and liquidity, and on our business, results of operations, financial position and prospects generally will depend on a number of evolving factors, including:
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The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained and could affect significantly more households and businesses. The duration and severity of the pandemic, including the degree of resurgence in the upcoming late fall and winter months and the timing of any vaccine, continue to be impossible to predict. There remains substantial uncertainty surrounding the pace of economic recovery and the return of business and consumer confidence.
The response of governmental and nongovernmental authorities. Many of their actions have been directed toward curtailing household and business activity to contain COVID-19 while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. These actions are not always coordinated or consistent across jurisdictions but, in general, have rapidly expanded in scope and intensity, contributing to substantial market volatility. We cannot predict whether and to what extent governmental and nongovernmental authorities will continue to implement policy measures to assist us and our customers and the failure to do so could have adverse effects on our business.
The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties, including increased unemployment rates, are affecting individuals, households, and businesses differently and unevenly and we anticipate will continue to do so. Many, however, have already changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions and discretionary spending. As a result, our credit, operational, and other risks have generally increased and, for the foreseeable future, are expected to remain elevated or increase further.
The effect on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 in the future is unclear. National, regional, and local economies (including the local economies in the markets areas which we serve) and markets could suffer disruptions that are lasting. Governmental actions are meaningfully influencing the interest-rate environment and financial-market activity, which could adversely affect our results of operations and financial condition. We can provide no assurance that governmental or nongovernmental mitigation efforts will continue or be effective in the future.
During the first nine months of 2020, the most notable impacts to our results of operations were a higher provision expense for credit losses, which we expect to continue. Our provision expense was $106.1 million for the first nine months of 2020 as compared to $18.8 million for the same period in 2019. With recent increases in COVID-19 infection rates in our market areas, our forecast of macroeconomic conditions and operating results, including expected lifetime credit losses on our loan portfolio, remains subject to meaningful uncertainty.
Governments have taken unprecedented steps to partially mitigate the adverse effects of their containment measures. For example, on March 27, 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as well. Since March 15, 2020, these have included a reduction in the target range for the federal funds rate to 0 to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses.
While there is evidence that our actions and those of governments and others have assisted our customers, counterparties, and third-party service providers and advanced our business and the economy generally it is uncertain how much, if at all, these actions will be effective in the future. For example, while our short-term loan modifications granted to certain customers impacted by COVID-19 may better position them to resume their regular payments to us in the future and enhance our brand and customer loyalty, these modifications have and may continue to negatively impact our cash flows and results of operations, may produce a higher degree of requests for extensions and rewrites than we have anticipated, and may not be as successful as we expect in managing our credit risk. In addition, while the FRB’s monetary policy may benefit us to some degree by supporting economic activity among our customers, this policy and sudden shifts in it may inhibit our ability to grow or sustain net interest income and effectively manage interest rate risk.
In order to safeguard the health and wellness of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including temporarily closure of certain offices, restricting employee travel and directing employees to work from home whenever possible, temporary closure of some branches and, in branches that remain open, offering only restricted drive-up service or lobby service by
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appointment, and have implemented our business continuity plans to the extent necessary. These measures, and further actions we may take as required by government authorities or that we otherwise determine are in the best interests of our customers and employees, could increase certain risks, including cybersecurity risks, impair our ability to perform critical functions and adversely impact our results of operations.
We are unable to estimate the near-term and ultimate impacts of COVID-19 on our business and operations at this time. The pandemic could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of our goodwill and other financial assets, diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. In addition, sustained adverse effects may impair our capital and liquidity positions, require us to take capital actions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, result in downgrades in our credit ratings, and the reduction or elimination of our common stock dividend in future periods.
As a participating lender in the SBA Paycheck Protection Program, we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties, which could have a significant adverse impact on our business, financial position, results of operations, and prospects.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. On April 16, 2020, the SBA notified lenders that the original $349.0 billion of funding under the PPP was exhausted, and on April 24, 2020, Congress allocated an additional $310.0 billion to the program. We participated as a lender in both rounds of the PPP. Due to the short timeframe between the passing of the CARES Act and the opening of the PPP, there was and continues to be some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. Since the opening of the PPP banks have been subject to class action litigation regarding the process and procedures that such banks used in processing applications for the PPP and their refusal to pay agent fees. Class action litigation has been filed against us, along with many other banks claiming the banks are obligated to pay agent fees. If these cases are not resolved in a manner favorable to us, it may result in significant financial liability and adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.
We may have a credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us, which could adversely impact our business, financial position, results of operations and prospects.

We may be required to consult with the Federal Reserve Bank (FRB) before declaring cash dividends on our common stock, which ultimately may delay, reduce, or eliminate such dividends and adversely affect the market price of our common stock.

Holders of our common stock are only entitled to receive such cash dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so. We may reduce or eliminate our common stock cash dividend in the future depending upon our results of operations, financial condition or other metrics which could be adversely impacted by the ultimate impact of the COVID-19 pandemic, which remains unknown.

In July 2020, the FRB updated its supervisory guidance to provide greater clarity regarding the situations in which bank holding companies, like Valley, may expect an expedited consultation in connection with the declaration of
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dividends that exceed quarterly earnings. To qualify, amongst other criteria, total commercial real estate loan concentrations cannot represent 300 percent or more of total capital and the outstanding balance of the commercial real estate loan portfolio cannot increase by 50 percent or more during the prior 36 months. Currently, we believe that Valley does not meet this standard for expedited consultation and approval of its dividend, should it be required, due to strong organic and acquired commercial real estate loan growth over the past three years. As a result, Valley could be subject to a lengthier and possibly more burdensome review process by the FRB when considering paying dividends that exceed quarterly earnings. The delay, reduction or elimination of our quarterly dividend could adversely affect the market price of our common stock. See additional information regarding our quarterly cash dividend and the current rate of earnings retention at the "Capital Adequacy" section of the MD&A.

We recently implemented new deposit services for businesses in the cannabis industry which could expose us to additional liabilities and regulatory compliance costs.

We recently implemented specialized deposit services intended for a limited number of state licensed medical-use (only) cannabis customers. Currently, we provide this new service to one customer; although we anticipate expanding this service to other customers in the future. Medical-use cannabis businesses are legal in numerous states and the District of Columbia, including our primary markets of New Jersey, New York, and Florida. However, such businesses are not legal at the federal level and cannabis remains a Schedule I drug under the Controlled Substances Act of 1970. In 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published guidelines for financial institutions servicing state legal cannabis businesses. We have implemented a comprehensive control framework that includes written policies and procedures related to the on-boarding of such businesses and the monitoring and maintenance of such business accounts that comports with the FinCEN guidance. Additionally, our policies call for due diligence review of the cannabis business before the business is on-boarded, including confirmation that the business is properly licensed and maintains the license in good standing in the applicable state. Throughout the relationship, our policies call for continued monitoring of the business, including site visits, to determine if the business continues to meet our requirements, including maintenance of required licenses and calls for undertaking periodic financial reviews of the business. The Bank’s program is limited to depository products and deposit transactions are monitored for compliance with the applicable state medical program rules and other regulations before approval and acceptance by the Bank’s BSA/AML department.

While we believe our policies and procedures will allow us to operate in compliance with the FinCEN guidelines, there can be no assurance that compliance with the FinCEN guidelines will protect us from federal prosecution or other regulatory sanctions. Federal prosecutors have significant discretion and there can be no assurance that the federal prosecutors will not choose to strictly enforce the federal laws governing cannabis. Any change in the federal government’s enforcement position, could potentially subject us to criminal prosecution and other regulatory sanctions. While we also believe our BSA/AML policies and programs for this new business are sufficient, the medical marijuana business is considered high-risk, thus increasing the risk of a regulatory action against our BSA/AML program that has adverse consequences, including but not limited to, preventing us from undertaking mergers, acquisitions and other expansion activities.















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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, 2020 were as follows:

ISSUER PURCHASES OF EQUITY SECURITIES 
PeriodTotal  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, 2020 to July 31, 202099 $7.09 — 4,112,465 
August 1, 2020 to August 31, 202010,694 7.63 — 4,112,465 
September 1, 2020 to September 30, 2020672 6.60 — 4,112,465 
Total11,465 $7.56 — 
(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, 2020.


Item 6.Exhibits

(3)Articles of Incorporation and By-laws:
(3.1)
(3.2)
(10)Material Contracts
(10.1)
(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 6, 2020  Ira Robbins
  Chairman of the Board, President
  and Chief Executive Officer
(Principal Executive Officer)
Date:   /s/ Michael D. Hagedorn
November 6, 2020  Michael D. Hagedorn
  Senior Executive Vice President and
  Chief Financial Officer
(Principal Financial Officer)
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